Choice Hotels International's CEO Discusses Q2 2011 Results - Earnings Call Transcript

| About: Choice Hotels (CHH)

Choice Hotels International, Inc. (NYSE:CHH)

Q2 2011 Earnings Call

August 2, 2011 10:00 a.m. ET

Executives

Stephen P. Joyce – President, CEO

David L. White – CFO

Analysts

Harry Curtis – Nomura

Steven Kent – Goldman Sachs

Ryan Meliker - Morgan Stanley

Felicia Hendrix – Barclays Capital

Joseph Greff – JP Morgan

Shaun Kelley – Bank of America – Merrill Lynch

Christopher Agnew – MKM Partners LLC

David Loeb – W. Baird & Co., Inc

Operator

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the Choice Hotels International Second Quarter 2011 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later there will be a question-and-answer session and further instructions will be given at that time. 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 provision of the Securities Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as choice or as management beliefs, expects, anticipates, foresees, forecasts, estimates or other words or phrases of similar importance. Such statements are subject to risk 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, 2010, 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 do 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 second quarter 2011 earnings press release which is posted on our website at www.ChoiceHotels.com under the Investor Information section.

With that being said, I would now like to introduce Steve Joyce, President and Chief Executive Officer of Choice Hotels International Incorporated. Please go ahead, sir.

Stephen P. Joyce

Thank you. Good morning and welcome to Choice Hotels second quarter 2011 earnings conference call. With me this morning, as always, is Dave White, our Chief Financial Officer.

As we noted last night in our release, we are pleased with our second quarter results which we published and hopefully you received it. We're excited by the positive momentum we are seeing on a number of fronts, including RevPAR growth, both domestically and abroad, in our development area, particularly our domestic conversion franchise sales results, which continued to accelerate during the second quarter and in the area of growing our central reservations contribution to our franchised hotels.

Our EBITDA and diluted earnings per share for the second quarter exceeded our outlook because of better than anticipated revenues driven by domestic RevPAR and international revenue growth. Considering these results and improved visibility into the second half of this year, we are raising our full year outlook for both EBITDA and diluted earnings per share as well as RevPAR.

On the macroeconomic front, however, the key fundamentals, employment, consumer confidence and GDP growth that impact our results have not changed significantly since our last earnings conference call in April. The bottom line is, we still expect a gradual, but steady recovery.

Turning to RevPAR during the second quarter, our domestic RevPAR increased 6.6%, which was approximately 130 basis points better than we were expecting. Importantly, the RevPAR increases we experienced during the quarter were broad as every one of our brands experienced positive RevPAR growth, which were driven by nearly across the board occupancies and average daily rate gains.

In June and July, the first two months of our third quarter, despite more challenging comps when compared to the same period of 2010, we saw RevPAR continuing to grow in the mid-single digit percentage range consistent with our outlook for the third quarter. Considering our second quarter and more recent results from the past two months, we are increasing our full year RevPAR growth outlook to 5% from the outlook we shared with you in our last earnings call.

Another highlight of the second quarter was our franchise sales results. For the quarter, we executed 69 domestic hotel franchise contracts, up 11% compared to the 62 deals executed in the second quarter of 2010. Our second quarter franchise sales results marked the fourth consecutive quarter of year-over-year growth in domestic conversion franchise sales agreements with conversion franchise sales contracts executed during the second quarter increasing 22% from 50 to 61.

The development in franchise sales environment for new construction remains challenging, which is not surprising at this point in the cycle and is consistent with our company's experience in the early recovery stage of the last lodging cycle.

Historically, our net unit growth has been more heavily dependant on conversion hotel openings and on new construction, and therefore, the building trend in conversion franchise sales is encouraging and we are optimistic that the continuation of those trends will enable us to return the unit growth lever to a much bigger contributor to our long-term growth.

Another highlight on the development front for the quarter was our continuing success with the Ascend Collection membership program. The Ascend Collections is an upscale network of hotels that are either historic, boutique or unique-type properties. They are located in the United States, Canada and the Caribbean. We just brought online our largest Ascend Collection Hotel, the 430-room Xona Resort Suites in Scottsdale, Arizona, represented – Ascend Collection hotels include the District Hotel in New York City, The Gold Hotel in Golden Colorado and The Inn of Chicago on the Magnificent Mile.

As of the end of June, the domestic Ascend Collection stood at 44 properties, and in addition there were 15 Outrigger properties and four hotels located outside of United States that were all part of the system.

During the past 12 months, the domestic Ascend Collection system increased by 12 hotels or 37% and we remain confident that we can continue to build on this recent success in developing this brand.

Finally, we continue to innovate in the area of business delivery and I can't overemphasize the importance of providing high-value, central reservations to our franchisees hotels. We believe that it is the primary reason why hotel owners choose to affiliate with Choice over the long-term.

During the second quarter, we continue to solidly execute on marketing and distribution strategies to grow our central reservations contribution. I'm pleased to report that for the first half of 2011, our central reservations contribution increased by more than 100 basis points to nearly 35%, which contributed to 10% increase in net revenue from our central reservation system compared to the first half of 2010.

Our proprietary central reservation channels, meaning our ChoiceHotels.com website and our call centers provide our franchisees the highest average daily rate at the lowest cost of delivery. The long-term success of our business and our growth is predicated on delivering incremental business to our franchise properties, and on this front, I am pleased to reemphasize that the momentum is very positive.

Just after our 57th Annual Convention in May, we launched our new integrated marketing campaign, Your Voice, Your ChoiceHotels.com. This campaign speaks directly to the travelers who stay in Choice branded hotels everyday. We let them know by booking directly on ChoiceHotels.com, they can get the best rate available on any online channel.

This campaign contributed to a record-breaking June for ChoiceHotels.com. In June, the best month in the site's history, we generated well over $100 million in centrally booked gross room revenues for our franchisees and in excess of 600,000 reservations.

And on July 12th, we had the best day in the history of ChoiceHotels.com generating 4.6 million in gross room revenues. Revenues from our mobile platform are also growing robustly. We saw a three-fold increase in mobile site revenue in June 2011 compared to the same period in 2010. We continued to invest in expanding our mobile applications for wireless devices with an Android application to be released later this year. As you will recall, we were the first major hotelier with a global iPhone application.

And finally, membership and in our Choice Privileges Reward Program recently crossed 13 million members as a threshold worldwide. We've added over a 1 million members year-to-date and is continuing to be one of the fastest growing programs in the industry.

So before I turn the call over to Dave, I want to reiterate that we are pleased with the upward trend we have achieved recently in a number of critical areas, and we remain optimistic that continued execution of our long-term strategies will create value for our current and future franchisees, and most importantly for our shareholders.

Now, let me turn it over to Dave to cover our second quarter performance in more detail.

David L. White

Thanks Steve. As you saw on last night's press release, we reported diluted earning per share of $0.46, which exceeded our previously published outlook of at least $0.43 per share. Compared to our outlook, two primary items impacted our results during the quarter. First, about half of our outperformance related to better than expected operating and EBITDA performance, specifically our royalty revenues were better than we had expected on account of a combination of factors, including domestic RevPAR growth for the quarter of 6.6% exceeding our outlook which had contemplated 5% growth.

In addition, international revenues for the quarter were stronger than we had anticipated on account of strong RevPAR performance in the international markets where we operate, along with favorable foreign currency translation. The remainder of our outperformance for the quarter is primarily related to lower than expected depreciation and amortization expense and lower interest expense.

As Steve mentioned, we were very pleased with the RevPAR performance of our franchisees during the quarter. As a reminder, our RevPAR results for the second quarter reflect our franchisee's growth room revenue performance for the months of March through and including May.

Our second quarter domestic system-wide RevPAR growth of 6.6% reflects accelerated growth compared to the 5.5% growth we reported in the first quarter of 2011. This RevPAR acceleration was realized despite the tougher comps in the second quarter this year compared to last year on account of the steep quarterly RevPAR growth trend we experienced each quarter last year.

Domestic system-wide occupancy increased by 230 basis points compared to last year with all of our brands and every chain scale segment where we operate from economy to upscale seeing significant improvements. We also achieved a 2% gain in overall domestic system-wide average daily rate. With nearly all of our brands gaining pricing power, ranging on an individual brand basis as high as 4.7% for our upscale Ascend Collection membership program.

Our RevPAR results in June and July have continued to be positive in the mid-single-digit percentage area and this has reflected in our outlook for the third quarter.

On the unit growth front, we continued to expand domestically and abroad, the footprint and quality of our franchise system. While our net domestic online unit growth rate of five-tenths of 1% over the past 12 months is not at the same absolute levels we have achieved in past years, our rate of net unit growth compares favorably to the net unit growth experienced for the overall U.S. lodging industry during the same time period, which according to Smith Travel data is approximately two-tenths of 1%.

We attribute this outperformance to the strength of our distribution platform for hotels and the markets where we compete and believe the strength will remain a long-term competitive advantage for us.

Finally, we achieved a 4 basis point improvement in our effective domestic royalty rate for the quarter. As a result of our net unit growth RevPAR and effective royalty rate results, we achieved a 7% increase in our domestic royalty fees for second quarter, which increased to $55.4 million compared to $51.7 million last year. The company's international fees included in royalty fees revenue were $6.9 million for second quarter 2011 compared to $5.8 million last year.

On the cost side of the business, our adjusted selling, general and administrative expenses for second quarter 2011 increased by $3.2 million. The adjusted figures for SG&A excludes certain specific items which we described in the Exhibit in yesterday's press release.

While this cost growth was within the range we had expected, it represents a higher year-over-year growth rate then we target on a normal basis on account of several items in this year's second quarter results that compare unfavorably to last year's results.

These items include a smaller mark-to-market adjustment related to deferred compensation plan investments, the impact of our annual convention, which occurred in a higher cost location this year compared to previous years. And cost incurred during the second quarter related to our corporate headquarters relocation on account of our pending lease expiration.

As we indicated in last night's release for the second half of 2011, we expect to manage our cost structure to a mid-single-digit percentage increased compared to the second half of 2010.

Finally, we regularly look closely at our cost structure and we continue to believe that we are making incremental cost investments in areas that can contribute to our long-term growth and enhance shareholder value, including infrastructure to support our upscale brands, international growth, and significant efforts to broaden our corporate and business development initiatives.

Our balance sheet and liquidity position remained strong, we finished the first quarter with approximately $91 million of cash on hand and total long-term debt of approximately $252 million, which represent a net debt to EBITDA multiple of less than one times are expected in 2011 EBITDA.

Turning to our outlook for the third quarter and remainder of 2011, we currently expect third quarter diluted earnings per share of $0.59. We increased our full year 2011 adjusted EBITDA to a range between $178 million and $180 million and we increased our full year 2011 adjusted earnings per share to a range between $1.75 and $1.77 per share.

The primary reason we are increasing our full year EBITDA and EPS outlook from our previous guidance is on account of better than previously expected domestic RevPAR performance in the second and third quarters compared to our previous outlook. This is reflected in our updated full year domestic RevPAR outlook, which we increased to 5% from 4% previously.

Our current outlook assumes net domestic unit growth as essentially flat compared to last year, the figures assume our domestic system-wide RevPAR increase to the third quarter and for full year 2011 are both 5%.

The figures assume a 1 basis point increase in the effective royalty rate for full year 2011 and an effective tax rate of approximately 34.5% for third quarter and 33.5% for full year 2011 respectively. All figures assume the existing share count.

We continue to experience historic low levels of hotel transactions in the segments where we operate. If we see continued improvement in the RevPAR, hotel financing, and transaction environments, these factors can be positive catalyst compared to our current outlook.

Now let me turn the call back over to Steve.

Stephen P. Joyce

Thanks, Dave. So, the lodging environment remains a strong and improving one for our franchisees and for us, the recent trends taking hold in the RevPAR and franchise development environment are encouraging. In addition, we continue to make impressive strides in business delivery to our franchisees which serves to further strengthen our value proposition with them.

We continue to innovate across our organization in the strength and improve the value and sustainability of our brand and I'm very excited about our ability to create and drive programs to improve the profitability of our franchisees and create value for our long-term shareholders.

We are excited about our growth prospects in many areas. First of all, Cambria, we made several major urban market developments including two in New York City and we have many others in advanced stages with several to be expected to be announced soon. Conversion markets are finally swinging up, financing will follow, and this is – this will benefit our deal flow. We expect this benefit to significantly help us in the mid to long-term.

And then finally, on the international front, our information technology platform is being delivered in Europe and we expect significant unit growth coming from these efforts. We'll talk about this more towards the end of this year and early into next year.

Now, I'm going to open up the call to answer any of your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Harry Curtis of Nomura. Please go ahead.

Harry Curtis – Nomura

Hey guys. Can you hear me?

David White

Yeah.

Stephen Joyce

Hey Harry, how are you?

Harry Curtis – Nomura

I'm okay. Thanks. How are you?

Stephen P. Joyce

Good.

Harry Curtis – Nomura

A quick question on the balance sheet. So sequentially, your receivables went up and the receivables on marketing and reservation fees also went up, what your expectations as far as cash conversation, do you think that the receivables are a little bit higher than normal? And would you expect that to convert to cash pretty soon?

David L. White

Hey Harry. This is David. So if you're looking at the trade receivable account which was about $58 million at the end of June. And it is up sequentially from the year-end balance sheet represent where it showed $47.6million. There is a seasonality impact that you have take into effect, so if you were to look back at last year's June balance sheet and you'd see the same kind of, roughly the same level of growth on a comparable basis. So there's nothing really different I would say on the receivable side of things for June of this year compared to June of last year. It's just really seasonality which is causing that increase.

On the receivable for marketing reservation fees, that is actually, I would say similar view. If you look back at last year's June balance sheet, the receivable balance was almost $59 million, so it's not that December from where we are at the end of June. So there is really no kind of change in our view in terms of the recoverability of those receivables or anything that I would think about differently on the cash flow statement than what you've seen in the past.

Harry Curtis – Nomura

Okay. And then the – and that leads me to the second question which I think most to – who have an interest in your stock or chopping at the bid and that is, you haven't bought any stock back. The stock is down from 42 buck a share. Cash is building on the balance sheet, what are your thoughts on using that, particularly given your more optimistic views about conversions and improving and continuation of pricing power?

David L. White

I'd say couple of things, one is, we've used our cash flow. We talked about using our cash flow for a number of items, Cambria Suites development expansion that brand and one of those items. In the past, the volume and the dollar amount of share repurchases have been lumpy. We said very factors impact the share repurchase program and the timing, the amount of the repurchases. I won't really comment beyond that and I think we've talked about the Cambria Suites utilization of cash flow, in the press release as well.

Harry Curtis – Nomura

But it looks like the Cambria utilization of cash flow should be towards the end of your, you know, necessary build out or is that not right?

David L. White

Well, as Steve mentioned in his script and we are looking at a number of different Cambria development opportunities and so dependant upon how to shake out that will dictate the use of cash to support that brand.

Harry Curtis – Nomura

So you'd be – so you're still in the use of your own balance sheet to build out that brand stage?

David L. White

I'm sorry, could you repeat that Harry, please.

Harry Curtis – Nomura

It's – so you are using your own balance sheet to build out the brand, it's not quite – is it sort of not ready to be to gain a kind of franchise traction that you are looking for?

David L. White

Yeah, I think from a Cambria perspective, our view is that we want to build the scale of that rapidly. I mean, the sooner we can get it to scale, it will have a sustainable ability to develop more through straight franchising like we've seen in the past with brands that we've launched such as suite.

Stephen P. Joyce

Yeah, and Harry I would say this too, obviously to start a new brand, you got to incent owners to do it and so we are putting sliver equity and mezzanine debt and other applications to work. I would tell you though that in today's environment that is the competitive environment because most of the other brands are also providing similar incentives.

Harry Curtis – Nomura

Okay. Any sense of over, let's say the next 12 to 18 months how much cash that's going to require?

David L. White

It would still be in the range of what we've been talking about, which is sort of that $20 million to $40 million.

Harry Curtis – Nomura

All right. I appreciate it. Thanks very much.

Stephen P. Joyce

Thanks.

Operator

Your next question comes from the line of Steven Kent of Goldman Sachs.

Steven Kent – Goldman Sachs

Hi. A couple of questions. First, can you just give us a little bit more color on why the fourth quarter suggest a deceleration in RevPAR, just give us some more on that if there is anything out there that you're seeing? And then second, on financing of new hotels, what is the local banks or the local financing groups concerned about on providing a little bit more capital to get some of these hotels built, is that they already have existing hotels or bad loans already on their balance sheets that they are concerned about?

David L. White

Yeah, I'll take the first part of that, Steve. So on the RevPAR side of things, I think the biggest thing you got to focus on is, if you look at last year's RevPAR on a quarterly basis, there was a really steep recovery. So, in the third quarter last quarter, I think RevPAR was up about 7%, and in the fourth quarter of last year RevPAR was up almost 10%. So, what you're seeing when you think about our outlook for the balance of the year is I think we are being more optimistic. And I think if we take the full year RevPAR outlook is more positive than we did a few months ago, but when you're looking it on a quarterly basis throughout 2011, you have to take into account that real steep RevPAR recovery that we experienced last year making the comps become more and more challenging as the year progresses.

Stephen P. Joyce

Okay. And in terms of the financing environment, so I think the answer is it appears based on what we are hearing from our franchisees to be improving, but I would call that pretty slow and gradual improvement. I think you've got a combination of two factors, one is, I think the reserve requirements being that the banks are being held to are making, they are much more cautious about putting loans out there. So, even with Washington's assurances that they are not asking for higher level of reserves, but we are hearing is in the applications from the auditors that they are that there is an increased identification and focus on the reserves that the banks hold.

And then secondly, a number of those banks are holding hotel real estate loans in their portfolio and based on the percentage they've allocated have not moved back to the market. Having said all that, for our strongest franchisees in a number of dialogues we are having now, it appears that is loosening up some and that a number of franchisees, we heard this particular during our convention where people were sort of still waiting on the sideline, the number of conversations we've got about folks that believe their lenders will – are ready to be begin lending to them again and their interest based on the improvement and the performance of their existing hotels and in the markets they work in is starting to move them towards thinking about either starting projects they haven't started or new projects. And so, I would say for first time in a long time that the dialogue that we had at the convention and at the (whole) is much more deal oriented than it's been. And so, we are taking that as a good sign that we are getting a gradual pushback into it. We don't expect anything rapid or sudden on the new construction side, but there are deals getting done. We are doing some and we expect that to gradually build.

Steven Kent – Goldman Sachs

Okay. Thank you

Operator

Your next question comes from the line of Ryan Meliker with Morgan Stanley.

Ryan Meliker - Morgan Stanley

Good morning, guys. Just a follow-up I guess on some of the hot topics with regards to Cambria and its growth. I'm wondering if you can give us any color on, I know you got, I think in the last quarter you mentioned about $20 million in land bank for the development of Cambria, just to be sold to developers. I'm wondering if you've been able to make any progress in finding developers line up and basically sell that land over or have anything under contract there? And also, I was hoping, you can give us some color on how you are going to use the $250 million fund that you talked about in the last call to fund Cambria in terms of identify in which markets to go into and what not. I know that the initial Cambria's may not have been in the markets you're focusing at, why you let some of them leave. So I'm wondering how that's going to change going forward? Thanks.

Stephen P. Joyce

Yes. So, let's see, on the first part of your question, as we look at the opportunities that we've got with the land that we banked, I would say a significant percentage of those land that we either have under contract or that we've – that we're actually holding title to, for most of them they are significant discussions going on about franchisees or owners wanting to take that land from us into a Cambria Development.

So we expect several of those deals to get announced in the not too distant future and as you know real estate deals – now deals that's done, but we got enough strong interest and enough of those that we feel very comfortable that for the lion's share of the land that we've contracted for that we got franchisees that are interested in. The actual amount of the land that we got because we haven't closed on a number of them. It's actually only $8 million, not $25 million. But if we closed on everything else that we've been working on then the number we come up to probably in the $15 million to $20 million range. So you're not that far off. And in some cases, we actually believe we're going to flip prior to taking title to it. So we're encourage by that.

Then, secondly, on the $250 million, it really depends on the deal. We've got a number of ways of incenting development through the cash stack and that can include a series of different options depending on the franchisees and their partner's desire. We can do mez loans, we can do sliver equity. We can help with top-end guarantees. We can support debt structures, there is just a number of different avenues for us to go at it. And we're doing it through a variety of ways with the franchisees depending on their needs and their project. And so, we believe that all of this is relatively short-term, incentive-based investment that will be recycled and are progressing along those fronts and got actually a number of pretty exciting projects that we're hoping to announce not too much into the future.

Ryan Meliker - Morgan Stanley

Thanks Steve. It's helpful. I guess and I'm going to ask you a little bit differently, and I understand how you guys are using various different financing methods across the capital stack. So I'm just thinking in terms of brand growth and brand development, I think on the last call you've indicated that the Summit Hotels that were removed from the Cambria system weren't particularly important to the system, I can speculate that's because the locations may not have been that ideal. I'm just thinking those were four of the first 20 hotels in the system. How are you going to go forward to make sure that you are investments into the system are in locations and properties that are important to the systems is my question.

Stephen P. Joyce

Got it. So, yeah, that mark, that those funds are targeted almost exclusively at all the major urban centers. So, we are looking at the number of our projects are in all the big cities that you would expect or in the high dense suburbs surrounding them and that's where that those dollars for the most part are targeted.

Ryan Meliker - Morgan Stanley

So, it sounds like the – your focus for the near term growth of Cambria is going to be geared towards major urban centers as for…?

Stephen P. Joyce

Yeah, that's for two reasons. One is I think that's the quickest way to build the brand and awareness for the brand. But also, even equally as important that's where deals are getting done. So, the financing is available for major urban markets that's where we are seeing the first real signs of lending and recovery. And so as you talk to lenders willing to do new constructions, they are looking much more aggressively at urban markets than they are any place else. So the combination of our incentive and the fact that that's where the lenders want to go means that's the best fishing available. And then, what we expect is past that that as it begins to ebb out into the other markets that are incentives required for those other markets will be less and our dollars will be targeted sort of on those major MSAs.

Ryan Meliker - Morgan Stanley

Great. Thanks a lot. I appreciate the color.

Operator

Your next question comes from Felicia Hendrix of Barclays Capital.

Felicia Hendrix – Barclays Capital

Hi. Good morning, guys.

Stephen P. Joyce

Good morning, Felicia.

David L. White

Good morning.

Felicia Hendrix – Barclays Capital

All right. Steve, you sounded pretty optimistic on – regarding the potential for conversion to start driving unit growth and at also on potential franchisee agreements. Just wondering, as you look at that when should we expect to see that flowing through your business?

Stephen P. Joyce

Well, the lag time between sort of the upscale transactions to begin occurring, so let me just – just to remind everybody, so we get our conversions from two or three different places. We get them from independents that want to upgrade. We get them from other brands pushing out some other product and are taking those into our conversion brands, and then, we also obviously get them from new build opportunities.

So, when we look at today's environment, look at the normal cycle, we are seeing the upscale and upper upscale transactions beginning to increase. Typically you'd see a 6 to 9-month lag from that. And so, if you looked at those transactions beginning to occur kind of first, second quarter of this year, if we follow to typical pattern, you could see something, in terms of up swinging conversions towards the end of this year into next if it follows what normally occurs.

The other piece of that is you're seeing the financing available for transactions in that upscale market. Typically then the financing for ours – for our properties begin in a lag to that as well. So – and then, as people are improving and seeing their deals flow, the other brands will stop extending properties that they don't believe no longer fit their brands and begin to push that out. We saw that from IHC significantly at the end of last year and early into this year and we're beginning to hear that this a growing trend that as the other brands see their growth prospects improving, they begin to push out other properties.

So, the combination of those normally in the cycle then means a big upswing in transactions and conversion opportunities. We've obviously historically gotten more than our fair share of those conversions. We expect that same thing to continue. This cycle has been more elongated than I've experienced. But it appears to me, I think the reason for my optimism over the mid-term at least is it appears that the right things are moving and that if we follow that normal lag of when the upscale stuff occurs and then when mid moderate tier and below begin to move. That we are really looking at some time towards the end of this year into next year that we should see a positive momentum. And then, the other piece is quite frankly having several quarters of 10 plus percent growth in our activity, even without a lot of transactions occurring, I think is one of the other reasons we're thinking that we'll start seeing an upswing in those numbers.

Felicia Hendrix – Barclays Capital

Okay. So it sounds like though it's not – even though you said it could be at the end of this year, it's not in your unit outlook?

Stephen P. Joyce

We have not included to our unit outlook, no.

Felicia Hendrix – Barclays Capital

Okay. And then, just…

Stephen P. Joyce

Yeah, we're still basically assuming that we're more or less on track with what we did last year, may be slightly ahead, but more or less on track, which is why you're seeing our forecast for the year.

Felicia Hendrix – Barclays Capital

Okay, okay. And then, I know this isn't a huge part of your business, but some of your hotels do have groups, smaller groups. Just wondering, if you can give us any color what demand looks like there?

Stephen P. Joyce

Yeah, we don't do a lot, you're right. But, we do, do a lot of SMURF business, which is the smaller social, military, religious, fraternal type stuff. And so, we have targeted our sales force and reorganized them around two things; one is actually pursuing corporate clients that give us both transient and group business, and we're seeing nice upswings in that. But then also targeting specific market areas like SMURF type business, we are the king of amateur sports. If you stay in any of our hotels on the Saturday night, you're going to see lots of kids and lots of parents looking for something to do. So, that's a very strong market for us. We are penetrating that by providing a lot more support. And then, the other is that we think we're probably one of the bigger players in family reunions, which is great business from the standpoint of – typically they are value-oriented, which drives them towards our brands. But also, we can support them in a way that makes for a strong event for them and puts us in a position to be highly competitive in that marketplace.

Felicia Hendrix – Barclays Capital

Okay. That's helpful. And then just Dave, on the SG&A side, and maybe this wasn't that significant. But I'm just a little confused because RevPAR kind of in a recovery and you talked about cash, you talked about cash earlier and using that for Cambria versus buy back stocks. It seems like you are persevering cash. I'm just wondering, why you'd moved your annual convention to a location that's more expensive?

David L. White

Yeah, well, a lot of this decisions like the location of your convention gets made several years, actually four years ahead of when the actual event takes place. So, that decision for this year's convention was actually made four years ago and obviously over the past two years as we've made our convention plans for the future we've taken that into consideration.

Felicia Hendrix – Barclays Capital

Okay. So when you make them, you don't lock-in the prices then?

Stephen P. Joyce

Yeah, you're locked in and out and clearly that was done.

Felicia Hendrix – Barclays Capital

I see, okay.

Stephen P. Joyce

Yeah. You're welcome. Clearly it was done prior to my come in. I can tell you that won't happen again.

Felicia Hendrix – Barclays Capital

Okay. Glad I asked. And just finally, you're moving your headquarters, I was just wondering if you get any kind of tax incentives from a Montgomery county to move?

Stephen P. Joyce

Yeah. We are very happy with the level of support we got both from the state and the county. I think we've been here a long time in the state. Our folks live in around here. Our strong desire was a new building that had access to public transportation and facilities and everything else. We found a great spot and the state and the county both felt that it was important for us to stay here, and therefore, we're very helpful from the standpoint making that work. I will tell you it was interesting because we got calls, not only from obviously the metro area, the other districts interested in our corporate headquarters, but also as far as Connecticut and Pennsylvania and other states, who are really getting aggressive about trying to move, get people to relocate their businesses to their areas. But in the end, we were very happy as well as I think the state and county felt good about the program that we all put together and are looking forward to construction and the move which will take about a year and half total length.

Felicia Hendrix – Barclays Capital

Okay. Thank you very much.

Stephen P. Joyce

Thank you.

Operator

Your next question comes from the line Joe Greff of JP Morgan.

Joseph Greff – JP Morgan

Good morning, everyone. I have a few questions on your development pipeline, and I joined late so I don't know, if this was given or not, but what percentage of your pipeline, development pipeline have firm opening dates for 2011, what percentage is for 2012, what percentage of the development pipeline relates to conversion opportunities? What percentage of the pipeline relate to some level of capital investment? And then, when I look at that pipeline what is that level of capital investment amount? Thank you.

David L. White

Okay. So I guess breaking it down in a few ways. I mean the ratio of conversion and new construction deals in the pipeline is actually laid out on Exhibit 6, I'm sorry Exhibit 7. So if you look at conversions at the end of June there were about 129 conversions, out of 451 total in the pipeline. Then in terms of the timeframe for opening for conversions, typically the conversion hotel, once we execute the contract can open anywhere between a couple of months and 9 months to come online. So one of the points we definitely like to emphasize on the conversions, which is the reason that the growth we're seeing on the conversion franchise sales is so important is that conversion franchise sales that we execute during a quarter can actually open during the quarter, and therefore they never even hit, what we call our pipeline. So you can even make sure you fact that in when you're thinking about our net – our gross openings and how close to the net openings.

On the new construction side of things, the – basically for full year 2011, our expectation is on 35 of the new construction hotels will come online, which is 10% or so of the new construction pipeline. Typically for a new construction contracts, the timeframe for openings is much longer than on the conversion side of things, ranges anywhere from I call it 18 months to three or four years. And as we point out and what we've seen over a long period of time is that, every contract we execute for either a conversion or a new construction hotel does not necessarily result on an open hotel in the system. That's very consistent with other hotel franchisers. And clearly, the success rate for a new construction hotel is not at the same degree a conversion hotel is, but so you got also factor kind of that in over an extended period of time.

In terms of capital utilization, really – in terms of the capital program, we've talked about for Cambria, I mean that's the only thing I would say is out there that's different what we've done in the past. I mean as you know (Jeff) we've done development incentives over the years where we will provide forgivable prom note upon opening of the conversion hotel or a new construction hotel. Those are normally pretty small dollars for our – kind of call it our core brands. On the Cambria side of things, I think we've kind of talked about the amount we expect to deploy overtime to grow the development of that system. I don't have the specific dollar amount that's committed here right in front of me, but can provide that supplementally.

Joseph Greff – JP Morgan

So is it fair to say then the growth conditions in the back half of the year from conversions and new construction is offset by removable?

David L. White

Basically our removals or termination rates for full year 2011, we're expecting to be in the range we've experienced for terminations historically over the past 5 or 10 years. So somewhere around in the 5% area.

Joseph Greff – JP Morgan

Thank you.

David L. White

Yeah.

Operator

And your next question comes from the line of Shaun Kelley of Bank of America Merrill Lynch.

Shaun Kelley – Bank of America – Merrill Lynch

Hey. Good morning, everyone. Just one – kind of one question, I think everything else is being touched upon, but generally, kind of watching the RevPAR numbers come in over the last couple of months and you have seen a bit of a sequential slowdown over the summer months. And you guys see a little bit more of the leisure business, so kind of was wondering if you could just give us your thoughts on, have you seen any of that, I guess sequential deceleration. I mean you kind of said that for June and July I think in your prepared remarks that you're comfortable with mid-single-digit in June and July heading into the third quarter. So could you just give us a sense, kind of what you're seeing from the consumer right now and how business feels out there? That would be helpful.

Stephen P. Joyce

Yeah, I think almost remarkably, given what's going on, the numbers have held up pretty steady. So every time I turn on the news, I expect to see that reflected in our numbers going forward. But they have been pretty consistent throughout the summer and that's why we're pretty comfortable saying, it's almost like what else could be thrown at it that could potentially affect things and it has already. So my view and I tend to be more of optimist is I think it's probably more upside than downside, but we're pretty comfortable with where we are because it's been holding pretty steady and we're not seeing, even through all of what's been going on, which typically consumer confidence is a big part of our performance. So we're pretty comfortable with the forecast we've given and that what we are seeing on a day-to-day basis even throughout all the hysterics that we've gone through over the last month with the debt ceiling and everything else that the business is holding up.

Shaun Kelley – Bank of America – Merrill Lynch

And just – and I appreciate that, and just more if I could, the second quarter of number of 66, I imagine that benefited a little bit from the Easter shift. Is it possible to quantify that or was that benefit as you just kind of look at the – kind of the monthly performance?

David L. White

Yeah, I don't have that quantified here in front of me, but I don't recall that being anything that we really discussed as being a significant impact to us.

Shaun Kelley – Bank of America – Merrill Lynch

Okay. Thank you very much.

Operator

(Operator Instructions) Your next question comes from the line of Ryan Meliker of Morgan Stanley.

Ryan Meliker – Morgan Stanley

Hey guys. Sorry, I just had a quick follow-up, I don't mean to be a dead horse when I think about Cambria. I just want to make sure I understand the strategy going forward. It sounds like, you guys are focusing your money or at least what you are putting to work in Cambria on urban use of the top markets. I'm just looking at the existing footprint of Cambria and it doesn't look like there's too much exposure to the top markets. And then if I look at, one of the STR's more recent pipelines, it doesn't look like there is a lot of a, less than half of the Cambria's in, you know, in some stage of development are in the top 25 markets. So, is it that your focus is more about putting your money to work in those top markets but you are trying to grow the brand everywhere? Or is it more that maybe there was an old strategy of just growing at where we could and now you are trying to focus things and change it a little bit different?

Stephen P. Joyce

Yeah, I think it's the latter, the company initially was successful in developing a number of units and actually had grown a pretty big pipeline prior to the financial collapse without putting the balance sheet to work. When I came in my – one of my first priorities was looking at opportunities to move and shift development to the major markets and knowing that and doing that we would probably have to use the balance sheet somewhat. So what you are going to see over the next 6 to 12 months is a significant shift of the construction and development activity from Cambria, from more of the tertiary markets into the major markets, and as I said earlier and that's probably makes sense because that's where the deals are getting done and started and construction starts. So, we are working really hard to make sure that we get several of the major market construction projects underway this year. We look like we are in pretty good shape on that. The two projects in New York are – in New York City are a good example. The types of things we are doing and then while you won't see them announce yet and won't see them in the pipelines that you are looking at. That will follow as those deals get done.

Ryan Meliker – Morgan Stanley

And then is that primarily the result of the fact that deals can get on in a major markets and they can't elsewhere or so it's not about the strategy about trying to focus in the major markets to grow that?

Stephen P. Joyce

No, we are focusing on the major markets, but because that's where they get none. Now, we are doing other deals. We've got a couple of other ones that are not in major markets, but the bulk of our activity and our investments are targeted at driving distribution in major markets.

Ryan Meliker – Morgan Stanley

Okay. So, I guess, I mean, I guess another way to ask that question is that is it reasonable to say that maybe the strategy before wasn't an ideal for growing the brand because some of these markets didn't have any exposure that you needed to really get the brand out there and now you are trying to change that? Or is that – or is it really just driven by, that's where the deals are?

Stephen P. Joyce

Look, I would say it is a combination of – the company was able to develop a relatively significant pipeline without investing heavily in the brand and so as a result I think at that point given where the company was, if that was a good strategy. I think given what's occurred over the last three years though and are desired to have Cambria be a rapidly growing vehicle. The best way to do that to built awareness of the brand is to target major markets. And so I think, you had a shift in both sort of the environment in which we are operating in. But also shifting strategy based on that and the desire to help push Cambria in a way in a market that it hasn't been very cooperative at all and to get some momentum going in those major markets and get in the biggest bang for the buck.

Ryan Meliker – Morgan Stanley

Great. That's great color. Thanks a lot Steve.

Stephen P. Joyce

You are welcome.

Operator

Your next question comes from the line of Chris Agnew of MKM Partners.

Christopher Agnew – MKM Partners LLC

Thank you very much. Good morning. Couple of questions. First on deployment of capital, based on this sort of the transactions you are seeing or looking at today, can you give us any sense at this stage what sort of duration in those investments will be? Are they short-term, sort of 12 to 18 months or 2 to 3-year type investments?

And then secondly, could you just maybe give a little bit more color on your comments and confidence about significant unit growth in Europe? Maybe any feedback or data points there? Thank you.

David L. White

Sure. Yeah, so on the duration of the lending, it obviously depends a lot on the financing markets. My experience has been, you know, when you put money that deals sort of that, it's typically a three-month – a three-year investment, it can go five, it can also go 18 months in a hot market with hot financing. So, but our anticipation the way we are budging for the capital is it sort of been 3 to 5 year range of where we'd be cycling it and which kind of dictates the number we put out as we feel that's where we begin when we go to the end of that investment, that's where we'd begin to – the capital would be recycled. So and we are reasonably confident that the application of that capital is going to get us sort of the development we are looking for and we're having good result so far and we will be sharing some of those announcements with you.

On the European side, this is the kind of the exciting part, we have a technology platform which is relatively unique for the industry and that is we have the only club-based massively distributed property management reservation system, which means something special because what it means is your cost of conversion are dramatically less because you don't have to buy systems and servers and cabling. Basically, if you have access to the internet, you have access to our systems. They were not previously available to the international markets. We worked hard over the last two years to internationalize that platform and we have done that. We've introduced it into Australia and we are in the process of introducing it into the U.K. first to be followed rapidly throughout the rest of Europe.

We are excited about what that does for our value proposition. It will give us a much higher level of connectivity to the distribution channels and we think therefore our contribution will be impacted positively. And we think that makes us a interesting player in the world's largest lodging market which is mostly focused on conversion. And so, when we look at the opportunity there, Europe is tough for lot of the major brands because the hotels tend to be relatively unique and aren't typically very consistent in their look and feel. We're very comfortable working in that environment, given our history. And so, we view Europe as a new major development market opportunity for us and we've got significant plans around how we're going organize, how we're going affect and attract new franchisees and drive new units. And I think we're at the point now, we're towards the end of this year or in the early next we'll be able to start sharing what our expectation is in terms of unit growth, but we view that as outside of United States are most exciting prospect.

Christopher Agnew – MKM Partners LLC

And, sorry, just a follow-up, I mean do you have any feedback from either the U.K. or any other continental countries in terms of what hotels think about the product, independent hotels and maybe to your sales people's feedback?

Stephen P. Joyce

Yeah, well I think the ideas in concept people think it's an interesting and compelling type equation. I think we got to demonstrate it work in the countries and I think when we have a franchises telling the story in the U.K or in France about what it does for them in terms of connectivity and what it does for them in terms of production, then that will really help move the needle, which is why our view is probably not going to impact this year significantly because we're in that rollout phase, but we're looking forward to impact next year and we'll have – as we get into that part of the phase and rollout we'll be able to give you a better idea of the receptivity towards it, but then also how many people are buying.

But we think the markets ripe. This is an area where there is not a lot of folks focused on in terms of this conversion market, Europe is rapidly shifting and so we think the timing is great and we're going to – we'll put a plan together and numbers in terms of what we expect and we'll talk about that probably early next year.

Christopher Agnew – MKM Partners LLC

Great. Thank you very much.

Operator

Your final question comes from the line of David Loeb of Baird.

David Loeb – W. Baird & Co., Inc

Good morning. I want to ask again about the free cash flow, I know you've been answering this a lot, but you have a lot of free cash flow. You're using maybe a third of that for the dividend these days. I know you're holding more cash and holding some of that free cash flow to use for the Cambria expansion. Can you just talk a little bit about your appetite for share repurchases and where else some of that capital may go besides those first two things that you talked about?

David L. White

Yeah, David so we talked about the share repurchases earlier and in the script we pointed out the types of places where we're making incremental investments on the emerging brands, international and your other kind of broader corporate business development initiative, so I kind of leave it that.

David Loeb – W. Baird & Co., Inc

I heard all that I guess I was hoping for a little more color and particularly given the pullback in the share price in the last quarter and the fact you haven't bought any shares this year, I was wondering if you could give just a little – go a little deeper on that?

David L. White

Yeah, we're not going to comment beyond that.

David Loeb – W. Baird & Co., Inc

Okay. And if I can – number two, if I can beat the dead horses just a little more than (Brian) did. If you could just give a couple of examples of Cambria development, I'm curious about your thoughts, I know brokers have been pushing an Atlanta site that was originally developed to the Cambria. Will that definitely be a Cambria once it's completed or you doing things try to get that back into the system. I've heard some talk about one in Dallas, if you could talk a little bit about just those examples of the kinds of efforts you're putting into grow that brand?

Stephen P. Joyce

Yeah. So the Atlanta deal, the franchisee ran into a financial difficulty sort of at the worse part of the market and it has got sort of stalled in its construction. It looks like that probably will result in a new deal being in Cambria. We've got – we have a couple projects in Dallas, but one in particular is pretty advanced and so that's looking – that was part of our land purchase acquisition so that's looking pretty positive. And then, if you go around the country and look at sort of the other major markets we are working something in a lot of them. Some of them with the land purchase approach, but some of them also based on being contacted by developers with projects that they think their brand fits well with. And so, we're actually pretty encouraged by kind of the receptivity of the brand and sort of the approach that we are taking and the combination I think of both generating wheels through land acquisition which we are getting at what we think are really great prices, as well as through the activity and some of the development community that we've been talking to appears to have now be getting to take some hold and there is financing available. And so, we're pretty encouraged that numbers of those deals are going to come fruition and you'll start hearing about actual deal announcements, not in the not too distant future.

David Loeb – W. Baird & Co., Inc

Great. And one, final one, on the Exhibit 5 on the room count data. I'm curious about removals, here in Cambria it looks like the net decline in Comfort, Comfort Suites was 38 and in some of the conversion brands about 13 and that's net clearly. Is that just kind of normal cyclical removals versus relatively slow development and conversion environment? Or is there anything else going there that's notable?

Stephen P. Joyce

Well, there's a combination, it is – I would say mostly the normal cyclical then we haven't seen the conversion swing up or we expect them. So our unit growth isn't as high as we would normally be at this part of the cycle. I will also tell you and we talked about this before, we're getting more aggressive about Comfort Inn. And so, we have marked course of beginning to more aggressively pursue consistency particularly the lower end of the brand and that's affecting those numbers.

David Robert Loeb – W. Baird & Co., Inc

Great, very helpful. Thank you very much.

Stephen P. Joyce

Thanks.

Operator

Ladies and gentlemen, that concludes the Q&A session. I'll now turn the call back over to your President and Chief Executive Officer, Stephen Joyce.

Stephen P. Joyce

Well, thanks, we appreciate your attention. We actually are fairly encouraged by everything we are seeing. We are excited about the numbers of initiatives and activities we got underway at the company, we believe that will provide significant growth for the company as well as significant value to the shareholders. You know, as always the shareholders come first in our priorities and we are appreciative of your call and look forward to talking about further developments in the fall. Have a nice day.

Operator

Well, ladies and gentlemen that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!