CHH Q1 2014 - CONF CALL NOTES

Slow and steady mid-scale segment, but new development beginning...

PREPARED COMMENTARY

  • Franchise revenues +6% based on royalty fees +5%
  • RevPAR:  domestic +5.6% based on occupancy +200 bps and ADR +1.1%, expect greater demand for hotel rooms, strongest results were in pacific and mountain regions
  • Improved outlook for remainder of 2014
  • Increasing RevPAR guidance by 100 bps to 4.5% to 5.5%
  • 59 new franchise development contracts in Q1 2014, stronger due to availability of financing
  • Now expect franchise contracts will exceed 2013 levels
  • Reservations made via central res system increased 42.6%, up 320 bps YoY for Q1 2014
  • EBITDA from franchising activities +15% in Q1 as result of franchise revenues +6% and 500 bps margin, franchise SG&A less than expected (delay in timing of certain expenses)
  • Domestic royalty revenues +5.5%
  • Franchise system hotel count +2.4%, driven by Ascend and Quality Inn brands
  • Comfort Hotels - 97 hotels cancelled in 2013, repositioned 33 of 97 within other brands.
  • Aggressive new construction plan for Comfort Hotels in key markets.
  • Additional SG&A in new construction team for 2014 for Comfort and Cambria Brands
  • Costs: less than anticipated, resulting in franchise margins expanding from 55.1% to 60.2%
  • Skytouch $3.3m of expenses, but lower than expected
  • Sales:  sold 2 of 3 MainStay hotels, expect to sell remaining hotel in Q2
  • Outlook remainder 2014: 
    • 30.8% tax rate
    • No share repurchase
    • Revpar 5% for 2Q  4.5 to 5.5% for 2014
    • Unit growth 1%-2%
    • Royalty rate will decline by 3 bps for the full year
    • Full year EBITDA of $227-232 million from franchise activities
    • Outlook considering franchised, owned and Skytouch activities:
      • 2Q EPS $0.48
      • FY EPS $1.87-$1.93  
      • FY EBITDA $207-212m
  • Strong start, optimistic, trends better, consumer expectations rising, economy picking up momentum, improving development cycle.

Q&A

  • What specific trends gave upbeat view - focused on employment trends as well as very low development starts = confidence for 2014 and next several years
  • Development financing - seeing constant improvement by local and regional lenders, CMBS coming back, leverage levels increasing from 50% to 65%/75%, even higher for stronger sponsors.  Core franchisee using local lender, while National franchisees use National lenders.
  • Any real inventory additions will be (at the earliest) late 2015 to early 2016
  • Construction timeline for average hotel -- 2 to 2.5 years, 9-12 months of actual construction, usually 12 months of zoning and entitlement process
  • Aggressive Comfort Hotel incentive plan will drive new development and room additions for Choice!
  • Conversion activity/trends -- up 1% to 2% but expect higher terminations
  • Cash increasing & how view dividend -- substantially all current cash is held off-shore, so off-shore cash not linked to dividend outlook.  Could use off-shore cash for acquisitions, development, or growth at Cambria brand.
  • View of leisure consumer vs. business consumer - leisure is very strong, getting stronger, and getting better for CHH.  
  • Easter shift impact to Q1 -- CHH not impacted by Easter shift because of Dec, Jan, & Feb results for franchisees.
  • Comfort Hotel brand revitalization -- new design, new protype, standards, bedding, breakfast, increase quality expectations, required performance incentive plans for franchisees, not Cambria-like, "Comfort Property Improvement Process" (CPIP). Goal to accomplish nationwide completion with 2-3 years.  Seeing $10 ADR improvement following CPIP, drop to bottom line.
  • Competitor reaction to CPIP - competitors moved early, expect to leapfrog Fairfield and Holiday Inn. 
  • Upper Mid-scale risk of oversupply -- not likely because supply is going to Upper and Upper Up Scale segments.
  • Details on CapEx total vs. Skytouch vs. development -- $15 million for systems, SkyTouch limited and usually expensed, Comfort Inn key money, Cambria mezz or JV money.  Framed $20-$40 million but could be higher.  Seeing opportunities in key urban markets, thus CapEx could be higher -- viz, Washington DC, NYC, White Plains, Phoenix, Chicago, etc.    
  • 30 Cambria Suites under construction by year end 2014.

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