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.