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CHH 1Q2010 CONF CALL "NOTES"

"While the domestic RevPAR and franchise sales environment remained challenging during the first quarter, the company's overall franchise sales results and recent RevPAR trends indicate some stabilization in this environment"

- Stephen P. Joyce, president and chief executive officer

CONF CALL

  • Their 1Q RevPAR includes December.  Are encouraged that the pace of decline has moderated
  • March and first few weeks of April - occupancies have turned positive and ADR declines have moderated.  RevPAR is down mid-single digits. 
    • So expect a decline of -2% in 2Q09
  • Domestic franchise development has been negatively impacted by reductions in property level profits and limited availability of financing has hampered their growth
  • Hearing that property transactions are picking up from the brokerage community
  • Have 2-3 Cambria units opening later this year
  • Near term prospects are better for Ascend as a conversion brand than that for Cambria
  • Surpassed the 10MM mark for members in CHH privilege - members accounted for 26% of revenues - up 500 bps y-o-y
  • Applications received declined by 29% for new franchises y-o-y. Have seen some encouraging signs of stabilization in development recently.
  • 18 relicensing transactions - down 49% volume wise - due to lack of transactions
  • Optimistic that conversion opportunities will increase in the near term

Q&A

  • MAR's guidance has more transient and urban customers and they have easier comps - so it's not exactly comparable
  • For the last decade, 4-9% of their fees are from initial franchise and relicensing fees- average of the last 10 years is 6%. Assume it gets better from current levels but unclear when it will return to average rates.
    • Need to get back to a normalized transaction environment which will really help the conversion market
  • Looks like removals have been pretty high the last few quarters and sequentially no room growth, why?
    • New construction pipeline is drying up as more hotels open - only 80 new hotels projected to open in 2010
    • Conversions are holding up better but still depressed. Conversion hotels open 3-9 months from signing- so you don't see it in the pipeline
    • More terminations from their portfolio - because they are enforcing brand standards, and franchisees are having credit difficulties
    • Expect to get back to net 2% room growth in the next few years
  • Relicensing only happens when a sale of a unit occurs
  • They historically have a 90% retention rate with franchisees
    • saying that they initiate most of the terminations
  • They have converted a lot of properties in their system to lesser brands--however, when properties leave their system, they either go to Wyndham brands or just become independents
  • Share repurchase program? Why did it trail off?
    • Price is a factor. Their approach is opportunistic. Cost of capital and liquidity are also factors.
  • While there have been a growing number of foreclosures, those assets aren't hitting the market as much as they thought.
    • Banks are extending more.
    • Given the upswing in RevPAR, owners are holding on more and funding negative FCF in hopes of an upturn
  • Initial franchise and relicensing fees- timing?
    • There is usually a 6 month lag between transaction pickups and growth there.
  • Is CHH interested in acquiring an UUP brand?
    • Yes... they are interested in an Upper Upscale full service. Ascend is partly helping them there - although it's a more "boutiquey" brand
  • April has been running relatively comparable to March. Occupancy is up slightly - but overall, fairly similar. They have less volatility than full service brands, and they are more leisure oriented.
  • Very little visibility into the summer season - their booking window is 7-10 days on average.
  • Marketing and reservation receivables?  When will they start billing their franchisees without getting the money back from their franchisees?
    • They do bill marketing and reservation fees and collect them every month--it's just that in certain periods they spend more then they receive. During the last lodging downturn they saw the same cycle of the receivable growing and then decreasing once things recovered. They are also investing in their international systems.
    • Expect modest growth in that receivable over the next few years and then a gradual decrease
    • Think it's critical to have that marketing spend during the downturn
  • Is their typical franchisees still making money given the declines in RevPAR? What is the health of their system?
    • Average operating margin is 40-50%. So it's probably half of that now and their cash flow is really dependent on how much leverage is on the property.
    • They have seen some modest deterioration in the health of their franchisee systems - but no different from last year.
    • Have not seen a material uptick in foreclosures in their system.
    • Think that they are making money - just less of it
    • Their franchisees have exposure to multiple brands typically - and they believe that their brands are fairing better than others so that should help them in the future
  • Expect that RevPAR is flat in 3Q and positive in 4Q.  Driven by occupancy growth
  • Central reservation system makes up 1/3 of their revenues- which is consistent over the last few years. OTAs are only 6% of their distribution, and they are relatively flat