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Low quality beat and lower guidance for 4Q09




  • Despite the most challenging lodging environment they have been able to grow their footprint
  • The operating environment for hotels continues to be challenging.  CHH RevPAR performance was 50 bps better than their chain segment comps
  • Pace of RevPAR decline in the 3Q was comparable to what they saw in the 2Q but things are starting to stabilize. Occupancy, rate and RevPAR declines on the weekends have been noticeably less severe than week nights (so high single digit for weekends vs high teens during week days)
  • December results will be in the their 1Q2010
  • Expect pace of RevPAR declines to continue to ease into 4Q09, Guidance of -12% in 4Q
  • Focusing on brand awareness - loyalty programs are seeing very nice member growth - will have over 9MM members and account for more than 24% of their revenues (vs 22% in '08)
  • Continuing their commitment to returning FCF to shareholders through dividends and share repurchase
  • Offset some percentage of their RevPAR declines with royalty rate increases and room growth.  Royalty fees are expected to grow 5 bps next year
  • Executed 79 new domestic franchise contracts in the quarter and applications for conversions were flat y-o-y. New construction franchise sales declined by 82% in the quarter.  22 re-licensing transactions.
  • Adjusted SG&A declined 8% y-o-y and expect to manage to a high single digit decline for the full year
  • Leverage = 1.8x Adjusted 2009E EBITDA
  • Goal is to generate the highest ROI for franchisees
  • They remain committed to returning FCF to shareholders


  • Looks like unit growth guidance has increase from July.
    • Gross openings are inline, but there have been less terminations than they anticipated
  • Conversion trends?
    • Holding up better than everything else.  New build market has become extraordinarily difficult. They have no seen that big uptick in conversions that they usually occurs when lots of hotels trade hands.  Bid and ask for hotels is starting to sync. Think that all the action in hotels will be all about conversions and that should benefit them as they are the "premier conversion company in the space"
    • Seeing some owners want to upgrade brands
  • Out of the 550 companies in the pipeline, what is under construction?
    • Low-to-mid teens area. Conversions have traditionally been (2/3rds?) of gross openings which aren't in the pipeline for very long. A lot of their pipeline will not start given the lack of construction.  The first financing that does come back will be in smaller hotels so they will benefit first
  • Cambria suites, no new contracts this quarter?
    • Victim of current financing environment.  Loans above $10MM simply aren't available. So until the financing market recovers that brand will grow very slowly
  • Potential acquisitions?
    • Some brands are in play, like Extended Stay, but haven't really seen a lot of others
    • Looking at everything and scanning the environment for opportunitites and hoping that brands will trade at better prices than in the past
  • Any change in other brands providing incentives on new build?
    • Have seen aggressive incentives but doesn't really move the needle in an environment with no financing
    • They have not changed their incentives... there aren't really many other companies that do any kind real conversion volume - they are really new builds
  • November 2008 was the first really bad month for them so comps get 600 bps easier over Sept/Oct last year
  • They have pretty good visibility into their guidance since more than two thirds of the "quarter" is over for them
  • Continue to think they are getting the benefit from trade downs although they would call it share gain from their value proposition
  • Are they getting more corporate contract business?
    • Yes - up 30+%
  • OTA's are not a big part of their business, EXPE is their largest OTA channel at 3% of their bookings.  Thinks that OTA's are an expensive channel, but anywhere you can get revenues today is worth dealing with
  • Why is the EBITDA coming down so much since they shouldn't be as sensitive to RevPAR?
    • Slight reduction on the royalty revenues
    • Lower initial and re-licensing fees
    • Re-licensing fees are really driven my turnover in asset base - they really can't stimulate that
  • Have a very high retention rate of properties in their system.  Haven't seen any real benefit from discounting franchising fees aside from the normal "ramp in fees" that they get (i.e. initial discount)
  • Primary priority for FCF is returning cash to shareholders, whenever they think their stock is cheap they will opportunistically buyback stock.  They are one of the only companies that increased their dividend this past year.  Lastly they are exploring ways to grow their business (brands, acquisitions, etc) - but returns need to be very high on those opportunities
  • 50% of conversions is from repeat business (when current franchisees buy new hotels)
  • Not seeing strength in leisure translating into more week night travel
  • The fact that RevPAR is starting to look better is just easier comps not from any fundamental improvement
  • Typical cost for a travel agent is 10%
  • Were the lower terminations just deferrals?
    • Some were but some were not.  The franchisee actually made the improvements they needed to make to keep the flag
  • Assume no gain or loss on investment on retirement funds in the 4Q.  If the market is up in 4Q than there could be a gain and vice-versa but there is an offset to higher SG&A on a portion of any gain or loss