Choice Hotels International's (CHH) CEO Steve Joyce on Q2 2016 Results - Earnings Call Transcript

| About: Choice Hotels (CHH)

Choice Hotels International, Inc. (NYSE:CHH)

Q2 2016 Earnings Conference Call

August 02, 2016 10:00 AM ET

Executives

Steve Joyce - CEO

Scott Oaksmith - Chief Accounting Officer

Analysts

Thomas Allen - Morgan Stanley

Shaun Kelley - Bank of America

Joseph Greff - JPMorgan

Anthony Powell - Barclays

Jared Shojaian - Wolfe Research

David Katz - Telsey Group

Operator

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the Choice Hotels International Second Quarter 2016 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 call conference call, certain predictive or forward-looking statements will be used to assist you in understanding the company and its results, which constitute as 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 its management believe, expects, anticipates, foresees, forecasts, eliminates, 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, 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 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.

Steve Joyce

Thank you. Good morning. Welcome to Choice Hotels' earnings second quarter conference call. Joining me, today is Scott Oaksmith, our Chief Accounting Officer. This morning, we'll update you on our performance for the second quarter of 2016, will also share some news about initiatives design to increase the number of reservations delivered to all franchisees directly from our proprietary distribution channels. Importantly again this quarter all three levers that drive domestic royalty revenue all increase. System size, Revpar and effective royalty rates. We're also seeing international growth in key markets and while still a small part of our overall business, we have some notable accomplishments.

So let's start with our distributions strategy. This quarter we continue to drive more reservations through Choice’s proprietary channels helping to increase the number customers to our franchises hotels at lower cost. This is a result of a number of new initiatives. Just a few weeks ago, we announced that visitors to choice hotels.com and on our mobile apps will now be able to access to discounted rates that can't be found anywhere else on the internet. Both existing and new members of Choice Privileges can access these exclusive room rates that are up to a 7% discount off to best available rate. This is in addition to our commitment to stand behind our pricing. If a guest finds a lower price elsewhere or online we will match the price and give the guest a $50 visa gift card.

The Choice Privileges member rate is the latest in a series of enhancements to our loyalty program. At beginning of the year we announced the biggest redesign of the Choice Privileges program in our company's history. The changes were so well receive that we already expanded the popular your [ph] extras program where guest can earn special rewards for mid-week stays with new partners like Uber. The changes are designed to bring greater value to members and in return to our business to Choice’s distribution channels and increased the number of loyalty members and it is all working. In fact, the numbers speak for themselves. We just surpassed 27 million Choice Privilege members. We are on pace to sign-up more members this year than in any year in our history. In fact, already this year we have signed up more members than we did in any year prior. 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 of these channels year-to-date increased to 57%, up 330 basis points compared to the same period last year. This quarter we had our highest CRS revenue day ever on June 20th surpassing $20 million. Prior to second quarter in 2016, we had never surpassed the $18 million mark for CRS revenue any day in our second quarter. The amount of revenue delivered through our CRS continues to set new milestones and reach new all-time highs on a weekly basis. choicehotels.com also continues to grow significantly and generates the largest share of revenue of our distribution channels.

Our direct online channels, choicehotels.com and mobile had 15 days with over 7 million in bookings in Q2 2016 compared to only 5 million last year. We hit our first ever $8 million day for choicehotels.com and mobile in June 2016. Bookings via our mobile applications continue to grow at a fast pace and has yielded an increase of 22% in the revenue for the second quarter compared to the same time last year. Our distribution strategy is delivering great results. We are aggressive in coming up with new ways to drive guest to our proprietary channels and is increasing the number of customers to our franchisees hotels at lower cost.

Now moving on to the rest of our results. There are number of positive financial highlights for the quarter. The company delivered 15% increase in adjusted earnings per share. Total revenues increased 4% for the quarter with franchising revenues and domestic royalty fees each increasing 7%. As I mentioned earlier, once again this quarter all three levers that drive domestic royalty revenue performance increased, system size, RevPAR and effective royalty rate. Domestic system wide RevPAR increased 4.3% in the quarter and exceeded total industry results as well as the results for the primary chain scale segments in which the company competes as reported by Smith Travel Research. Our comfort family of brands continues to outperform its focused competitive set and has now experienced 21 straight months of RevPAR gains.

Moving on to some more good news in the development and brand front. In the second quarter we saw executed franchise agreements increase by 6% driven significantly by our new construction results. New construction was up 40% fueled in large part by the growth of our Cambria brand. The domestic development environment continues to remain strong and our franchise agreement applications in house at the end of the second quarter were up 8% including a 9% increase in conversion applications. We continue to expect the number of executed domestic franchise agreements for a full year 2016 to exceed our very strong results from last year.

Our momentum in the upscale space continues with our Cambria brand continue to grow in key markets across the country. The domestic pipeline for Cambria increased by 112% compared to the same time last year. In the second quarter we celebrated the ground breaking of a 222 room, 14 store Cambria in the heart of Downtown Philadelphia just off Ridenhour Square. We also signed 9 new franchise agreements to bring Cambria to key markets including three Southern California. One adjacent to LA Live at Downtown which is a 180 rooms, two our largest Cambria to date 350 rooms in Anaheim near Disneyland where the new Star Wars Park is opening and three another 225 room project near LAX.

We also signed new projects in Boston, Seattle, Indianapolis and Oklahoma City. These signings are consistent with our strategy of growing the Cambria in high profile locations within the top travel markets across the country, further enhancing the long-term brand visibility with the target upscale customer choice is actively recruiting to the previously discuss changes to our loyalty program.

These recent signings follow the grand opening of our terrific new Cambria and Manhattan the Cambria times square earlier this year and the announcement last quarter about two hotels coming to downtown Chicago was a conversion of existing hotel and as adapter reuse of the commercial office complex, which are both now under development.

Moving to our international growth, we are seeing momentum in key international markets, as a result of several deals that are adding new hotels to our system. We recently announce a new master franchise agreement to expand into the UAE and Saudi Arabia, where we believe our midscale brands such as Comfort and Clarion will perform very well. As part of our European expansion in the first half of 2016, the company signed agreements to add 19 properties in Germany, Austria and Hungry under the Comfort and Quality brands, and another deal to establish multiple hotels in Belgium. Choice is further growing its presence in Germany with two new Comfort brand hotels in Frankfurt and Düsseldorf, and recently launch its upscale at Ascend Hotel Collection in the UK and France.

Choice continues to see tremendous opportunity in Europe and we are uniquely positioned to aggressively grow and compete. We are pleased with the momentum we are now seeing and strong Revpar gains domestic and international growth. And new initiatives on the distribution firm that our successfully driving more business to our proprietary distribution channels.

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

Scott Oaksmith

Thanks Steve. In this morning's press release, we reported adjusted diluted earnings per share of $0.71 a 15% increase over the prior year. Adjusted diluted earnings per share excludes executive determination benefits totaling approximately $2.2 million, which represented approximately $0.03 per share for the quarter. However adjusted and diluted EPS exceed our previous outlook of $0.66 for the quarter by $0.05 per share. Approximately $0.03 of this outperformance is attributable to better than expected operating results. The remaining $0.02 was the result of a lower effective 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 SG&A expenses for the quarter were less than we had anticipated as a result of the delay in the timing of certain expenses that we now expect will occur in the back half of the year.

Our adjusted hotel franchising EBITDA for the second quarter increased 7% over the same period of the prior year, and our hotel franchising margins expanded by 60 basis points to 69.2%. Our franchising revenues for the quarter increased 7% over the prior year, driven primarily by growth in our domestic royalties and procurement services revenues. Domestic royalty revenues for the second quarter increased 7% over the prior year to $81.1 million driven by growth in all three of our key levers.

We achieved a 4.3% increase in domestic RevPAR in the second quarter which exceeded our previously published outlook of 3% to 4% increase. Our RevPAR increases were driven by 3% increase in average daily rates and 80 basis points increase in occupancy. We were particularly pleased that our RevPAR results exceeded the performance of the overall industry as reported by Smith Travel Research by 80 basis points.

Furthermore, excluding the impact of the energy markets, our second quarter RevPAR results would have increased by an additional 150 basis points over our reported increase. We expect this spread to decrease over the remainder of the year as oil markets stabilize and comparables become easier. We attribute our second quarter RevPAR outperformance against the overall industry and the primary change scales in which we compete primarily due to the continued strength of leisure travel, the rejuvenation of our Comfort brand as well as new revenue and rate management tools that we are recently provided to our franchisees.

As you may know, although we continue to increase our share of business travel, our business remains predominantly leisure travel focused. And as a result we expect to see continued strong RevPAR results in the third quarter as the summer travel season continues. As a result, we expect our third quarter RevPAR results to increase between 3.5% and 4%. On the supply front, we grew the number of hotels operating in our domestic franchise system by approximately 1% compared to June 30th for the prior year. This growth was in line with our expectations.

Our domestic supply growth numbers continue to be impacted by our Comfort brand rejuvenation strategy which we have discussed in past calls. Excluding the impact of this strategy, we grew the number of net units online in our domestic system by more than 130 units which represented 4% increase. This increase compares favorably to the industry wide supply growth rates. Furthermore our quality brand has continued its strong growth and is approaching 1,400 units. This represents nearly 6.5% increase over the prior year.

In addition to the strong unit growth, the quality brand has also reported one of the highest RevPAR growth rates across our portfolio, increasing over 6% in the second quarter. Our domestic effective royalty rates have also continued to expand and reached 4.4% in the second quarter, a 12 basis points extension. Furthermore, our year-to-date effective royalty rates have increased 10 basis points compared to the prior year. As a result, we have revised our outlook and now expect our respective royalty to expand 7 to 9 basis points for the full year. With respect to franchise development we executed 147 new domestic hotel franchise agreements during the second quarter, a 6% increase over the prior year. New domestic hotel franchise agreements or new construction projects increase 40% over the prior year quarter, highlighted by our Cambria hotel and suites brand, which executed 9 new agreements in key markets that we believe will continue to drive the success of this brand.

Our domestic pipeline for our Cambria brand continues to expand and has more than doubled over the prior year and now stands at 53 units. Our total domestic pipeline June 30 has grown to 591 hotels, which is an increase of 14% over the prior year. Our relations and renewal activities continue to reflect the strong hotel transaction environment, and improved 26% over the second quarter of the prior year and are up 16% year-to-date.

Our business continues to drive significant cash flows and we strive to allocate these cash flows for those items that will ultimately return the highest value to our shareholders overtime. During the second quarter we continued to utilize these cash flows to return value to our shareholders through a combination of share repurchases, dividends and investments in our business to driven future growth.

During the second quarter we completed the opportunistic and accretive repurchase of 400,000 shares of common stock under our repurchase program at a total cost of approximately $19.4 million. In addition to these share repurchases we also pay dividends during the second quarter at a quarterly rate of $0.205 per share or approximately $11 million. This represented the 5% increase over prior year levels.

Finally, we continue to utilize our balance sheet to prudently support the growth of our Cambria brand. During the first six months of the year, we have advanced approximately $67 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 $18 million of these investments previously utilized to support the expansion of this brand. And these funds are now available to incent new Cambria projects. We expect these advances will accelerate the pace of the Cambria brands growth over the next several years.

Now, I'll turn 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 32.5% for the third quarter and 31% for full year 2016. As mentioned in our earnings release this morning. Our effective full year effective income tax rate reflects the early adoption of the country standards update 2016-09 which requires access income tax benefits to lower the stock compensation we recognized in the company's income statement.

The adoption of this standard reduced our previously reported income taxes for the first quarter of 2016 by approximately $1.6 million. Our hotels franchise and activity guidance assumes that our RevPAR will increased approximately 3.5% to 4% for the third quarter and range between 3.5% and 4% for full year 2016. Based on our year-to-date results and current RevPAR trends we have updated the range of our projected domestic RevPAR increases for full year 2016 from a range of 3.75% to 4.5% to a revise range of 3.5% to 4%.

As I previously mentioned they have increase our projections for the growth and our effective royalty rates. As a result, our guidance now assumes that our effective royalty rate growth will increase between 7 and 9 basis points for the full year. And our net domestic unit growth will increase between 2% and 3%. And excluding the impact of our Comfort rejuvenation strategy, we expect our domestic portfolio net unit growth of our other brands to increase by approximately 5% in the aggregate. We are maintaining our full year guidance for 2016 adjusted EBITDA from franchising activities as a range between 270 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 $16 million and $19 million. We expect our third quarter 2016 diluted EPS to be at least $0.78 per share. And our full year 2016 adjusted diluted EPS to range between $2.38 and $2.43 per share. Our consolidated adjusted EBITDA for full year 2016 is expected to range between $252 million and $256 million. We have increased our full year adjusted diluted EPS range by $0.08 per share primarily due to the impact of a lower than previously projected effective tax rate and accretive share repurchases.

These adjusted EPS and consolidated EBITDA estimates assume that we incur net reductions in adjusted EBITDA related to non-franchising activities at the midpoint of the range for those investments. Now let me turn the call back over to Steve.

Steve Joyce

Thanks Scott. So to sum it up, again this quarter all three of the levers that drive domestic royalty revenue system size RevPAR and effective royalty rate have increased. Our international growth, while still small part of our overall business, is notable and we’re seeing momentum particularly in Europe and other key markets. We are investing in programs designed to drive more reservations through our central channels, improve guest loyalty and enhance the value of our brand in an effort to drive incremental business to our franchisees. As you can tell, we’re optimistic about our continued long-term growth prospects and our ability to drive excellent results for our company and in particular for our shareholders.

Now I am going to open up the call to see if you have any questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from Thomas Allen from Morgan Stanley. Your line is open.

Thomas Allen

My first question would just be around -- so RevPAR beaten the second quarter but you’re lowering for your guidance. Is it June and July trends that are making you more conservative or anything else? Thanks.

Steve Joyce

Actually we’re having a good summer and it's kind of holding at the levels, but we’re also seeing like everyone else has discussed, our business results mid-week are less robust than the leisure side, leisure side is holding up strongly. And then as we get into the back end we’ve got -- we still got the impact of oil on our results. Although the impact is lessening, it's about little over a point now, last year it was several points.

So, the continued effect of that -- so if we get more recovery the nice thing is, it feels like it will definitely bottom out and it's on its way back up, the question is how quickly do those markets recover. But all in all we’re seeing a very healthy environment and what we’re trying to do is to look at -- we think we're going to between those results and we think actually fourth quarter would probably be a good quarter for us as well. Summer is good because of the leisure side and -- but we are seeing a trend where we think where we’re sort of operating is in that 3.5% to 4% range and it's pretty steady so we feel pretty good about it.

Thomas Allen

That's helpful and then you gave some interesting stats on your distribution and your direct booking push some of you peers have talked about how they thought like it hadn’t negatively impacted RevPAR growth, but I think Marriott highlighted about 40 basis points of drag. Do you feel like it's impacting your RevPAR growth at all or have you never quantify that? Thanks.

Steve Joyce

Now we obviously when we start given discounts first you customers, there is a question about what the incrementality of that business is, but we are also benefitting from a significant number of new members joining those privileges the results being that those are probably -- a lot of those are incremental and so we think net-net it’s going to be real positive for us and in the long run when you think about what it cost you to have a booked -- a room booked through on OTA versus through our channel, we can afford to give our customers a discount and through the incremental customers we get that our booking with channels and are dramatically more expensive, we're going to benefit net-net.

Thomas Allen

So just to follow up on that quickly so long-term you think the business is going to be a benefit short-term it does sound like you're getting a bid of a RevPAR drag just given you are giving your members of discount.

Steve Joyce

We haven’t seen a RevPAR drag yet we think it's at least being offset.

Thomas Allen

Okay, that's clear. Thank you.

Operator

Thank you. And our next question comes from Shaun Kelley of Bank of America. Your line is open.

Shaun Kelley

In the prepared remarks, I think you guys mentioned that you we're seeing a fairly healthy transaction environment, now its maybe helping to drive some activity, be it on the conversion side or what not. Could you elaborate a little bit there, I think that's a little different then what we've heard from some of the large franchisers this quarter where some of them have actually called out that there fees have been a little light because transaction activity slowed. So is that just mean you could just talk little bit more about?

Steve Joyce

Yes, well large transactions activity is up both conversions and new builds. We're finding a lot of demand for our product lending is holding up so while we CMBS market was a little lesser active, but what we're seeing in terms of long-term trends is, there are some slide adjustments on the levels of leverage being offered but our franchises tend to put a lot of equity in the deals anywhere they don’t highly lever the deals and I think what's you are seeing on margin is the developers that were used to a very high leverage levels to make their deals happen.

Is what's falling off that's not usually our franchise system and so as a result even with the lessening of leverage levels, so think about a lot of times up folks were running in the 70 percentage points now, it's probably drifting more towards 65%. In their view that they -- are a lot of them aren’t levering pass 65 anyway and so I think if you are seeing fall off in developments it's from those higher yield, higher leverage levels deals and that's not our bread and butter.

Scott Oaksmith

Then we actually saw an acceleration of the pace that we like to see in our second quarter which increased to 26% and so on a rolling 12 months basis we’ve seen over 8% of our system size relicensed over the last year.

Shaun Kelley

And then the second thing would just be little bit on Cambria as we start to see some new brand launches out there and some new positioning from other people. Just curious on how competitive is it right now to get the new deals signed? And obviously you’re offering some incentives there, but that par for the course when you’re trying to launch and accelerate a new brand. So if you could just talk about the incentives environment and how aggressive it is out there at the moment.

Steve Joyce

So there is a lot of competition, we are aggressively incenting our development, which is working. In addition to that the developer interest in our product is up significantly as they see how these new urban products perform. We’re getting to very quick ramp rates and running some impressive RevPAR index premiums. White Plains open at 130%, the New York Hotels are going to be premiums within the first 9 months to 12 months of their opening. The hotel lot of our headquarters, while from a location standpoint we’ve got somewhat disadvantages is wanting RevPAR regularly, indexes regularly in the 130s.

So people are taking notice of the performance. And the one advantage that we have is some of the others don’t have is because of the vast size of our system, we have enormous number of customers looking for urban locations. So the poster child is New York City where 9 million people contact us looking for a room, 9 million a year. We had 1,500 rooms. We’re not worried about selling our hotels. We’re not immune to a market that is softening. We’re going to fill it, the question is at what rate. But even in New York we’re very happy with the results we’re achieving.

Shaun Kelley

And I should probably know this, this is my last question. But what’s the price point for developer at the moment for one of the new Cambria properties on a per room basis like all in or maybe ex-land is probably the right way to think about since that can vary dramatically?

Steve Joyce

I think the way you have to think about it is in a Greenfield prototype suburban environment which we’re not doing any of, it would be about 120 to 125 key in land depending on where you are that 5,000 to 10,000 key to that. What we’re doing in our urban products which are all custom in the lot of high-rise and mid-rise. So, the average cost of the urban product is probably running in the 220 to 250 range per key, Manhattan is probably was a little higher than that, but on average if you look at where we’ve been, it's in the low to mid 2s.

Operator

Thank you. And our next question comes from Joseph Greff from JPMorgan. Your line is open.

Joseph Greff

Could you just revisit what’s your expectations for SkyTouch turning profitable or not an EBITDA drag? Thank you.

Steve Joyce

So we’re obviously -- we put that out there. We are holding to that. It is going to happen. We are in the process right now of evaluating two or three options as to how to get there. We’re hoping that you hear something from us relatively soon. But we believe we’re well on our way to proving that commitment out. And so as we look at the options that we got we were finding some very attractive alternatives. And the question is which one do we end up landing on and making a deal.

So our view is that commitment you can still count on and we're actually hoping to do a little better in that.

Joseph Greff

Thank you.

Operator

Thank you. And our next question comes from Anthony Powell from Barclays. Your line is open.

Anthony Powell

On the union growth to this year I think you tracked me a bit below to 2% or 3% guidance range do you expect the pickup to come from a new construction hotels or conversion is doing back half of the year?

Steve Joyce

Actually both so we normally and it's [Indiscernible], we have an acceleration of deals towards the fourth quarter. We have done 97 different things to try to spread it out more evenly in the year, but variably our guys going in twice as money deals in November and December it they bring in any other month, so it's just the historical cycle. Yes so we're feeling really good about the environment, our in house apps, the developer interest we had a very strong month for the month of July, ahead of budget, so picked up probably 20 deals I think on that lag. And so barring something unforeseen we're feeling like it's going to be a pretty record deal and I don’t think we put the number out, but it's a significant increase over the last year which is our target. Think of it in terms of approaching almost 700 deals.

Scott Oaksmith

And we should think about our commercial opening as typically down pretty strong openings in that November and December time frame as Steve said through the cyclicality of the business.

Anthony Powell

Got it, thanks. And on the direct booking and initiative does that impact you P&L directly at all or does that just make your franchise as more attractive to developers.

Steve Joyce

It makes us a lot more attractive to developers because if they know they are going to get 57% of their business from us, that's going to lower their overall cost of customer acquisition a lot and quite frankly we’re tired of the fallacy that the lowest rates are on OTA. It's not true, they spent $2 billion a year saying it, but it's simply not true and we're trying to get the consumer to be aware that the lowest rates achieved are on brand.com sites not in an OTA. And so I think the entire industry is tired of hearing about the OTAs, we particularly don’t want to be elected by the OTAs that how we are going to approach the customers and so I think you are going to see a much more aggressive stance, not just in Choice but across the board.

Anthony Powell

Alright, that's it from me. Thank you.

Operator

Thank you. And our next question comes from Jared Shojaian from Wolfe Research. Your line is open.

Jared Shojaian

So if you were to break out those three buckets of the RevPAR performance, the Leisure, the Comfort refresh, the new rate total, is their one component that's having more of an impact right now than the others and I'm specifically wondering in regards to the Comfort refresh if that's more responsible for what you are seeing right now.

Scott Oaksmith

I would say, what’s most responsible is the leisure travel at this point in time. The consumer confidence and kind of unemployment rates being where they are today is really kind of made the leisure traveler much more resilient than the business traveler. So I think that's kind of the lion’s share of the increases there are but we are seeing definitely RevPAR index improvements for the Comfort brand and as well as some of these new tools they’re still in the infancy of rolling them out on the rate and revenue management tools that we think going forward can have a an impact on our RevPAR results.

Steve Joyce

So the other thing to think about too that we still believe it is upside for us even at this point in the cycle. Is if you look at where we've been with relatively lack luster GDP growth we’ve had some pretty remarkable results. We’ve got a labor participation that is still below 63%, those people that are participating or our customers, if they go back to work that’s continued upside for us. And so as we see it, if we get any descent of work in terms of GDP growth and some real improvement in employment then that will help drive our results further, which is why you hear us being relatively optimistic about not only for this year, but also for ’17 and into ’18, because while we may not post 7% RevPAR results, we think we’re going to post very steady very attractive return in yields for our shareholders and for our overall results.

Jared Shojaian

And then just as a follow question, can you remind me what percentage of your hotels are in these big urban markets right now? And how does that net urban RevPAR growth compared to just your system RevPAR growth right now? I am assuming it's weaker. But do you think that’s more a function of just excess supply in those big markets, or do you think it could be Airbnb share shift?

Steve Joyce

It's not Airbnb. So we’re not seeing that as an impact. So, the full service folks have seen that in markets where they were full and the Airbnb expands, you’ve seen the results. But we’re not seeing any result, any impact on our side, which is in fact -- but we like the business which is why we launched vacation rental. So, we actually kind of think that was a pretty smart idea I think the only thing about those guys is they’re going to have to pay taxes and worry about life safety and zoning over time. But we think that’s an attractive business.

Getting back to your main point, we’re probably less than 10% in urban markets and the performance is varying, but anywhere we’ve got Cambria, it's obviously a very up RevPAR growth cycle because they’re relatively new and they’re increasing in every case every year. And then we’ll start to see the results that we’ve been hoping for like Tuesday week ago we sold out almost every Cambria in the system. So we’re starting to see the results that we thought were available to us over market because of the excess demand we’ve got, because our product is simply a newer and better product than anything else out there, consumers re act to it in a way that I’ve never seen with another brand. So we know we’ve got a winning formula, we just need to continue to accelerate the distribution of them. We’re looking to have a significant number of hotels open and operating by ’18 and once we have that in a firmly established space then we think we’re going to have a brand to be reckoned with.

Operator

Thank you. And our next question comes from David Katz from Telsey Group. Your line is open.

David Katz

I congratulate you on a good quarter because I think the core of your business is very straight forward and its merits are relatively clear. So I’ll apologize for asking about SkyTouch again, but among the range of options that it sounds like you’re considering. Would those include situations where you don’t own it, or all of it anymore? I mean is that a fair question about whether this should be part of what is otherwise a very clean and straight forward business and this while its related is something a bit different. Do you think that's fair?

Steve Joyce

Yes, it is different but we actually we like the opportunity a lot. And the answer to your question is absolutely that's one of the likely outcomes we’ll see, we've got several different alternatives we're evaluating with different approaches. But it's not lost on us that's SkyTouch is better off not being seen a Choice entity, because as they sell to industry and other brands which we're in deep conversations on all over the number of major brands it is a factor they got to consider there is no risk to their data or anything else so are going to be sure they are in almost every way that they are going to benefit from having that system, but quite frankly in the discussions it's a point that gets raised, we think we never intended to hold it long-term the idea was to build it up and then launch into some vehicle where it would on its own and you should expect to see probably something to like that from us.

Scott Oaksmith

We're excited about what we're seeing from the customer base. We've seen the 25% increase in the pace of the timings to create our Tier 2 and Tier 3 customer segments and I think Stephen said in the past calls were in all the conversations we need to be with the bigger Tier 1 customers.

David Katz

So it is if I would just ask sort of why the drag still exists or what is it that the businesses would benefit from -- in a partnership is it broader distribution, is with a sales force, is it a marketing -- more of a marketing strategy, what is that it at needs that will cause it to turn the corner?

Scott Oaksmith

Well, okay. Let me give you a slightly different ones from a tech company launch this is about as good as I've seen what we we're talking about profitability in year three. So my lens is a little different, I think this has been a really good adventure. If you look at any basis from a tech startup which literally is three years old, we're at 37 million to 38 million [ph] revenue run rate and we've attracted significant numbers of customers in Tier 2 and Tier 3, we’re talking with several Tier 1 opportunities and our view is based on that performance and based on what we're going to do that granted this is my first tech company I've launched, but being profitable by year three from what I understand is a pretty good results. And we think we can accelerate that to one of these options. So we actually feel really good about the investments we've made because if you think about it.

Our overall investment has been $50 million to $60 million if we were put on that balance sheet and that was in investment that we could capitalize, which we can’t, we wouldn’t even -- you guys wouldn’t even want to talk about it. So we see it as that -- we know that investment has creating real value for us real value and so will see as we go to figure out the next stage in the life cycle of that company but we're feeling pretty good about it.

David Katz

Understood so not to repeat it, but then in the motion is that you have the tech company that, okay mission accomplished, its losing -- it's getting distribution, but its losing money and combining it with this core business that does nothing but make money, and you sort of understand the confusion or the conflict that that creates, and that’s how you’re thinking about its options going forward?

Scott Oaksmith

See that’s what I meant with different lens, we’re not losing money, we’re making an investment in something that’s going to pay off. So if you look at it from investment standpoint you would say -- and by the way we’re not going to lose money next year.

So, our view is very different. Our view is we’ve had invested money in an asset that has significantly more value than we put into it. And we believe it's going to continue to return value to us. So we don’t view it as money losing, we look it as investing.

Operator

Thank you [Operator Instructions]. This concludes today’s Q&A session. I would now like to turn the call back over to Stephen Joyce for closing remarks.

Steve Joyce

Thanks for joining us. As always, we obviously appreciate your interest in Choice Hotels. We’re very excited about where we’re going and where our opportunities are. And that concludes our call for today. We’ll see you next quarter.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.

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