Choice Hotels International Inc (CHH) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Choice Hotels International First Quarter 2017 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, 2016, and other SEC filings for your information about important risk factors affecting the company that you should consider.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We caution you, do not place undue reliance on forward-looking statements, which reflect our analysis 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 first quarter 2017 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. We're obviously very excited to share Choice Hotels' first quarter 2017 earnings update. Today, I'm joined by some of our key leaders, including Dominic Dragisich, who joined Choice as our key Financial Officer on March 6.

Dominic brings impressive experience in both finance and business administration. He will lead Choice Hotels' financial strategy as well as play a key role in strategic corporate growth initiatives, with a focus on company performance, and particularly shareholder value.

Dominic and I will provide our first quarter earnings update, after which the phone line will open for Q&A. And we'll be joined by Patrick Pacious, who is our President and COO; and Scott Oaksmith, our Senior Vice President and Chief Accounting Officer.

Today, with nearly 6,500 hotels in 40 countries and territories worldwide, we are one of the world's largest hotel companies. In the U.S., Choice Hotels represents 1 in 10 hotels. We continue to aggressively expand and reach new markets every day.

In February, Choice reported strong fourth quarter and year-end results. And I'm here and pleased to share that, that momentum is continuing in 2017. There are 3 key strategic areas that are contributing to our continued success: first, is our strategic efforts to help increase franchisee profitability; second, it's continued growth and momentum in our development pipeline; and third, is the strength of our core businesses.

Our first point, the strategic effort to increase franchisee profitability, remains vitally important to our business, and we continue to achieve success particularly when compared to our competitors. Choice domestic RevPAR is up 3.8% in the first quarter, compared to the industry at 3.4%. RevPAR grew only 2.3%, which further demonstrates that our tools and efforts are working and we are outperforming our competitors.

Choice is committed to helping franchisees enhance their operations by providing industry-leading tools, and in turn, drive incremental revenue. On average, hotels that use our revenue management tools see an additional 6% RevPAR lift, which translates into over 6% in annual incremental gross revenues for these hotels. Plus hotels using our Smart Rates tool are realizing further revenue benefits by optimally pricing their inventory.

In addition, loyalty continues to be a hot topic, and Choice is one of the industry leaders in this area. On our last call, we talked about Choice Privileges and our program redesign in 2016, the fact that we have more than $30 million Choice Privilege members worldwide and how $4.6 million of those members joined us in 2016, that we were rated #1 by USA TODAY readers. This growth continues on in 2017 as we enrolled 1.1 million new members in the first quarter, outpacing our first quarter 2016 privileges enrollment.

In addition to Choice Privileges providing value to both our guests and franchisees, it is helping us achieve a key metric to continue this success in the future, which is increasing the contributions from our proprietary channels. And I think you're going to be impressed with the results.

In the first quarter, revenue from our proprietary channels was 64.9%, up 530 basis points compared to the same year last year. This is driven almost exclusively by direct reservations on our digital platforms and Choice Privilege member revenue growth.

A new version of our Choice Hotels mobile app was also introduced in the first quarter. As the majority of mobile app users are Choice Privilege members, we wanted to ensure that these loyal guests have a state-of-the-art app that meets their evolving needs.

In addition to making bookings simple and quick, the new app makes it easy for our members to enjoy the benefits of their loyalty by redeeming points for free nights, gift cards and other rewards. The app continues to have more user adoption and engagement, resulting in an increase of over 60% year-over-year revenue growth, plus reservations from the app are up 52%. In addition, we've already hit record reservation thresholds for the year on our proprietary channels.

On March 6, our central reservation system achieved a $19 million day. Last year, this milestone was not achieved until June. Furthermore, choicehotels.com achieved 6 days with more than $7 million in revenue in the first quarter, a first for us. These stats are indicated -- indicators that our tools are working for Choice, our franchisees, and guests, which further supports our optimism.

While strategic efforts to increase profitability is one key component of our success, we are equally excited to share our next update, continued growth and momentum in our development pipeline. On the last earnings call, we reported an exceptional fourth quarter, and our franchise development strategy continues to generate these strong results.

In the first quarter, we saw 106 executed franchise agreement in the U.S., a 51% Increase, driven by both new construction and conversion projects. We're experiencing -- we experienced more than double, in fact, 2.5x more new construction agreements in the first quarter compared to the previous year. This impressive growth is driven by our Comfort brand as well as our Sleep Inn and MainStay dual brand concept.

Our team secured 25 new Comfort agreements in the first quarter, 15 of which are new construction. This development interest results from our efforts to transform the Comfort brand, which continues to deliver great results and sustain all-time high guest satisfaction scores. We are also beating the upper mid-scale segment in RevPAR growth and stealing share from competitors, recording 30 consecutive months of RevPAR index gain compared to Comfort's competitors.

The Sleep Inn-MainStay dual brand concept also continues to gain the attention of developers. There are currently 7 open, 6 more secured in the first quarter and a robust line of 50 locations. This prototype allows hoteliers to service multiple customer segments under one roof, while delivering construction and operational efficiencies through shared public space, back-of-the-house facilities, and hotel staff. Developers in the mid-scale segment are really responding to this product, which is another example of Choice's innovation.

In addition to the increase in new construction agreements, our conversion-focused brands continue to thrive with 68 conversion agreements signed in the first quarter, which represents a 24% increase. Our Quality Inn brand, which is the largest brand in our system with 1,457 U.S. locations, accounts for a significant portion of these results.

Quality Inn RevPAR grew by 3.9% in the first quarter, which exceeded the RevPAR growth of the overall mid-scale segment and outpaced RevPAR growth of the competitive set by 150 basis points. What's driving this momentum? Simply put, it's our strong value proposition. Franchisees know that when affiliating with Choice, they gain instant brand awareness, as well as extensive support and resources to help increase a property's position in its local market.

For example, while our competitors are pulling back on field support, Choice recognizes the importance of face-to-face relationships to help our franchisees. We believe we have the best, more experienced and engaged area directors in the business.

In addition, we provide ongoing robust education via the Choice University learning models. As a result, we are attracting franchisees from our competitors and drawing first time hoteliers to the industry because of the tools and the resources we provide.

We are also creating new franchisee opportunities with our upscale segments. Choice has nearly 350 upscale hotels globally. Specifically, Cambria continues to grow in the U.S. with a focus on top RevPAR markets. In fact, just this week, our first California property opened in Los Angeles at the airport. And we have a second property in the Chicago Loop opening soon. Internationally, we opened 18 new properties in 8 different markets in the first quarter, and we're excited about our continued international growth opportunities.

My final point is the strength of our business model. For those of you who have been tracking our company, you are well aware we have a consistent, reliable franchising business model and continue to deliver stable returns for our shareholders.

In the first quarter, our domestic royalty fees increased 6.6%. And the overall royalty rates increased by 17 basis points. Our business model results in industry-leading margins. Investors continue to recognize Choice for its long-term, exemplary capital allocation, maintaining prudent leverage, using excessive cash flow for dividend programs and making calculated investments to drive brand growth.

So this time, I'd like to ask our CFO, Dominic Dragisich, to share more specifics on our financial results. Dom?

Thanks, Steve, and good morning, everyone. I want to begin by saying how great it is to be part of such a talented team. Choice has outstanding leadership, and I look forward to contributing to the company's continued success.

As you can see from Steve's remarks and the information I will share, I joined Choice at a great time. Our financial strength and tremendous runway for growth provides us a platform to focus on investments that fuel our core business as well as new innovative ideas. Right now, let's dive into our first quarter results.

Today, we reported diluted earnings per share of $0.51 for the first quarter, which exceeded our previously published outlook for the quarter by $0.02 per share and represents a 38% increase from the same period of the prior year. Reported adjusted EBITDA was $56.4 million a 24% increase over last year.

Our operating performance was highlighted by continued improvement in hotel franchising activities as well as our complementary adjacent lines of business. As Steve discussed, our focus to help franchisees drive revenues and profitability, benefits both Choice and our franchisees.

And key performance metrics, continue to be strong. This includes a 9% increase in first quarter franchising revenues to $85.9 million and a 15% increase in first quarter adjusted hotel franchising EBITDA to $57.6 million. 3 key performance indicators I will focus on include: one, growth of our domestic royalty revenues; two, continued improvement in our franchise development and relicensing results; and three, continued margin expansion.

First, our domestic royalty revenues. The improvement in our hotel franchising revenues for the quarter were primarily driven by our domestic royalties, which increased nearly 7% over the same period of the prior year to $64.5 million. This domestic royalty revenue was impacted by leap year, which included an extra day in the first quarter of 2016. The extra day did not impact our RevPAR statistics, but we estimate that year-over-year growth was negatively impacted in our domestic royalties by about 1% compared to the first quarter of 2016.

The critical areas that drive our domestic royalty growth all continued to improve in the first quarter compared to the prior quarter highlighted by our domestic systemwide RevPAR, which increased by 3.8%, hotel system size, which increased 1.3%, and our first quarter effective royalty rate, which increased 17 basis points.

Our first quarter RevPAR growth was driven by 100-basis-point increase in occupancy and a 1.9% increase in average daily rate. Even more impressive is that our RevPAR results for the quarter exceeded the overall industry's performance by 40 basis points, as reported by Smith Travel Research. This extends our record of outperforming the industry to 4 consecutive quarters and 10 of the last 11 quarters.

In the first quarter, we also continued to outperform the primary chain scale segments in which we compete. For example, our Comfort and Sleep Inn brands have now recorded 30 and 34 consecutive months of RevPAR index gains compared to their focused competition.

The Easter holiday timing also had a positive impact on our 2017 first quarter RevPAR results. Easter fell in the second quarter of this year compared to the first quarter of 2016. As a result, we expect our RevPAR for the second quarter of 2017 to decline slightly from our first quarter results to a range of 2% to 3%. And we are still maintaining our full year RevPAR forecast of a 3% to 4% increase.

Pricing of our franchise agreements also continued to improve in the first quarter, continuing the momentum achieved in 2016. Our domestic effective royalty rates expanded by 17 basis points in the first quarter to 4.55% and represented an increase to the 13-basis-point growth we achieved in the fourth quarter of 2016.

We continue to expect our full year rates to increase 12 to 14 basis points, which is an acceleration of the 11-basis-point increase achieved in 2016.

Next, let's review more detail on our continued success in franchise development. The number of hotels operating in our domestic franchise system grew by 1.3% compared to March 31, 2016. Excluding the impact of our Comfort brand transformation strategy, we grew the number of units online and on domestic system by 107 units net, which represents a 3% increase.

Our domestic unit growth was highlighted by our upscale brands, Cambria and Ascend, which grew by 13% in the aggregate versus the same period of prior year; our Quality Inn brand, which increased by approximately 5%; and our Rodeway Inn brand, which increased nearly 8% versus the same period of the prior year.

The number of rooms opened in our Cambria and Ascend brand systems grew by 18% and 11%, respectively, since March of 2016. And the royalties generated from these brands increased 19% and 20%, respectively. We opened 2 new Cambria hotels, in the first quarter and expect to open 8 to 10 more in 2017 in key travel markets.

Accelerating the pace of Cambria openings provide a positive catalyst to future revenue growth as the Cambria brand commands higher RevPAR and has higher room counts compared to the company's other brands.

The fundamentals that Steve discussed to drive new hotel development and conversion opportunities remain strong. During the first quarter of 2017, we executed 106 new domestic franchise contracts representing over 7,200 rooms. This 51% increase in our new franchise development was driven by both conversion and new construction activity, and our new construction franchise agreements have increased quarter-over-quarter for 13 of the last 14 quarters.

We believe that favorable industry fundamentals for supply growth will continue, and we expect our new construction franchise agreement growth to continue to accelerate over the strong results we posted in 2016. In fact, in the first quarter of 2017, our domestic hotel pipeline increased 24% over the same period of the prior year highlighted by a 30% increase in new construction and a 13% increase in conversion agreements.

As a result of our domestic pipeline growth and the continued industry-wide supply growth, we continue to expect growth for our domestic franchise system size in 2017 and are forecasting an increase between 2% and 3%.

In addition, relicensing and renewal activity continues to grow. After improving 11% for the full year 2016 compared to 2015, the number of relicensing and renewal contracts during the first quarter of 2017 was 8% over the same period of the prior year. This is another positive indicator that the hotel transaction and lending environment remains conducive for growth.

This moves me to my third point. As a result of items driving our top line franchising revenue growth, coupled with prudent cost management, our adjusted hotel franchising EBITDA margins increased by 300 basis points to 64.6%. This builds on the impressive margin expansion we experienced in 2016 and allows us to continue to return value to our shareholders.

Now let's turn to our outlook for the remainder of 2017. As always, our outlook assumes no additional share repurchases under our share repurchase program as well as an effective tax rate of 34% for the second quarter and 33% for the full year 2017.

Our hotel franchising activity guidance assumes that RevPAR will increase by approximately 2% to 3% for the second quarter and range between 3% to 4% for the full year 2017. Guidance also assumes that our effective royalty rate growth will increase between 12 and 14 basis points for the full year, and net domestic unit growth will increase between 2% and 3%.

Excluding the Comfort transformation strategy's impact, 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 EBITDA from hotel franchising activities is a range between $297 million and $302 million, which represents approximately a 9% increase over the prior year at the midpoint.

With regards to our nonhotel franchising activities, we continue to project adjusted EBITDA reductions and expect full year 2017 to range between $4 million and $6 million. We expect our second quarter 2017 diluted earnings per share to range between $0.75 and $0.77 and our full year 2017 diluted earnings per share 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% over the prior year at the midpoint. These earnings per share 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.

I leave you with one overarching point. We continue to build on our 2016 operating performance in the first quarter, and we're optimistic that 2017 will be another great year.

With that, I will turn the call back over to Steve.

Thanks, Dominic. We are obviously very excited to have you on our team and I'm already impressed by the value you're adding.

Before we conclude, I want to highlight several industry, and economic trends and how these reinforce our optimistic outlook. In the first quarter, industry RevPAR growth was 5.7% for weekends and 2.6% for weekday. The demand growth continues to be fueled by leisure, and industry research speaks to the strength of the leisure segment.

As you know, that's our sweet spot. And this, combined with the fact that consumer confidence remains high, gives us every indication that our business is positioned to capitalized on these economic and industry trends. So we -- as we continue to focus on our strategic efforts to increase franchisee profitably, continued growth in momentum in our development pipeline and the strength of our core businesses to deliver consistent, stable returns for our shareholders.

We are well positioned to continue this momentum, and drive excellent results for our company and our shareholders. As I mentioned in my introduction, I'd like to invite Pat Pacious, President and COO; and Scott Oaksmith, Senior Vice President and Chief Accounting Officer, to join Dominic and me in the Q&A.

At this time, I'm going to open the call up to any questions you may have.

(Operator Instructions) Our first question comes from the line of Felicia Hendrix from Barclays.

Welcome, Dominic.

Thank you so much. I appreciate it.

And I'm going to call you now because you're new.

Well, and I blocked your number.

I am going to -- I do have a few starting for you seriously, though. On the -- I just -- my first one's on the unit growth, just to dig a little bit deeper and you gave us so much detail on that. Thank you. So in the quarter, it was up 1.3% and you said adjusting for this Comfort system exits, it would be 3%. And I think last quarter, you said the adjustment, it would be about 3.7%. So it seems like there's a bit of a sequential deceleration. Now you're domestic pipeline is certainly strong and you reiterated your full year guidance. I'm assuming there's not much to read into that. But I did want to ask about this slightly lower unit growth in the quarter sequentially first.

Sure. So much of the reduction was really driven, as we said, by the Comfort transformation as well as the foundation brands. And frankly, quarter 1 reductions are not uncommon for us as we tend to clean up the system due to noncompliance and other issues. But really, the strength in our pipeline is what makes us so optimistic when we take a look at the 2% to 3% unit growth going forward. Given that we have conversion up about 13% in our pipeline and it typically takes anywhere from 3 to 6 months to open, we're even more optimistic that we'll continue to hit those aggressive figures for the remainder of the year. And we are holding to that 2% to 3% guidance.

Okay. But in that range, nothing's shifted for you?

No.

And then just on the other revenues. The other revenue line was about 90% higher than we expected in the quarter. So I was just wondering what was driving that?

Yes, the primary driver of that, Felicia, is we have a onetime program around rolling out our chip and PIN devices to our franchisees. So those would be some revenues this year that you'll see to the other income that won't be a recurring revenue stream for us going forward.

Chip and PIN devices, what's that?

The EMV, so basically the credit card devices at the hotel. So rather than use the magnetic strip, the chip and PIN. We're in the process of rolling out those to our hotels, and there are some revenues associated with that as well as some costs.

And going forward, we should see a more normalized level there?

Yes, that will be a 2017 increase. But it won't go on prior to that.

Okay, but we could see it in -- for the rest of the year?

We will, yes.

Okay. And then just finally, Steve, with the Cambria brand, I was just wondering, where is the rollout relative to your expectations? And do you think that you can get the brand to the point where you don't need to offer key money to the developers? And then also just a few follow-ons with that, when a developer chooses a Cambria over other brands, just what are the main reasons they cite for this? I'm really kind of asking that in the perspective of with the Marriott [Muscle] now behind the lost, you now might have a different competitive environment there for Cambria. And then just a little bit different just on Sleep, how you're seeing things vis-a-vis Hilton's new Tru brand?

Okay, so let's start with Cambia. So the answer is we are obviously creating incentives for people to do those hotels. It's working incredibly well. We are looking at maybe adding 14 this year open. Construction is increasing. Within 9 months, I wouldn't be surprised if you saw construction in the 25- to 30-unit range. So it's all going extraordinarily well. We are doing -- basically, we're very much on track with our original plan for Cambria, which was a 3-year program. The only difference is we're doing it with larger hotels with bigger revenues. And so the unit count actually is a little behind what we expect, but the revenues are actually a little ahead because of the size. So that's working incredibly well. They're opening very strong. They're stabilizing within 9 to 12 months based on some programs that we're doing. And so the developer community is taking note. So the -- and we've got some great projects coming up. We've got another -- we've got 2 more projects in LA. They're going to open 1 at LA Live; 1 on Spring Street, which is going to have the coolest rooftop bar in all of Downtown LA. We got projects in San Francisco right off in Union Square. The one in Chicago is the Oriental Theater, which is an old Masonic temple. It's going to be one cool hotel. So it's really exciting to watch the momentum. And then the developers, the reasons people are choosing us are 2 reasons. One is, we have open urban markets; we're buying dirt; we're putting deals together with partners; we've got a lot of multiple unit partners, so once they do one, they are doing several; so we've got several that are on the verge of doing 5 or more. And so we're attracting institutional capital for the first time. We got several punch in funds involved in a lot of our hotels. So it's just everything is working from that perspective. The performance is backing it. And the reason people choose us is because: one, they see a brand on the make; two, they can develop in the territories that they want to develop in; and three, we're providing incentive capital. I don't view the Mariott-Starwood deal as an impediment. I view it as an advantage. I think that's going to drive more deals for us, not fewer. And then, on Sleep Inn -- I'm sorry?

You want me to?

Pat, why don't you tell us about Sleep?

Sure. Good morning, Felicia. So on Sleep Inn, I mean, we're very optimistic on the pipeline that we're seeing for Sleep. We introduced a new prototype last year. And 8 months later, we actually have the first of our hotels that have used that prototype open. So we're feeling very good about where the development side is on Sleep. It's the lowest cost to build in the segment and has the highest ADR. So when you put that combination together, developers are very attracted to it. And so we feel very good about sort of where that's going. And I think as we mentioned earlier, it's had 34 consecutive months as a brand that's stealing share from the competition. So we feel really good about how well we are positioned with Sleep Inn.

And you haven't seen any kind of -- I mean, I know it's a new brand. It takes a while to build up. But any kind of nipping at your heels from Tru or anything like that?

No, I think it's too early to tell where Tru is going to end up, where it's actually going be introduced in the market, where the cost per key is going to come out. And ultimately, how it's going to perform sort of where everybody is sort of waiting to see. And developers we talk to don't have answers yet. So it's still something that I think needs to be defined in the marketplace.

And our next question comes from the line of Shaun Kelley with Bank of America.

This is Barry Jonas in for Shaun. Just a couple of questions. One, just going on the Comfort transformation. Can you give us any sense what sort of a headwind to unit growth that might be come 2018 and beyond?

We don't see much of a headwind on Comfort right now. As we've -- as mentioned on previous calls, we've opened up a significant number of markets for Comfort which is providing opportunity for us. And the value proposition as we've been talking about as well is really starting to resonate with existing owners who want to do a second Comfort or a third or a fourth with us as well as attracting new developers to that brand and to the hotel industry in general. So we feel actually pretty positive about the Comfort growth, both this year and beyond.

Yes, and I think the key point is the pruning of the system is essentially completed this year. And we expect the system to begin growing as we've mentioned with the deals we're doing in '18.

Understood. Then when you think about investments in advances, the $43 million that you invested in the quarter, where do you expect that to end up? And when do you think recycling activity will start to offset some of the incremental investments you're making?

Well, a typical cycle -- so we've done this a lot. We've actually recycled significant capital already through some of the deals that stabilize quickly. So the typical round trip for capital that we're putting in is, call it, 5 years. It's a 2-year construction period, 3 years to stabilization. That's when a refi event occurs, and that's when our money comes out typically. It could be shorter. In New York, we got money out in the first year. We most of the capital in mezzanine loan we've put into that out because they were able to refinance quickly and the hotel is doing incredibly well. It could take -- I've seen deals that I have done previously that took 7 years instead of the 5 to get where we wanted to be for the owner. But I think what you should think about it is that cycle goes in. It's a 2-year investment during construction period. And then on average, I think you can say 3 years of recycle. So you're seeing a lot of the investments we made earlier starting to recycle. We've got some loans coming due and other things that are going to occur. But we're going continue, though, to -- continue to recycle meaning we're going to put that capital back out in new deals. So I think the guidance we've given over the years about how much we're going to utilize, I think it's still probably good to follow. And I think there was a question earlier about how long will we continue to do that. Our sense is when we get to 100 hotels, when it's performing well, which will be sometime in the latter part of this decade, then we'll be able to reevaluate the type of incentive we give based on the performance and the demand for the product. But right now, we couldn't be happier with where we sit.

I think that's exactly right. We have authorization up to about $500 million. And the beauty of the model is really, as Steve mentioned, is that we are expected to recycle that money within a 5-year period, which results in an open hotel, under a similar asset-light model in the rest of our portfolio. So coupling that with the fact that Cambria could command up to 5x the royalty with some of our other hotels, makes it even that much more compelling.

Great. And then just last one from me. It looks like initial franchise and relicensing fees are down about 3% in the quarter. Just when will that fee line item start to pick up? And how does that work relative to the transaction activity you're seeing?

Yes, so we couple them together obviously. And I think the good news is, is we saw relicensing fees up 8% as we mentioned on the call. And this is in addition to the 11% growth that we had last year. Now with initial fees, it's primarily a timing in revenue recognition with accounting rules. So we do anticipate seeing an uptick in this as well.

So typically, they would -- you would recognize those fees when the hotel opens on the new construction. And so the average of our new construction 18 to 36 months after a contract execution. So that's when you'll see that revenue recognition coming in.

And our next question comes from the line of Thomas Allen from Morgan Stanley.

It's Mark Savino on for Thomas. Just as we think about the 3% to 4% full year RevPAR guide, can you just give us maybe a little bit more color as to what you're baking in, in terms of the broader economic growth?

Yes. So I think when we think about RevPAR, obviously, we track pretty closely with GDP and whatever the rates are. And so you're still seeing very strong consumer confidence. GDP was up 1.4% in the first quarter and still projected to be up about 2.2% for the full year and unemployment is down to 4.5%, so that's really a positive sign for us. Disposable incomes continue to be projected to be up over 2% this year or so. We feel like we're going to see a pretty strong RevPAR year all year. I think Dominic mentioned that there was the Easter shift in our first quarter results. We've prescribed about a 60-basis-point impact to that, so benefited about 60 basis points in Q1 and down in the second quarter, which is why you see a slightly lower RevPAR guidance in Q2. But then for the remainder of the year, we feel like we'd be in that 3% to 4% range for the rest of the year.

But I think the way we're thinking about it is we think it's going to be a strong RevPAR year. Because of the way Easter worked, the numbers have jumped around a lot. And if you look at Smith Travel's report on this, it explains all the details why. And so what we're seeing for May early on is pretty strong, and we're expecting a strong summer. But I think what you'll see from us is we're going to know a lot more sort of after -- through May as we see where it starts settling out. But we are not expecting anything other than a strong RevPAR year. And the question just is, is how strong does it get which is why we gave you the range we gave you.

That makes sense. Just -- and then just switching gears on the buybacks, noticed you didn't buy back any stock in the quarter. So just wanted to get sort of your latest views on how you're thinking about that?

Sure. Sure. And I think as always, we first look internally on how we allocate our capital, right? And if we invest it wisely internally, we do believe that we'll have outsized returns for our shareholders. Again, I know that we've said this on previous calls, but we'll always continue to follow the philosophy that return to shareholders is our top priority. And the beauty is, is we have to look at all of the available options to us. We are deploying capital obviously for Cambria, other strategic projects. And we can -- we'll continue to consider both dividends and then share repurchases in the future as well.

And our next question comes from the line of Carlo Santarelli from Deutsche Bank.

Just given, obviously, the growth this year in your effective royalty rates and some of the changes that are going to be made to the portfolio over the year as well as the portfolio growth, how are you guys kind of thinking about the growth in your effective royalty rate as we look out to 2018?

Yes, I think -- well, we've been able to grow our effective royalty rates for a few reasons. Obviously, we've been investing in our brands over the last several years highlighted by the Comfort transformation strategy. And improving our brand has certainly allowed us to improve the pricing of our contracts. Last April, we did increase the rack royalty rates on 6 of our brands anywhere from 25 to 50 basis points. So that's helped to have a positive lift. And lastly, we're seeing the burn-off of royalty rate discounts that we did back when the lodging sector was just beginning its recovery. Those kind of 3 events have given us these outsized effective royalty rate gains here in the last 2 years. I would expect some of these bigger gains still continued in mid-2018. And then as we go forward, we get back into the more historical growing the system rate about 3 to 5 basis points a year after that.

So you're comfortable with similar kind of 12 to 14 again in '18.

I don't have the exact number. There were certainly more than the 4 to 5 that we've seen historically, so closer to that 10-basis-point range, I would think.

And our next question comes from the line of Jared Shojaian from Wolfe Research.

So this was the first quarter in a while that your RevPAR actually missed a little bit the midpoint of the guide. Were you just being less conservative going in? Or did you experience any unanticipated in issues during the quarter?

We didn't miss. We were above the midpoint.

We were -- we guided to 3.5% to 4%. And so we came in at 3.8%. I don't think there was anything that we missed. It just was a range that we believed, I think we're within 20 bps of that midpoint of the range. We were really, really pleased with how we performed against, both the total industry, which we exceeded, as well as our chain scale segment. So there was no surprises than just now being here and hearing that.

And I think what you should read into is we confirmed our guidance for the year. That's what we think.

Right.

All right. So okay. So maybe on that then, maybe you can help me understand a little bit better. The 3.8% you did in the first quarter, you had an easier comp, you had the Easter benefit. And now I think in the second half, you're projecting around 4% for the 3Q and 4Q. Maybe you can help me understand a little bit what I'm missing. It feels like a toucher comp. So just maybe curious how -- why you're confident that you're going to be able to get there?

No. I mean, I think at the end of the day, we obviously had a strong Q1 where we never exceeded all the expectations in the levers of RevPAR. I think when you take a look at the plan that we set for ourselves early in this year, we were more bullish coming into the year versus our competitors, and we believe we're tracking against that plan. And while we did see -- or expecting to see a little bit of a dip in April as a result of the Easter shift, we actually are very happy with the preliminary indicators and it's frankly a little bit above our expectation. So we do anticipate seeing continued strength throughout the rest of the year.

Okay. And then just one quick last one. Can you guys give us an update on SkyTouch and where you stand with that?

Scott, why don't you share the good news?

Sure. So I guess we talked in the last call our expectations for SkyTouch this year to run at a breakeven, we're on that pace. And we feel really good about how Q1 went. We're above our sales expectations on that front as well. So right now, we have over 300 non-Choice Hotels customers, and the pace in Q1 was better than Q1 last year and the year before. So we continue to see strong momentum. I think it's important to recognize that the spend that we did in the last several years was really about investment in the platform. That investment is now there. The product is running in Amazon Web Services. We retired a lot of technical debt, so it's really positioned for growth right now. And we feel really good about the guidance we've given on that as far as running at a breakeven and the sales pace we're seeing. A SaaS business model works a little bit differently. The beauty of it and the similarity to our current business is, once you sell that contract, it's recurring revenue. And we feel really good about the progress we're making on that front.

And as far as your views on strategic alternatives, where do you stand with that on -- for SkyTouch?

We're currently focused on growing the business. We're not actively looking at that. It's always something that has come along as others have reached out to us, but we feel really good about the business today and where it's headed.

And our next question comes from the line of Gregory Miller from Suntrust Robinson Humphrey.

I'm online for Patrick Scholes. Wanted to dig in further on your pipeline growth. Curious if you noticed any changes in trends where your domestic franchisees are adding new construction supply within the market, particularly for Comfort and Sleep Inn. How much the pipeline growth is in the CBD and suburban locations versus areas that are currently seeing lower levels of supply growth nationwide such as in highway and rural markets?

I don't know if we have any specific numbers on it. But anecdotally, I mean, the way we feel about it right now is a lot of the top 50 urban markets, development is slowing down a little bit for those markets just because a lot of supply has come in and now you're seeing a real shift in strength in both the secondary and tertiary markets, which is where Comfort tends to shine. So we are seeing that pickup in those markets. I don't know we have specific numbers on it, but it's...

I think the way you might want to think about it is if you look at our entry in the upscale with Ascend and Cambria, that is primarily urban markets. We're doing a few Comforts in urban markets, but most of them, as Pat mentioned, are the secondary and tertiary markets. And the encouraging thing about the pipeline for us is that had laid the major urban markets -- now the major urban markets as typical in the cycle is starting to slow a little as some of them begin to increase -- have supply increases. We don't find it slowing us down in the upscale space because we're wide open there. And the great thing about our system is we don't have many rooms in primary urban dense suburban locations, but we have enormous demand for them. So when we're doing these upscale hotels, we know we're going to fill them. So if you think about the rest of it, the encouraging thing for us and the reason we're so bullish on the supply growth for us is the secondary and tertiary markets are really where the action is. And that's where we do the bulk of our brands. So we're seeing very encouraging signs from that.

(Operator Instructions) Our next question comes from the line of Robin Farley with UBS.

I had a question I missed the part -- the first part of the call because you're overlapping calls, so I don't know if you commented. But have you seen any benefit with some of the increased regulation against Airbnb in some of your markets? I'm thinking New York, in particular, just some of the changes that started to be enforced there in kind of January, February. Do you kind of have a change in leisure demand there that you think may be tied to that?

We don't see much impact at all. Steve just mentioned, those sort of dense urban markets and destination locations where Airbnb has a lot of supply, I guess, if you want to call it that, that's not where our -- so we have a lot of inventory opportunity there. So it's not impacting us directly there. I think it's interesting to look at Airbnb, I mean, about -- I think they have like 3 million listings. About only 1 million of those are actually comparable to a hotel. And most of them are in those sort of major markets and destination markets. They're also not where our customer really plays from a price point perspective, nor from a length of stay perspective. So we don't really see an impact from what's happening at Airbnb. I'll say, though, we are pleased to see that the regulators are starting to treat them more like hotel companies. So when you think about fire and safety, those types of issues that hotels are required to adhere to, that municipalities are waking up to that fact that everybody needs to play by the same rules. So we're encouraged by that development.

So I think the other thing that we've talked about on previous calls is, we don't view it as a threat, we view it as an opportunity which is why we launched Vacation Rentals by Choice so -- which we're excited about the progress of that business. So we think they've got to play by the same rules as the rest of the industry. But they're here to stay. We're just not -- we just don't see really the impact from it and for all the reasons that Pat mentioned. But we think the models are worth pursuing and we're pursuing it.

Okay. Great. And then one other clarification that you may have addressed during the call. But your full year EPS guidance is unchanged, but your tax expense is lower, which in theory would have added a couple of cents to the EPS. So I don't know if you can give any color on kind of what's driving that lower taxes rate. But kind of why that didn't help the full year EPS guide?

I think we have maintained our range, which is a fairly wide range. So we will still maintain within that. The only other item that's made a little bit unfavorable to where we thought it would be. The timing of some of our Cambria openings, where we're in joint venture and partners, some of the upfront costs around opening the hotels are a little bit higher so we're seeing a little bit below the line and our equity earnings numbers that may be a little bit lower than what we expected at the beginning of the year. But overall, still on target.

And that concludes our question-and-answer session for today. I would like to turn the conference back over to Steve Joyce for any closing comments.

Thank you. Thanks for joining us. As always, we appreciate your interest in Choice Hotels. That concludes our call for today.

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