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Edited Transcript of CHH earnings conference call or presentation 27-Oct-16 2:00pm GMT

Thomson Reuters StreetEvents

Q3 2016 Choice Hotels International Inc Earnings Call

Silver Spring Oct 27, 2016 (Thomson StreetEvents) -- Edited Transcript of Choice Hotels International Inc earnings conference call or presentation Thursday, October 27, 2016 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Steve Joyce

Choice Hotels International, Inc. - CEO

* Scott Oaksmith

Choice Hotels International, Inc. - SVP, Finance & CAO

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Conference Call Participants

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* Jared Shojaian

Wolfe Research - Analyst

* Anthony Powell

Barclays Capital - Analyst

* Robin Farley

UBS - Analyst

* Shaun Kelley

Bank of America Merrill Lynch - Analyst

* Thomas Allen

Morgan Stanley - Analyst

* Jeff Donnelly

Wells Fargo Securities - Analyst

* David Katz

Telsey Advisory Group - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the Choice Hotels International third-quarter 2016 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 provisions of the Securities Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as choice or as management believes, expects, anticipates, foresees, forecasts, estimates or other words or phrases of similar import. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Please consult the Company's Form 10-K for the year ended December 31, 2015, and other SEC filings for 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 to not place undue reliance on forward-looking statements which reflect our analysis only 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 third-quarter 2016 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, Incorporated. Please go ahead, sir.

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Steve Joyce, Choice Hotels International, Inc. - CEO [2]

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Good morning, and thank you. Welcome to the Choice Hotels earnings conference call.

Joining me today is Scott Oaksmith, our Chief Accounting Officer. This morning we're going to update you on our performance for the third quarter of 2016. It was another strong quarter, with development increasing, more business than ever being driven through our proprietary distribution channels, and our RevPAR results outperforming the competition.

So let's start with RevPAR performance. This quarter domestic system RevPAR increased 4.5%. Our domestic RevPAR performance for the third quarter exceeded total industry results by 120 basis points and also exceeded growth reported by Smith Travel Research for all of the segments in which we compete by 220 basis points. This marks the sixth consecutive month and eight of the last nine quarters that Choice's RevPAR performance growth has outperformed the industry.

There's a number of factors that are driving these results. First, Comfort. Our efforts to rejuvenate the Comfort brand, which have included the implementation of higher standards for hotels joining the brand, required meaningful property improvement plans, and targeted underperforming Comfort for termination and replacement with new construction product, are all working. These efforts have resulted in 24 consecutive months of RevPAR index gains.

The strong performance of our Comfort brand has not gone unnoticed by the development community, and we are pleased that over the last two years the Company has executed 162 new Comfort construction franchise agreements, which is more than double the number of agreements executed in the previous two-year period.

Our Comfort new construction pipeline has grown to 180 hotels, which represents a 30% increase over the prior year, and we are confident that the improvements we have made to the existing hotels in our system and this new product will continue to fuel Comfort's performance over the next several years.

SmartRates, another area that is helping improve daily rates at our franchisee hotels, are the state-of-the-art tools that we have launched to help hotels set and drive the best rates. In May we launched a new tool for our hotels called SmartRates. It is a powerful pricing optimization system developed by Choice Hotels that provides hotels with daily rate recommendations.

It analyzes market conditions, the way a hotel has set rates in the past, and how a hotel's competitors have set their rates. The tool, using essentially artificial intelligence, actually learns about the hotel's demand patterns so it can ultimately recommend the best possible rates.

We launched this at just the right time. As occupancy levels peaked we knew much of the RevPAR gains this year would come from making sure hotels set their rates correctly. This is driving growth and profitability for our franchisees' hotels, and is helping us achieve strong RevPAR growth.

Choice Privileges Member Rate. Another area that we are excited about is the launch of our Choice Privileges Member Only rates in which visitors to ChoiceHotels.com and our mobile apps are able to access discounted member rates that can't be found anywhere else on the internet.

Both existing and new members of Choice Privileges can access these executive room rates that are a 2% to 7% discount off the best available rate. This is in addition to our commitment to stand behind our pricing. If a guest finds a lower price elsewhere online, we will match that price and give that guest a $50 Visa gift card. While it is still early on, based on the initial results we are optimistic about the long-term impact that this program could have.

Choice Privileges Program Redesign. At the beginning of the year we announced the biggest redesign of the Choice Privileges program in our company's history. The changes are designed to bring greater value to members, in return drive business to Choice distribution channels and increase the number of loyalty members. And it is all working.

We have just surpassed 28 million Choice Privileges members. We have already signed up more members this year than in any other year in our history. All of these new members are contributing to the increase in revenue generated by our central reservation system and property direct loyalty program. The revenue contribution on these channels year to date increased to 54.7%, up 230 basis points compared to the same period last year.

This quarter we had our highest CRS revenue day ever on July 11, surpassing $21 million. And we had four other days in the quarter that exceeded $20 million. In July we experienced four of the top five revenue dates ever for the Company. The amount of revenue delivered through our CRS continues to set new milestones and reach new all-time highs.

ChoiceHotels.com continues to grow significantly and generates the largest share of revenue of our distribution channels. Our direct online channels, ChoiceHotels.com and mobile, had 17 days with over $6 million of bookings in Q3 2016 compared to 9 in Q3 2015. We hit our highest day ever for ChoiceHotels.com and mobile in July 2016, with an $8.2 million day.

All of these initiatives are delivering great results and helping us drive RevPAR performance over our competition.

Now, moving on to the rest of the results, there are a number of other very positive financial highlights and development results for the quarter.

The Company delivered a 17% increase in diluted earnings per share. Total revenues increased 11% for the quarter and franchising revenues and domestic royalty fees each increased 7%. Our year-to-date domestic system-wide gross room revenues reached a record of approximately $5.3 billion for the Company domestically.

On the development front we executed 161 new hotel franchise agreements, a 25% increase for the quarter. And our relicensing and renewal transactions remained very strong. The increase in our domestic franchise agreements was driven by growth in both new construction and conversion deals, and we continue to expect the number of executed domestic franchise agreements for full year 2016 to exceed the very strong year we had in 2015.

Our domestic pipeline of hotels has also continued its strong growth and has increased 20% over the prior year. These strong results are driven in a meaningful way by our momentum in the upscale segment and the refresh of Comfort and Sleep brands. We believe that the growth and the size of our domestic pipeline provides a strong platform for growth in our domestic system size over the next several years.

We are pleased with the momentum we are seeing with strong RevPAR gains, our distribution strategy driving more business to our franchised hotels, and strong development growth.

Now let me turn it over to Scott Oaksmith to share more detail about our financial results. Scott?

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Scott Oaksmith, Choice Hotels International, Inc. - SVP, Finance & CAO [3]

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Thanks, Steve.

Our third-quarter financial results continue to strengthen and build on the momentum of the first half of the year. In this morning's press release we reported diluted earnings per share of $0.84, a 17% increase over the prior year. Our reported diluted EPS results exceeded our previous outlook for the quarter by $0.06 per share.

Approximately $0.05 of this outperformance is attributable to better than expected operating results, while the remaining $0.01 was the result of lower interest costs and a lower expected income tax rate than we had previously expected. Our operating income results exceeded expectations due to a combination of better than projected hotel franchising revenue performance as well as lower than anticipated SG&A expenses.

Our franchising revenues for the quarter increased 7% over the prior year, driven primarily by growth in our domestic royalties and procurement services revenues. Once again during the third quarter all three of the levers that drive domestic royalty revenue increased compared to the prior year. As a reminder, these three levers are RevPAR, effective royalty rate, and system size. And the performance of these levers resulted in a 7% increase in domestic royalty revenues to nearly $91 million.

A few highlights of these RevPAR levers are as follows. We achieved a 4.5% increase in domestic RevPAR in third quarter which exceeded our previously published outlook of a 3.5% to 4.0% increase. Our RevPAR increases were driven by a 3.4% increase in average daily rates and a 70 basis point increase in occupancy.

As Steve mentioned, we were particularly pleased that our RevPAR results exceeded the performance of the overall industry, as reported by Smith Travel Research, by 120 basis points. Our outperformance of the industry's RevPAR results was consistent in terms of our occupancy and ABR performance, as we exceeded industry occupancy rates by 70 basis points and ABR by 10 basis points.

We were also pleased that we outperformed the primary chain scale segments in which we compete, and have now outperformed these segments in seven of the last eight quarters.

We attribute our third-quarter RevPAR outperformance against the overall industry and the primary chain scale segments in which we compete primarily due to the continued strength of leisure travel; the redesign of our Choice Privileges program, which has resulted in the aggressive expansion of a number of loyalty program members; the rejuvenation of our Comfort brand; as well as the new SmartRate inventory pricing system that Steve previously discussed.

We expect to see these trends continue and, as a result, we expect our fourth-quarter RevPAR results to increase between 4% and 5%.

Our domestic effective royalty rates have also continued to expand and totaled 4.39% in the third quarter, a 12 basis point expansion. Furthermore, our year-to-date effective royalty rate has now increased 11 basis points compared to the prior year. As a result we have revised our outlook and now expect our full-year effective royalty rate to expand 10 to 11 basis points.

On the supply side, we grew the number of hotels operating in our domestic franchise system by approximately 1% compared to September 30 of the prior year. This growth was in line with our expectations.

Our Quality brand continues its impressive growth, increasing 6.2% over the prior year, and now exceeds 1,400 hotels in the United States. In addition to the strong unit growth, the Quality brand also reported one of the highest RevPAR growth rates across our portfolio, increasing 6% in the third quarter.

As Steve discussed, our Comfort brand rejuvenation strategy is working and is driving the RevPAR performance of the brand as well as stimulating demand for new construction hotels. However, this strategy has had a short-term impact on our domestic supply growth numbers. Excluding the Comfort brand, we grew the number of net units online in our domestic system by 120 units, which represents a 3.5% increase. While we expect to continue to enforce our new higher standards for the Comfort brand and to require meaningful property improvement plans for existing and new entrants, the pace of targeting underperforming Comforts with termination is expected to decline.

Furthermore, we expect the opening of new construction Comfort hotels to accelerate over the next several years, reflecting the robust Comfort domestic pipeline and sustaining development activity due to the continued improvement in the brand's RevPAR performance.

With respect to franchise development, the fundamentals that drive new hotel development and conversion opportunities remains strong. During the third quarter we executed 161 new domestic hotel franchise agreements, a 25% increase over the prior year.

New domestic franchise hotel agreements for new construction projects increased 13% over the prior-year quarter, highlighted by our Comfort family of brands, which executed 17 new agreements, or an increase of nearly 90% over the prior year.

Our licensing renewal activity also continued to remain strong as we executed 114 agreements during the third quarter of the current year compared to last year's strong results of 119 agreements. And year to date these transactions are up 8% over the prior year.

Our SG&A from hotel operations increased $3.2 million, or 13%, during the quarter. However, if you exclude the impact of fluctuations in the fair value of investments held in our nonqualified deferred compensation plans, which amounted to approximately $2 million, SG&A expenses increased approximately 5%. The increase in the SG&A related to these fluctuations in fair value is offset by investment gains recorded in other gains and losses in our consolidated statement of income.

Our hotel franchising EBITDA for the third quarter increased 5% over the same period the prior year, or 8% if you exclude the fair value adjustments I just mentioned from our hotel franchise [transaction] SG&A.

During the third quarter we continued to use our significant cash flows to return value to our shareholders through a combination of share repurchases, dividends, and investments to our business to drive future growth.

During the quarter we completed the opportunistic and accretive repurchase of 100,000 shares of common stock under our share repurchase program at a total cost of approximately $5.6 million.

In addition to these share repurchases, we also paid dividends during the third quarter at a quarterly rate of $0.205 per share, or approximately $11 million. This represented a 5% increase over prior-year levels.

Finally, we continued to use our balance sheet to prudently support the growth of our Cambria brand. During the first nine months of the year we advanced approximately $78 million in support of Cambria's expansion. These advances were primarily in the form of joint venture investments, forgivable key money loans, senior and mezzanine lending, and site acquisitions.

Importantly, we also recycled approximately $25 million of investments previously used to support the expansion of this brand during the first nine months of 2016. These funds are now available to incent new Cambria projects. We expect these advances will accelerate the pace of Cambria brand's growth over the next several years.

Now I will turn to the outlook for the remainder of 2016. As always, our outlook assumes no additional share repurchases under the Company's share repurchase program. Our outlook also assumes our effective tax rate to be 33% for the fourth quarter and 31.5% for full-year 2016.

Our hotel franchising activity guidance assumes that our RevPAR will increase by approximately 4% to 5% for the fourth quarter and range between 3.5% and 4.25% for the full-year 2016. Our stated guidance represents a 25 basis point increase to the top end of our range from our previous guidance of 3.5% to 4.0%.

As I previously mentioned, we also increased our projections for the growth in our effective royalty rates. As a result, our guidance now assumes that our effective royalty rate growth will increase between 10 and 11 basis points for the full year, and our net domestic unit growth will increase by approximately 2%.

Excluding the impact of our Comfort rejuvenation strategy we expect our domestic portfolio net new growth of our other brands to increase by approximately 4% in the aggregate.

Our full-year guidance for 2016 adjusted EBITDA from franchising activities is a range between $272 million and $274 million. With regards to our non-hotel franchising activities, including SkyTouch and vacation rental activities, we are projecting reductions in adjusted EBITDA for full-year 2016 to range between $18 million and $19 million.

We expect our fourth-quarter diluted EPS to be at least $0.51, and we are increasing our full-year 2016 adjusted diluted EPS to a range between $2.43 and $2.46, and our consolidated adjusted EBITDA for full-year 2016 is expected to range between $253 million and $256 million.

In summary, we are pleased with our third-quarter performance and believe we are well positioned to continue our strong momentum for the remainder of the year and into 2017.

Now I'm going to turn the call back over to Steve.

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Steve Joyce, Choice Hotels International, Inc. - CEO [4]

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Thanks, Scott.

So to sum it up, again this quarter we had strong financial performance, development is up, and our RevPAR results outperformed the competition.

These great results are due in large part because our Comfort rejuvenation has helped drive 24 consecutive months of RevPAR index gains for that brand; we launched our SmartRates program at just the right time, to ensure that hotels are setting rates properly; and with our Choice Privileges redesign and our Choice Privileges member rates we are investing in programs designed to drive more reservations through our central channels, improve guest loyalty, and enhance the value of our brands in an effort to drive incremental business to our franchisees. Add to all of this that leisure travel has been holding up strong, which is a significant part of our business, and job growth has been trending more favorably.

As a result of all these factors, we are optimistic about our continued long-term growth prospects and our ability to drive excellent results for our company and our shareholders.

Now with that, I'm going to open up the call to any questions you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Jared Shojaian; Wolfe Research.

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Jared Shojaian, Wolfe Research - Analyst [2]

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I think on the last call you were hoping to have some new positive analysis on how you were going to get SkyTouch to positive EBITDA. Curious where you stand here. And is 2017 still the EBITDA breakeven target? And is that like a end-of-year run rate positive? Or how should we think about that? And then obviously how do you think you'll get there? Thanks.

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Steve Joyce, Choice Hotels International, Inc. - CEO [3]

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Okay. So the outlook is unchanged, and that is we do not expect to have a cost for SkyTouch for 2017, not run rate, not at all. So we will have no impact from SkyTouch. And that's because we have invested in the product to the point we need to and now we're ready to grow that system significantly.

There are two likely outcomes as we've discussed before. We are in discussions on both of them. And I think relatively near term -- near term meaning 30 to 60 days -- you will hear from us about what our plans are for that brand. But we're excited about the performance of it and the sales pace, and also the opportunities we've got as a result of that.

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Jared Shojaian, Wolfe Research - Analyst [4]

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Okay, thank you. And then, looks like your pipeline showed some decent growth here quarter over quarter. But the Hilton Tru pipeline has also really started to pick up. So I'm curious what you're hearing from developers and franchisees. Is there any share shift going on from Comfort or any of your other brands over to Tru right now? And how do you think about Tru from more of the longer-term perspective and even from a competitive perspective once they're operating next year?

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Steve Joyce, Choice Hotels International, Inc. - CEO [5]

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Yes, I think the answer is it's a little early to tell. They've done an excellent job with their sales from Tru. So their numbers out of the gates are pretty impressive. Whenever you launch a new brand like this you get a lot of signings; you don't necessarily get a lot of hotels. So we'll just have to see how that all plays out.

But actually we're very pleased with the growth of our development opportunity with Comfort, partly because it had cooled somewhat with the performance of the brand and now has heated back up with the performance of the brand.

So we just came from a key client event this week with most -- with a significant chunk of our major developers. They're a significant chunk of the pipeline. And they're pretty bullish on doing our product in some pretty big numbers.

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Jared Shojaian, Wolfe Research - Analyst [6]

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Okay. Great. And then if I could just sneak a real quick housekeeping question in. You're guiding to a nice acceleration in room growth in fourth quarter, somewhere around 5%, which I guess is just related to the conclusion of the Comfort rejuvenation. But is that the right level to think about future growth, particularly in 2017 as well? Or is there anything unique about next year? Thank you.

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Steve Joyce, Choice Hotels International, Inc. - CEO [7]

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Yes. So let me give you some color. We're not going to give a number for 2017 yet, in part because I think it will be much more useful when we see how the year ends up. But the way to think about it is the way we've been looking at it, is RevPAR has gotten better as the year has gone on. And we think that the fourth quarter is going to be better than the third quarter. And I can also tell you that October is very strong. We had a very strong September. We're having a very strong October so far.

So our view -- and that's why we took the guidance up -- our view is at that point that 2017 will be a good year. We have yet -- but I think we want to wait to see where the year ends up and what our bookings look like for the following year, and sort of the economic outlook as well, which seems to be shifting a little. I think everybody's waiting for the presidential election to kind of settle down and see what that does overall.

But we'll actually -- we definitely think next year is going to be a very good year. The question is how good. And right now we're pretty bullish on the RevPAR results.

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Jared Shojaian, Wolfe Research - Analyst [8]

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Okay, thank you.

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Operator [9]

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Felicia Hendrix; Barclays.

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Anthony Powell, Barclays Capital - Analyst [10]

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It's actually Anthony Powell here for Felicia. Just kind of on the RevPAR topic, obviously you've outperformed recently relative to the industry. In your experience, how long can that kind of divergence last where leisure and your type of chain scales outperform the higher priced corporate-leveraged chain scales?

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Steve Joyce, Choice Hotels International, Inc. - CEO [11]

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So clearly if you just look at the Smith Travel results the upper end, particularly at business driven hotels, have had a more moderating effect on their RevPAR than on the leisure side. But our view is, I think we're going to outperform for some time, in part because of the leisure component. And that will hold up better than the business traveler will, because it always does.

And so, as a result, we think that gives us an advantage going in. But more importantly, we're taking share. So the things that we're doing are moving customers out of other hotels and into our hotels. And we don't expect that to stop at any point. That's our plan for the foreseeable future.

So I think when we look at our RevPAR for next year, our RevPAR is based on two things. What's the industry going to do? And how much are we going to outperform the industry? And that's the way we're looking at it.

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Anthony Powell, Barclays Capital - Analyst [12]

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Right. Thanks. And I guess moving on to SmartRates, I thought that was interesting. In what type of markets or environments is that initiative doing the best? And can SmartRates be integrated into SkyTouch? Or is that for your proprietary systems?

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Steve Joyce, Choice Hotels International, Inc. - CEO [13]

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Yes. So two things. One is, the system itself obviously is most -- is more valuable in high-demand markets because you've got more business to yield. But quite frankly, we've seen it effective across the board. We have it in almost 4,000 hotels at this point and it'll be in all the hotels shortly. And we're seeing on average 2% to 5% bumps as a result of that.

And along with your question, though, obviously in the higher-demand markets, it is more valuable. But one of the things why it's so important to our system is, look, we have a number of very sophisticated franchisees and owners that have significant revenue management programs. And this will help them some, because it's a very good tool.

But where it's really going to help is our rank and file franchisee who doesn't necessarily have the same revenue management resources. And so this tool replaces a lot of the need for human skill sets that are harder for them to afford at their size. And it allows for a very sophisticated recommendation of pricing and positioning that doesn't require a very sophisticated knowledge of revenue management.

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Scott Oaksmith, Choice Hotels International, Inc. - SVP, Finance & CAO [14]

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And given that we rolled it out earlier this year and we only have 4,000 of our hotels on today, we expect this to continue to improve as our franchisees get more comfortable using the product and it's really out to all of our hotels.

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Anthony Powell, Barclays Capital - Analyst [15]

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All right, great. That's it for me. Thank you.

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Operator [16]

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Robin Farley; UBS.

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Robin Farley, UBS - Analyst [17]

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A couple questions. One is you're raising the guidance for the royalty rate for the full year. What's driving that? Is that sort of brand mix that's shifting that's driving a higher royalty rate? Or just a little color behind that?

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Scott Oaksmith, Choice Hotels International, Inc. - SVP, Finance & CAO [18]

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Mostly it's the success of our development efforts. So our royalty rate has been increasing based on two things. One is we do do ramp-ups of our royalty rates on our initial contracts. So as those burn off we get back to our rack rates for royalty. And then we've had more success in this development environment selling the initial contracts at higher royalty rates than in previous periods.

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Robin Farley, UBS - Analyst [19]

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And then also, your unit growth for the year, you're guiding down a little -- not guiding down, just less of an increase, I guess 2% instead of 2% to 3%. I think you mentioned something about Cambria. Is that just Cambria, the difference between the 2% and the 2% to 3% for the full year? Is it just the Cambria brand or are there other factors in there?

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Scott Oaksmith, Choice Hotels International, Inc. - SVP, Finance & CAO [20]

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It's really about just timing of when hotels are going to open. We're constantly looking at our pipeline and projected opening dates. And when we had the 2% to 3% we just -- there's a fair number of hotels that will move into the first quarter of next year. So it's more about timing in some of our conversion and new construction openings. It's not a Cambria story. It's just the general portfolio brand.

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Steve Joyce, Choice Hotels International, Inc. - CEO [21]

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And as we mentioned, it's a little bit more about the fact that we're at the tail end of cleaning up the Comfort system. And that has been depressing the unit growth number for quite some time, with good results I'll say.

On the other hand, over the last couple of years we probably without the Comfort program would average more like 4% to 5% in unit growth. But it's obviously clearly the right decision that we made. And it's going to set the Company up in a really good position for the next decade.

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Robin Farley, UBS - Analyst [22]

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Okay, great. And then last question is just you mentioned the strength in the quarter from leisure travel. And I wonder if you have any comments on the oil regions. Because in previous quarters you have talked about how the oil and gas issues may have impacted you more because of the type of hotels that you have. But given those trends, are you seeing less softness in those markets? Or just curious what your observations there are.

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Steve Joyce, Choice Hotels International, Inc. - CEO [23]

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Yes. So we have some fairly significant exposure to the oil markets. And obviously some of them are doing better than others, depending on the price of oil in markets. But what we're finding is we're no longer getting the impact of those rates falling and that business falling. That business has sort of leveled off. So as a result, our RevPAR increases aren't being depressed by declining RevPAR in those markets.

Now we also haven't seen it swing up significantly either. But our view is the worst, it's kind of through. It's kind of worked its way into where you're going to be marketwise. And then it's a question of how you view the oil price markets moving as to whether or not that begins to pick back up.

There was some pretty frenzied activity in the midst of all this where people were renting our hotels for the entire year for their crews. I don't think we're going to see that back again. But clearly those markets are long-term markets, based on where you see most long-term forecasts for oil. We haven't seen really any significant uptick yet, but we're not getting the declines. And our sense is that over time it will gradually rebuild based on the price of oil.

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Robin Farley, UBS - Analyst [24]

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Okay, great.

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Scott Oaksmith, Choice Hotels International, Inc. - SVP, Finance & CAO [25]

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And I'd just add a little more color to that, Steve. It did impact our Q3 performance. So we would have estimated that our RevPAR would have been about 130 basis points higher if you exclude the oil markets. But that has gotten sequentially better each quarter.

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Robin Farley, UBS - Analyst [26]

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Okay. Great. Thank you.

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Operator [27]

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Shaun Kelley; Bank of America.

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Shaun Kelley, Bank of America Merrill Lynch - Analyst [28]

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Just wanted to touch on the drag that you're seeing from the Comfort removal program this year. And then you mentioned that that is expected to lessen going forward. So looks like the drag this year is about 200 basis points, the difference between your 2% and the kind of ex Comfort 4%. So how much of a drag would you quantify next year and maybe moving into 2018?

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Scott Oaksmith, Choice Hotels International, Inc. - SVP, Finance & CAO [29]

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As Steve said, we're not going to give guidance specifically for 2017. But we would start seeing our unit growth over time to get back to that historical 4% to 5%. So I would expect our overall unit growth would be better next year than it is this year. One of the slight delays we'll have is we -- even though we'll stop kicking out or terminating as many Comfort Inns, we are filling our pipeline with more new construction. So there is a 18-month to 36-month, depending on the market, lag when the new construction hotels are opening. So we'll see the pace of terminations decline next year and then a lot of those openings coming in in late 2017 and 2018.

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Steve Joyce, Choice Hotels International, Inc. - CEO [30]

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I think one way to look at is obviously over the last couple of years we've shrunk the system. We expect the system to stop sort of shrinking next year and after that we expect it to grow.

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Shaun Kelley, Bank of America Merrill Lynch - Analyst [31]

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Okay, great. Understood. And then, my follow-up is on the SmartRate program. I know you already answered that a little bit with respect to an earlier question. But I guess just to be very specific or very clear, does this complement an existing revenue management program that you already have at your hotels? Or did you not have any revenue management in place for these hotels and this is a new program? Just trying to kind of understand what exactly is incremental or new about this feature.

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Steve Joyce, Choice Hotels International, Inc. - CEO [32]

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Yes. So the answer is that we've got several things that we provide to the franchisees, mostly technology-based, to help them with their rates. And they've been introduced over the last couple of years. SmartRates is the most recent and most sophisticated tool that we've offered them, that we've developed in house.

But we offer, for example, revenue management where we have -- franchisees can pay a relatively low fee and receive high quality professional revenue management from folks on our team. That's been very well received. There's I think --

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Scott Oaksmith, Choice Hotels International, Inc. - SVP, Finance & CAO [33]

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Six hundred (inaudible ) --

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Steve Joyce, Choice Hotels International, Inc. - CEO [34]

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-- 600, 700 people on it. And it's grown pretty rapidly. Actually, one of our problems is finding enough revenue managers to do the work. But franchisees are beginning to really see the value in being better at pricing optimization. And so a lot of them are signing up for not only -- they're all using SmartRates and, as Scott mentioned, we want to increase the relative use and employment of that tool. It actually has an automatic feature on it which, if you set that to go, it will set your rates for them. And so that is an improvement over some of the folks' revenue management practices where they don't really have the sophistication.

But for the most part, our franchisees are really starting to see the value of revenue management in part because of the increases in occupancies we've driven over the last several years, and the value that comes from yielding when you're in a better occupancy position.

So this is one of several tools that we've introduced. This is one of our strengths. We view ourselves as a hotel and a technology company. And we're able to provide really valuable tools for our franchisees at relatively inexpensive costs that significantly increase the performance of their hotels.

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Shaun Kelley, Bank of America Merrill Lynch - Analyst [35]

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That's great. And just lastly would be the -- has the tool actually been rolled out to 100% of the system? Or where do we sit in terms of the rollout?

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Steve Joyce, Choice Hotels International, Inc. - CEO [36]

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We're at about 4,000. And obviously what we want is 6,200.

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Shaun Kelley, Bank of America Merrill Lynch - Analyst [37]

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And is that a decision on their side, that they have to pay something or use something to gain access? Or how does that -- how is that decision made?

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Steve Joyce, Choice Hotels International, Inc. - CEO [38]

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No, it's just the pace of the rollout.

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Shaun Kelley, Bank of America Merrill Lynch - Analyst [39]

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Just the pace of the rollout. Okay. Great. Thank you very much.

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Operator [40]

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Thomas Allen; Morgan Stanley.

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Thomas Allen, Morgan Stanley - Analyst [41]

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What are you hearing in terms of the lending environment for your franchisees? Thank you.

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Steve Joyce, Choice Hotels International, Inc. - CEO [42]

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Good question. So we just obviously had a lot of discussions with the folks there. A number of our bigger folks are not really seeing much at this point. The general view is the lenders are still lending but they have lowered the levels somewhat.

And so, I think on average if I were going to characterize what people have said to me -- and a lot of this also came out of the Lodging Conference in Phoenix -- I think where people were lending fairly regularly for the right sponsorship and the right product and the right franchisee, kind of in the low to mid 70s, it sort of looks now like that has moved to the low to mid 60s.

Now I will tell you, I was talking to several of our franchisees doing lots of projects. And some of them it hasn't changed at all. A lot of it's about the banking relationships you have. And so -- but the regional lenders are still lending. And the local lenders are still lending. They are -- it looks like there has been a general sort of easing of the leverage levels that they're doing.

But it's not slowing our franchisees down in terms of development, because, quite frankly, most of our franchisees don't leverage that much anyway. They actually like a lot of equity in their deals because they like the idea of not worrying about what happens in a downturn. So if you looked at our system, it probably has an overall lower leverage than almost any other system out there. So while there is a softening in the leverage levels, we're not seeing it impact development yet.

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Thomas Allen, Morgan Stanley - Analyst [43]

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That's helpful. Thank you. And then, just in terms of your franchise business, I just want to understand the outlook a little bit better. You raised the high end of RevPAR guidance. You raised the royalty rate. But you didn't raise the high end of the EBITDA guidance. Can we just walk through that?

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Scott Oaksmith, Choice Hotels International, Inc. - SVP, Finance & CAO [44]

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Sure. So as you noticed, we did take down our unit growth slightly from the high end 2% to 3%, to 2%. So that kind of mitigates some of those increases. So we feel kind of where we're seeing the numbers we're going to be somewhere in that range.

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Thomas Allen, Morgan Stanley - Analyst [45]

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Okay. So it was all in the unit growth. Okay. That makes sense. Thank you.

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Operator [46]

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Jeff Donnelly; Wells Fargo.

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Jeff Donnelly, Wells Fargo Securities - Analyst [47]

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Steve, you mentioned earlier about taking share. Have you seen your mix shift maybe towards more corporate, like you're picking up the cost-conscious business traveler? Or is it that mix remains fairly steady for you guys?

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Steve Joyce, Choice Hotels International, Inc. - CEO [48]

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We're seeing a lot more activity on the corporate side. Our requests for proposals through the season is up significantly. Business travel, though, in general is pretty moderate, the growth of it, even for us. And, yes, we do think we're taking a little share, but we also think the pie is getting a little smaller. And so as we look at it, I think the bulk of our increases are probably more on the leisure side.

And what's happened is we've increased a lot of our business midweek. So when you look at the midweek business, in a lot of cases you can say that is more BT related. I think ours is a mixture. So I think we're driving more business midweek and a chunk of it's BT. But I also think a chunk of it's leisure.

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Jeff Donnelly, Wells Fargo Securities - Analyst [49]

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And just maybe a question for Scott. I think you had mentioned before about some of the drag that was on your RevPAR this quarter because of exposure to some of the oil patch markets. What percentage of your rooms do you feel falls into those types of markets?

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Scott Oaksmith, Choice Hotels International, Inc. - SVP, Finance & CAO [50]

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I think somewhere around 7% to 8% of our rooms are in those markets.

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Jeff Donnelly, Wells Fargo Securities - Analyst [51]

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Okay. And I guess, maybe to turn it around, where did you guys see regional strength in your portfolio? Was it by sort of just regions of the country? And do you kind of see it more in, like, locations, like roadside versus urban? I'm just curious if you have any insights there.

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Steve Joyce, Choice Hotels International, Inc. - CEO [52]

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It's a combination. We'll give you -- obviously there's regional differences. There's a lot of market differences, though, as well within those regions, Where everybody's talking about supply increase, we actually -- supply is increasing but it's increasing to historic levels of about 2%.

The issue is it's not evenly distributed. So you're seeing some markets that are getting a lot of inventory and they're obviously going to have to digest that inventory. But we're also seeing a number of markets that are still strong, which is where we're aiming a lot of our development efforts at.

And then on a regional basis it does vary somewhat.

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Scott Oaksmith, Choice Hotels International, Inc. - SVP, Finance & CAO [53]

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Yes, we definitely saw strength in the Middle Atlantic area as well as East South Central and the Pacific region. And certainly the small metro town resort locations, airport locations, had strong RevPAR performance for us.

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Jeff Donnelly, Wells Fargo Securities - Analyst [54]

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So just maybe one last question. As you think about uses of capital in 2017, your comments on SkyTouch were helpful. Do you see any drag on EBITDA next year, maybe related to the timeshare business you're looking at? Or do you think that's just kind of remain a small --

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Steve Joyce, Choice Hotels International, Inc. - CEO [55]

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It's pretty small. We're actually very excited about the rate of pace on talking to these vacation rental management companies. And we've got a significant pipeline. But we are doing that with a relatively small team. So our view is there's some cost to it, but it's not very significant.

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Jeff Donnelly, Wells Fargo Securities - Analyst [56]

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Okay. Thanks.

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Operator [57]

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David Katz; Telsey Group.

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David Katz, Telsey Advisory Group - Analyst [58]

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So two questions, if I may. First, you're having obviously a terrific impact with the repositioning or the rejuvenation of the Comfort brand. And I think it's obviously a very sensible strategy, given the crowds of brands at that end of the spectrum. Are there any other brands that you might turn to next that are in need of a revisit, for example, Quality, which is obviously a pretty large system, or Econo Lodge or any of those? Is this going to be an ongoing process? And I wondered how much you have spent to date in actual capital out the door on the Comfort repositioning so far.

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Steve Joyce, Choice Hotels International, Inc. - CEO [59]

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Okay. So I think it's pretty safe to say the two things that we wanted to accomplish were the Comfort and the Sleep rejuvenation, which have both been, quite frankly, pretty spectacular in their results. So we don't have -- there is not a need to run any other major programs.

The interesting thing about Quality is even with that remarkable growth the guest scores are going up. So we've never been, as a company, at a higher intent-to-return level as we are at this point. And that includes the brands we worked on, but also existing brands.

So, yes, we don't really see the need for any kind of the major programs that we've done and the kind of impact that you saw, particularly on the Comfort side but also in the Sleep.

And so, what you'll see from us going forward is we're very focused on making sure our brands represent us well to the consumer. So you will see us working to tighten the consistency of a number of the brands. But it won't be -- it's going to be a much less sort of major program than the Comfort and the Sleep programs have been.

And then in terms of the money we spent on Comfort, we announced a $40 million incentive. We've probably used --

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Scott Oaksmith, Choice Hotels International, Inc. - SVP, Finance & CAO [60]

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$25 million to $30 million of it so far.

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Steve Joyce, Choice Hotels International, Inc. - CEO [61]

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Yes.

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David Katz, Telsey Advisory Group - Analyst [62]

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And one more question, if I may. And it's obligatory. I'm thrilled that everyone left it for me. But, you know, we continue to read and hear and discuss quite a bit about the shared-economy opportunity in Airbnb. And intuitively, and I invite you to correct me, the price-focused leisure customer seems as though that is the target for that business. What have you thought, seen, and done about it to date and how are you thinking about it going forward?

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Steve Joyce, Choice Hotels International, Inc. - CEO [63]

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Okay. The first answer is we like that model. And we're emulating it in a way that we think makes more sense for us. So we actually like the idea of having new product introduced into our system that our customers can use [and our points in]. And that's why we launched a vacation rental business.

You know, I'm not going to say there's no impact to us from Airbnb, but we can't detect it. The reason being is Airbnb focuses on major markets where there's lots of demand. And so they impact the urban markets. They impact the resort markets. We're not heavily populated there.

I don't want to suggest that we haven't lost any rooms to Airbnb. I'm sure we have. But we have detected really no impact in our overall results. And I think it's in part because our inventory is differently placed than a lot of the other hotel companies.

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David Katz, Telsey Advisory Group - Analyst [64]

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All right. And if I could ask one more question, please. Out of some of the M&A that's gone on and may go on in the future, there may be some brands that become available. Do you think about any spaces in your lineup that might be appropriate to sell or areas of opportunity that you think would fit for Choice out of all that? And the essence of the question is, should we consider the notion that you might go out and buy a brand and put some capital [out for] it at this point?

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Steve Joyce, Choice Hotels International, Inc. - CEO [65]

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So let's start with our intent is to continue to be a complete portfolio set of offerings to the consumer. Our upscale strategy has obviously come into play and it's working in a big way between Ascend, which is the largest soft branding brand by a lot and the one that's going to grow the fastest. As a matter of fact, it's going to grow faster than the next several competitors added together. So we started at 13 or 14 hotels. We're now over 200. I think we're at 208 or 209. And that's going to grow 40 hotels this year. So that has been a runaway success.

Cambria has taken off in a big way. We've got 13 under construction. I think we'll be at 18 in the next couple of months. We're going to open, call it, 4 this year. We'll open 16 to 20 next year. And we think we're going to ramp to a 40- to 50-unit pace within a couple years, depending on the financing environment, obviously.

And so as we look at that, we think that's really a significant chunk of what we wanted to accomplish. But I've made no secret of the fact that I think an appropriate upper upscale brand that is relevant for the future is something that we should be looking at and looking for opportunities. Probably more of purchase option if something becomes available than a development option, because I'm not as young as I used to be.

So we have looked at several opportunities. And because we don't have to do anything because of this company's story -- this company is going to grow significantly for the next several years without doing anything.

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David Katz, Telsey Advisory Group - Analyst [66]

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Right.

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Steve Joyce, Choice Hotels International, Inc. - CEO [67]

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So we're a very disciplined buyer. You know, the nice thing is even the investment bankers come in, when they sit and talk to us, they go -- here's the hard part. You actually don't have to do anything. You're in really good shape where you are.

And so you're going to see us continue to look for opportunities. We've talked a lot about Europe. We've looked at several things there. Haven't landed anything yet, but we could. And we would like to have a strong entry into the upper upscale market, because I think that really completes our portfolio. I don't think you're going to see us in luxury. So kind of been there, done that. But I do think a full service, upper upscale adapted for what makes sense in today's environment, which is different than a lot of the product that's out there, but a strategy that sort of gets you into that place of what the next full service, upper upscale offering to a consumer actually is going to be like -- that I think is an interesting opportunity for us. And we'll see whether or not we get it.

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David Katz, Telsey Advisory Group - Analyst [68]

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Right. Can I just ask you to clarify what you meant by today's -- that's adapted for today's environment? What did you mean by that?

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Steve Joyce, Choice Hotels International, Inc. - CEO [69]

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I think that the 300-room, suburban, 10,000-square-foot, full-service hotel is a dinosaur. But --

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David Katz, Telsey Advisory Group - Analyst [70]

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Okay. Thanks very much.

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Operator [71]

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And ladies and gentlemen, this concludes our Q&A session for today. I would like to turn the call to Management for any final remarks.

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Steve Joyce, Choice Hotels International, Inc. - CEO [72]

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Okay. So thanks obviously for joining us. As always, we appreciate your interest in Choice Hotels. That concludes our call for today. We'll talk to you in February.

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Operator [73]

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Ladies and gentlemen, we thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day.