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Choice Hotels International, Inc. (NYSE:CHH)

Q2 2012 Earnings Conference Call

July 27, 2012 09:30 ET

Executives

Steve Joyce – President and Chief Executive Officer

Dave White – Chief Financial Officer

Analysts

Jeffrey Donnelly – Wells Fargo

Felicia Hendrix – Barclays

Robin Farley – UBS

Joshua Attie – Citi

Nikhil Bhalla – FBR

Patrick Scholes – SunTrust Robinson Humphrey

Operator

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Choice Hotels International Second Quarter 2012 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 believes, expects, anticipate, foresee, forecast, estimate or other words or phrases of similar import. 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 refer to the company’s Form 10-K for the year ended December 31, 2011 and other SEC filings or 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 achievement. 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 2012 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, President and Chief Executive Officer of Choice Hotels International Incorporated. Please go ahead, sir.

Steve Joyce

Thank you very much. Good morning. Welcome to Choice Hotels’ second quarter 2012 earnings call. With me this morning, as always, is Dave White, our Chief Financial Officer.

As you know, we put out our press release last night. We are very pleased with the second quarter results. Consumers are traveling. We are driving record traffic to our hotels. We’re seeing both strong RevPAR and global system growth. And we are very excited about accelerating momentum in franchise development world. In fact, this past quarter has been the best travel season we have seen in several years and our franchise development results are very strong with the number of domestic franchise contracts up 54% compared to last year and meaningful gains in both new construction and conversion hotel franchises. All of these factors contributed to a very good quarter. As reflected in the key indicators, we used to measure our performance.

RevPAR is up nearly 8%, which is better than the industry average for the comparable time period and ahead of our own expectations. These results reflect to the mix of occupancy that was up over 250 basis points and an average daily rate increase of 2.8%. Both domestic and global net unit growth increased 1.3% ahead of our target. And these two drivers resulted in strong domestic royalty fee growth of approximately 8% for the quarter. Our EBITDA and diluted earnings per share for the quarter increased 14% and 20% respectively.

We also continue to execute our long-term capital allocation strategy. And last night, we were pleased to announce that our Board of Directors declared a special cash dividend of $10.41 per common share or roughly $600 million in the aggregate. The special cash dividend will be paid on August 23. In this unprecedented and prolonged period of historically low interest rates, this capital structure transaction and significant return to our shareholders is both an appropriate corporate finance decision and the right strategic action for Choice. One of our long stated goals is to deliver increasing value to our shareholders in the most efficient and effective way possible. This transaction achieves this objective in a meaningful way, lowering our overall cost of capital without affecting our ability to grow this company.

The special dividend announced last night reflects management and the Board’s confidence in the future of our brands and their substantial cash generating capabilities. After this transaction, we will continue to have significant financial resources to fund our business operations and to exploit potential and actual business development and growth opportunities in the near-term.

Turning back our quarterly results, we’re especially pleased with the strength and the momentum of our new domestic franchise development activities. During the quarter, we executed 106 new contracts, which is substantially higher than the same period last year. We’re seeing positive momentum in conversions and also notably in new construction activity, which was up nearly three-fold over the last year’s second quarter.

We’re excited about how well developers are responding to the Sleep Inn program with 12 new deals year-to-date and developers liked this Sleep Inn prototype, which is a very efficient building that offers low development costs as well as low operating costs than in comparison to any of the other mid-scale brands and works particularly well in a significant number of secondary and tertiary markets.

We’re also seeing a very positive response in our Comfort Inn and Comfort Suites design package. In particular we’re seeing a lot of interest in new construction markets that are based on energy like North Dakota, South Dakota, Texas and Pennsylvania.

On the conversion front, we executed 85 new deals during the second quarter driven primarily by Quality Inn which increased from 11 deals in the prior year to 36 this quarter. Finally, in addition to the strong new franchise sales, we’re seeing ongoing strength in the number of new re-licensings and renewal contracts, which we view as a positive catalyst for overall franchise sales opportunities going forward. So, to summarize, we feel very good about our development results and are heading in a positive direction.

Turning to the area of reservation contribution, our central reservation or CRS is on pace to have a record-breaking year. Just last week on July 16, we had our highest revenue day ever on the CRS at $12.4 million. This was matched by our highest ever CRS reservations total for one-day, which exceeded 72,000 reservations. We are currently delivering nearly 37% of our franchisees hotel reservations through our CRS, which is 200 basis points higher than this time last year.

choicehotels.com’s contribution is also higher than it’s ever been at 19%, which is more than 150 basis points higher than the same time last year. Choice drove over $1 billion in revenue through choicehotels.com in 2011 and year-to-date revenue is 18% over that. This revenue is attributable to both strong traffic growth and site conversion. choicehotels.com is attracting 100 million visits annually and we are tracking 15% higher year-over-year.

Our mobile reservations platform expansion has been a key contributor to our strengthened CRS results. We were first to market in our industry with the iPhone app, launched the Android app last summer. We also just launched our iPod app in May, and our mobile revenue is up year-over-year by over 230%, which makes up about 7% of our online revenue, which is higher than the industry average of around 4% according to focus rate. Contributing to these strong results is our integrated multi-brand marketing campaign, which is comprised of traditional TV, online TV, digital search, social media and some really innovative partnerships with the Weather Channel, Rand McNally and USA Today as well as Pandora. In addition, Choice Privileges offers are really resonating with our guests. So, we are firing on all cylinders, and effectively travel demand through our lowest cost channels for the benefit of our franchises.

A few notes about Choice Privileges. In May, we topped 15 million members worldwide, which is tripling our membership just in – just over the past five years. This impressive achievement means Choice Privileges is the one of the fastest growing rewards program in the travel industry. And in April, the Freddy Awards, which recognizes rewards programs over 1.3 million frequent travelers scored Choice Privileges as the second best program overall, which is our best result in the program’s 14-year history. We expect continued focus and dedication of resources to this program to continue to strengthen the value of our franchise and brands to consumers and the hotel developers.

Looking ahead, while there are a number of macroeconomic challenges on the horizon, slower than hope for employment gains, uncertainty surrounding the elections here at home and the ongoing challenges in Europe, we remained optimistic about our opportunity to continue to grow our business and create value for our shareholders and we are well-positioned to perform particularly well in a variety of economic environments.

So, with that, I am going to turn it over to Dave to give you a little bit more detail on the quarter.

Dave White

Thanks a lot, Steve. As you read in last night’s press release, we reported diluted earnings per share for the second quarter of $0.55, which represents a 20% increase over the diluted earnings per share of $0.46 reported for the same period of the prior year. The increase in diluted earnings per share over the prior year results reflects continued improvement in our EBITDA performance driven by both top-line revenue performance and disciplined cost management.

EBITDA increased 14% to $53.6 million for the three months ended June 30, 2012, compared to $47 million for the same period of the prior year. Our second quarter franchising revenues increased by approximately 6% compared to the prior year primarily due to improvements in our domestic royalty revenues, which increased by approximately 8% and an improvement in our initial and re-licensing fees revenues.

The increase in domestic royalty revenues was primarily driven by 7.7% increase in RevPAR, reflecting a combination of occupancy and average daily rate increases of approximately 250 basis points and 2.8% respectively. Our RevPAR performance also compared favorably to our forecasted RevPAR increase, which was 7% for the second quarter. Similarly to our first quarter, we saw strong gains in RevPAR performance across all of our domestic brands.

Furthermore, the RevPAR gains reflect continued improvement in the occupancy rate, which suggests that our franchises still have opportunities going forward to increase the room rates beyond the 2.8% increase experienced in the second quarter and as a remainder, our RevPAR results for the second quarter reflect our franchisees gross room revenue performance for the months of March, April, and May. On the supply front, we were able to grow the number of hotels operating in our global franchise system by approximately 1.3% comprised of domestic unit growth of 1.3%, and international growth of 1.6%.

Our effective royalty rate declined by one basis point to 44.33% for the six months ended June 30, 2012, due to the various incentive programs we have implemented to provide for royalty rate discounts in the early years in an effort to increase franchise sales development. These discounts are greater in the early term in the franchise agreements and prior discount tactics and are expected to burn off at a steeper rate as we move forward. Initial fee and re-licensing revenue increased 14% to $3.2 million for the three months ended June 30, 2012 due to an increase in both new franchise agreements as well as the number of re-licensing and renewal contracts.

During the second quarter of 2012, we executed 106 new domestic franchise sales contracts, representing a 54% improvement compared to the same period of the prior year. We are particularly encouraged that the pace of new franchise agreement has accelerated from the first quarter and we are optimistic that the development environment will continue to improve.

The number of re-licensing and renewal contracts executed during the second quarter improved 27% as the hotel transaction and lending environment continues to show gradual improvement. The percentage increase in initial and re-licensing revenues were lower than the percentage increase in the new and re-licensing contract figures, primarily due to the timing of revenue recognition related to contracts executed under our incentive programs. On the cost side of the business, the measures we’ve implemented in the fourth quarter of 2011 to increase productivity and streamline services continue to have a positive impact on our margins.

As a result, the combination of the top-line revenue growth in a $2 million or 7% decline in our SG&A for the second quarter of 2012 resulted in a franchising margins expanding from 61.2% in the second quarter of last year to 65.9% in the current quarter. Diluted earnings per share for the second quarter of 2012 were also impacted by a decline in the company’s effective income tax rate for the three months ended June 30, 2012 from 34.5% to 33.5%.

And our second quarter diluted earnings per share performance exceeded our previously published outlook of $0.31 per share by $0.04. We are optimistic that these trends will continue throughout the remainder of 2012. As we announced last night, our Board of Directors declared a special cash dividend of $10.41 per share or approximately $600 million in the aggregate. The special cash dividend is being paid with the proceeds of companies recently completed $400 million senior notes issuance and our new senior secured credit facility, which we also announced last night. The company’s new senior secured credit facility consists of a $200 million revolving credit charge and a $150 million term loan charge with an initial four-year term. We expect to utilize the proceeds from the term loan as well as approximately $50 million under the revolving credit charge prepayment special dividend.

Our decision to declare a special dividend is consistent with our primary focus of creating value for shareholders in the attractive debt markets. Favorable tax environment for dividends and our low leverage levels, which allowed us to enter into this transaction. An additional question that maybe on the minds of some of our shareholders is whether or not, a portion of the dividend will be considered a return of capital. While we will not be certain until we close out 2012 and can calculate actual cumulative earnings and profits, we currently expect based on our historical earnings and profits and forecast for the balance of the year, that substantially all of the dividend will not be deemed a return on capital, but rather would be ordinary dividend income.

After the final determination is made at year end we will communicate that result to the market. In addition to the special dividend we will continue to seek ways to return value to our shareholders as well as continue to make strategic investments to grow and strengthen our business.

For the six months ended June 30, 2012, the company also declared and paid cash dividends at a quarterly rate of $18.5 per share and during the six months ended June 30, 2012, the company paid cash dividends totaling $21.4 million and we expect to maintain the payment of a quarterly dividend on our common stock subject to the discretion of our Board of Directors. During the second quarter, we repurchased approximately to 200,000 shares of stock under our share repurchase program at an average price of $37.39 per share. And we currently have authorization to purchase up to an additional 1.4 million shares of stock.

Turning to our outlook for 2012, we currently expect third quarter diluted earnings per share of $0.61, and full year 2012 diluted earnings per share to range between $1.91 and $1.94 per share. Our outlook for 2012 reflects the impact of increased borrowing costs to be incurred as the result of the declaration of $600 million special cash dividend to be paid on August 23 these costs are expected to total approximately $40 million or $0.16 per share. We expect full year 2012 EBITDA to range between $201 million and $203.5 million. The figures assume our domestic system wide RevPAR increase for the third quarter is 5% and ranges between 6% and 7% for full-year 2012, and they assume an effective tax rate of approximately 34% for the third quarter, and 33.8% for full-year 2012.

Based on the supply growth we have experienced today, we are increasing our supply growth estimates to a range between flat and 1%. However, based on the success of our developer incentive programs have had on our franchise sales results, we are reducing our effective royalty rate increase forecast from an increase of 1 basis point to flat. All figures assume the exiting share count which was approximately 58 million shares as of July 26, 2012. So overall, we are very pleased with our results thus far and hope to keep the momentum going throughout the remainder of the year.

And now, let me turn the call back over to Steve.

Steve Joyce

Thanks, David. Well obviously, we’re pleased with the results from this quarter and the continued strength of the recovery in the travel industry. We had a very good year so far. We’re closing on earning levels measured in EBITDA that are comparable to peak levels achieved in the last cycle. And I am excited and optimistic about our continued long-term growth prospects and our ability to continue to drive excellent results for our company and shareholders.

I have said before, because of the supply demand balance going forward, we believe the hotel industry and particularly for Choice because the value orientation of consumers that we are in for a very good run and the question will be if we get any cooperation from the economy, we are in for a really, really good run. So, we remain optimistic about the future about our options.

And now, I’d like to open up the call to answer any of your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Jeffrey Donnelly of Wells Fargo.

Jeffrey Donnelly – Wells Fargo

Good morning, guys.

Steve Joyce

Good morning.

Jeffrey Donnelly – Wells Fargo

Dave, I guess Steve told me that you are the responsible one, so I want to pass along kudos for the special dividend. I think it’s…

Dave White

Or if you like it, I think I’ll take some of the credit.

Jeffrey Donnelly – Wells Fargo

Yeah. I am curious after its payment, as we look down the road is it your plan to use future cash flow to wet all leverage back down new current levels or do you expect to run at this sort of new level of leverage going forward?

Dave White

Yeah, our expectation while we’ve said – said all along is we have a long-term kind of leverage level where we feel comfortable and we’ve historically talked about that as kind of 3 to 3.5 times debt-to-EBITDA. So, I think the way you should think about it is that in the near term, we’re going to be focused on managing back towards those levels. And when you look at kind of the credit facility that we put out there last night, we can see how the leverage covenants kind of ratchet down over the –over the four years. So, that’s kind of our – that’s kind of our thinking on that. Over the near-term, we’ll focus on de-leveraging. And again, just to emphasize what Steve kind of highlighted, which is – this really reflects the confidence of our Board and our management team and the substantial ability of our brands to generate significant cash flows. So, we feel pretty good about our ability to de-lever fairly quickly, but that’s how I think you should think about the leverage levels going forward.

Steve Joyce

Well, to de-lever quickly and also to invest in all the opportunities we think we are going to, so…

Jeffrey Donnelly – Wells Fargo

Okay. And maybe you can clarify something in one of the releases this morning, it maybe just misreading it, but it stated that the dividend will be paid on the 23rd, but it also states the dividend, the ex-dividend date is the 24, I think it’s just a typo, but I could be mistaken, but I think the…

Steve Joyce

No. It gets a little technical, but Dave wants to explain it.

Dave White

Yeah, there is some rules for a large dividend like this. It’s more than 20% of the stock price that New York Stock Exchange has, that’s just how it works for kind of a large special dividend. It’s a little bit different than kind of a more ordinary dividend. So, those are actually the right – right dates. So, basically holders of the stock, basically at close of business on August 23 are the ones who will be receiving the cash payment.

Jeffrey Donnelly – Wells Fargo

Okay, okay. I just wanted to clarify that because you’ve had a lot of questions on that. And Steve, I am curious what gives you the confidence in the development environment? Does that – is that the result of either you guys partnering with folks or you are seeing an inflection in banks willing to provide capital out there?

Steve Joyce

Yeah, a little bit of both. So, we just – I just was with a bunch for our franchisees a day ago. So, they are seeing for existing hotels a much better lending environment, where the leverage levels are coming up, and the requirements in terms of the tenants of the agreement, the guarantees are starting to ease somewhat. So, they are pretty positive about that. And in fact the ones that we’ve got that have really strong relationships with their banks are the ones that we’re seeing there actually looking at the new construction activity as well.

So, I wouldn’t call it, it’s not like the lending environment it is completely back, but it is – it has steadily improved. As we talked earlier in the year in the success of Cambria in the units we are getting done there. That is – that was in large part due to the lending environment that they come back in the urban environments. But now we are starting to see its spread out more to our typical markets that we are operating in, and we think that plus the transaction environments, which is why we watch the (indiscernible) so carefully that – it looks like that transaction market is finally coming around.

And when people are selling hotels; that’s typically when we get a shot at the conversion opportunity. And so, we just – we are viewing all of – we’ve been waiting for this for three-and-a-half years and it looks like we are finally getting into a more normal look at the upswing in the cycle, where development will begin to come back where we’ll see a lot of conversion opportunities first. But then new construction will follow and barring something unforeseen, it looks like that momentum is building.

Jeffrey Donnelly – Wells Fargo

And just one last housekeeping question is did you give us royalty fees from international hotels?

Steve Joyce

Yeah, let me – I’ll come back to that in just a minute here Jeff. I don’t have that right here in front of me.

Jeffrey Donnelly – Wells Fargo

Okay, thanks.

Operator

Your next question comes from the line of Felicia Hendrix of Barclays.

Felicia Hendrix – Barclays

Hi good morning.

Steve Joyce

Good morning, Felicia.

Felicia Hendrix – Barclays

I was just wondering, Steve, you just kind of alluded to this just that some other lending is loosening up a bit– I’m wondering can you talk about the competitive environment, of the franchise are seeking out and if there is a little more access to capital, we are just hearing that some of that lenders are willing to lend to franchises who are only willing to line themselves a certain brands?

Steve Joyce

Well that’s, you’ve got, you’ve always had a certain number of the lending communities that don’t – it’s not so much the brands, it’s the segments they like to lend into. And so, the number of banks that lend into the moderate tier and below where we are substantially, there are banks that avoid that space, because they like to stay in the upper moderate top scale. And then, I think what you are seeing now, which we are actually benefiting from is banks are beginning to ask what the contribution of brands is. And so, when they are looking at a brand for a hotel in an underwriting scenario, they are looking to what the contribution levels are for those brands. And so that puts us in a very good position, particularly in the conversion market, because of the folks that do a lot of conversions, we drive more business into the hotels than anybody else on average about 37%. And so that puts us sort of on the top of the list with most lenders, who are lending in our environment.

Felicia Hendrix – Barclays

That’s really helpful. Thanks. And unfortunately Steve, I had missed some of your pre-prepared remarks, hopefully you didn’t touch up on this, but with your pipeline, can you just tell us, I mean, obviously we see the guidance and all that kind of stuff, but you had nice rate of growth this quarter in terms of new units and conversions and can you just tell us what you might be seeing for further quarters?

Steve Joyce

Yeah. I think, we have had two straight quarters now, Felicia, where the development results have been accelerating, culminating with the second quarter being particularly strong. So, we are feeling really good about the development environment. I think when you break it down new construction, I mean, obviously we have seen actually some positive things going on in new construction. Some of that, I think has been driven by energy market type supply growth, which is fine. That’s good growth for us, but on the conversion side, which as you know has normally represented a fairly significant part of our gross openings, that’s been really encouraging with kind of the growth of quality in really leading the way.

And I would highlight just, if you think about it sequentially at the end of the year, at the end of ‘11, we had 131 conversion contracts in our pipeline executed, but not yet of the hotels and that’s increased by a little more than 10% to where we are here at the end of June. And obviously, during the six months some of the – something was in the pipeline at the end of the year has come online. So, we’ve been able to start to replenish our conversion pipeline at a faster rate than the openings coming out of it, which is very encouraging to us. And as we look forward in the second half of the year, I think we are feeling pretty good about how our brands are positioned to continue to do well on the development front.

Felicia Hendrix – Barclays

Great, thank you so much.

Steve Joyce

Sure.

Operator

Your next question comes from the line of Robin Farley of UBS.

Robin Farley – UBS

Thanks. Yeah, I wondered if you could talk a little bit about the decision with the special dividend and how you weigh that against using the capital, returning the capital, share buyback versus the special dividend?

Dave White

Sure. Well, the biggest thing is we have not abandoned share buyback. It will continue to be a tool to return capital to shareholders. The amount that we were able to do, clearly would have taken us several years to accomplish in the share buyback scenario. And then, the – quite frankly, when we look to the decision, we have been – we have been evaluating this for several years. We are looking for the right set of circumstances and we view this as the relatively perfect storm of – you’ve got capital markets, where the lending environment is incredibly attractive both from a rate perspective and from a tenant requirements perspective underneath in those loan documents.

So, we’ve never seen a more positive environment to do that. And that’s indicative of the rates that we are able to achieve and the fact that we gave up almost no flexibility whatsoever. So, we view those capital markets as sort of in a relatively unique scenario. It’s driven by the high-yield markets and so that’s – but that’s affecting all of the markets. So, we view that as – that maybe around for another couple of months, but it’s not going to be around forever. Secondly, tax rates on dividends are never going to be better. I don’t know how much worse they are going to get, but they are going to get worse. And so we viewed this as an opportunity to take advantage of what will probably be the lowest tax environment for dividends for the next 10 or 15 years.

And then lastly, when we have talked about this extensively, we had an under-optimized balance sheet. Our cost of capital wasn’t what it should have been, because we hadn’t used the capital that this company should have used to driven to certain level, that sort of optimizes that – that cost of capital. In a way though, that is the right investment for the company. And we’ve invested significantly in the business as we have talked about over the last couple of years, we’ll continue to do that. This doesn’t preclude any of the things we’ve talked about.

In fact, it’s all built in and – but at the same time we get to sort of those levels that we think is the optimal positioning of our balance sheet, which is in that 3 to 3.5, so we’re a little above that now. But because of the amounts of cash we generate, relatively short-term we’re going to right back in investment grade territory, which is where we think we should be sort of in that 3 to 3.5 time scenario. So, we think that met all the criteria and all of these came together in a scenario that we don't think we’re going to see again. And we thought this is the right time to do it. We wanted to go early because we think at the end of the year there is going to be a line of companies looking at similar things and we wanted to make sure that we got ourselves in time to take advantage of those without getting the pressure of a supply demand scenario.

Robin Farley – UBS

Okay. Thanks. And then my other question is on just with your guidance in your unit growth your own guidance up a little bit and royalty rate guidance down a little bit, so kind of trading off between growing the unit base versus kind of improving the profitability per unit. I know you mentioned there some sort of in the early years discounting, I guess when – how long of a period is that through the first 12 months or 24 months, when do you think we’ll see that royalty rates start to up tick as you get past this initial period?

Dave White

Yeah. I mean each contract that we do is obviously negotiated based upon kind of the facts and circumstances for that particular hotel, in that particular market and who we’re competing against for that franchise line. So, there’s not one answer for every contract, but on balance the way to think about it is the first three to four years, it’s going to take three to four years for those rate discounts in the early year to burn off. And that’s kind of what you should start to see is as we open those hotels, you’re starting – what you’re starting to see in the second half of this year is hotels that we sold a year, a year and a half ago that had even steeper royalty rate discounts will start to weight favorably on the effective royalty rate. But, you’ll still see, as we continue this incentive to kind of gain share, some holdback on the effective royalty rate over the next couple of years, in terms of the pace of growth, I’d say.

Steve Joyce

Yeah and I think the important thing to note about these incentives is, they really aren’t a dramatic change from the types of ramping of fees that we’re doing previously. What we’ve done is accelerate that ramp into a more concentrated period. So, you’re getting the same relative markdown from full price contract, you’re just getting it more in the first year or 18 months. As a result that affects that first year or first 18 months, but then what you do is spring back to a full priced contract. So, that when we talk about that it’s a steep return to that. That’s why we’re saying that, because the contracts long-term or at the full rate, and what we’re expecting to do. So, but we are moving that discounting up into the early years to incent people to move now. It’s been very effective. It does cost us a little bit in the near term, but very quickly it springs back to full pricing.

Dave White

And the other thing we get, normally is most of our contracts normally have a window, every fifth year where the franchisee or the company can take a penalty free out. And when we do these incentives, we typically push that window out a couple of years. So, essentially kind of locking it in a extra couple years of cash flow, and that’s something that we think is valuable.

Robin Farley – UBS

Okay, great. Thank you.

Operator

Your next question comes from the line of Joshua Attie of Citi.

Joshua Attie – Citi

Thanks. Good morning. Can you tell us how June and July is pacing relative to the 5% RevPar guidance for the third quarter?

Steve Joyce

Well, let me give – Dave can give you some color. So, June is not in our numbers that’s in our third quarter. And June was an incredibly strong month we pushed close to 9% in RevPar. July has softened. And we don’t have final members yet, but it appears that July may come off from that 9% high 400-500 basis points. We’re not sure – we have a very short window in the bookings, so we don’t really know what August is going to give us, because our booking pattern is literally seven, eight days out. So, we’re assuming that may stabilize at a little higher level, but what we’ve baked in is the assumption that we’re going to continue to strive relatively strong RevPars. But as you recall we made all of our RevPar gains in the third and fourth quarter of last year. This summer wasn’t all that strong in the second quarter, it was in the third and fourth quarters where we’ve really drove some really significant increases. So, as we move into those comps that’s why you’re seeing us, we think that the relative strength of the demand is holding up, but you are just getting topper comparisons in the back-end, Dave?

Dave White

Yeah, now I think that pretty well hit it.

Joshua Attie – Citi

But your third quarter will include June, July, and August, correct?

Dave White

That’s right.

Steve Joyce

That’s right.

Joshua Attie – Citi

It includes up 9% for June, maybe up 5% for July, and then whatever August is.

Dave White

That’s right.

Joshua Attie – Citi

Okay. And can I just ask a question on the increased development activity, I know you talked a little bit about this earlier. How much of the increased activity is conversions versus new builds – roughly is at 85% conversions or you can give us some idea.

Dave White

Yeah, so for the quarter, conversion franchise sales were up about 40%. So, they were about 75% of our total franchise contract number for the quarter. And the new construction was up 163% off of a fairly small phase last year in the in the second quarter. So, we went from 8 to 21 deals on the new construction side, we went from 61 to 85 deals on the conversion side.

Joshua Attie – Citi

And on the construction side, are you putting capital?

Steve Joyce

For the deals that we did in the third – in the second quarter most of those are comfort and sleep. So, I would think about this is more of our normal development type incentives we had in the past, I mean there is some to get a prominent type things and some fairly limited situations where we might do something beyond that so for the most part, these are kind of the core mid-tier brands are already at scale. So, the capital commitment really into those new construction contracts is fairly – fairly limited and fairly consistent with what we have done in the past.

Dave White

Yeah. Where the capital is going is into the Camburi bill from what we have discussed?

Joshua Attie – Citi

Do you expect to hit $30 million year investment target over the next year or so or come close to it?

Dave White

I hope so, we’ve got, I think where we to-date 17 committed.

Steve Joyce

Yeah, something like that.

Dave White

So more like on that $17 million committed, we will see whether or not those go through and so, it’s building. So, we are encouraged by that and we are hoping that as we get into ’13. If you look at the number of deals we are hoping to do that would put us sort of in that range, but we are not at that level of making commitment at this point.

Steve Joyce

That’s still what we are targeting and I think that’s the right thing to do to support the development of that brand.

Joshua Attie – Citi

Okay, thanks very much.

Steve Joyce

You’re welcome. And I – answer on a previous question that I have in for international royalty fees. So for the second quarter of this year, international royalty fees were $6.3 million and for the first quarter of this year, there were $5.5 million.

Operator

Your next question comes from the line of Nikhil Bhalla of FBR.

Nikhil Bhalla – FBR

Hi, thank you. Just – if you could remind us about G&A expense heading back into the – towards the back of the year. You may – made some comments earlier, I’m sorry, I missed that.

Steve Joyce

Yeah. So in the – so, basically kind of going back, your last year, we have talked about a $15 million cost reduction compared to the last years, full-year gap SG&A expense. For this year, when you think about it for the full year, we will probably coming in at not quite that level and there is really a couple of reasons for that. I would think about it as somewhere around half of that level, but there is really a couple of primary reasons for that I think are important.

So, probably half of that variance is really driven by things that are kind of variable cost. For example, franchise sales commissions since franchise sales have exceeded or we expect to exceed what we are thinking they would be – when we gave that outlook. We are going to have a higher commission’s expense, which will take SG&A higher, but obviously there will be revenues tied to that. Some of the items related to the mark-to-market accounting for our non-qualified benefit plans is also factored in that and then there was a litigation settlement in the first quarter that is impacting that.

So, we look at that gap – that explains a big piece of it and then the other piece of it is transaction cost, obviously, then we weren’t contemplating related to the special dividend as well as with our range, we thought about some additional cost. We are expecting them to correlate to these business development opportunities so that’s kind of how we are thinking about and how we modeled in our guidance.

Nikhil Bhalla – FBR

So, half of the $15 million that you guided to before basically that’s how you should think about it, right?

Steve Joyce

Yes, we are thinking about in our guidance.

Nikhil Bhalla – FBR

Okay. And is there just if we try to weight it, is it more towards the fourth quarter or the third quarter or is it more even across both.

Steve Joyce

I would say it’s fairly, fairly even.

Nikhil Bhalla – FBR

Okay, alright. Thank you.

Steve Joyce

Okay.

Operator

(Operator Instructions) And your next question comes from the line of Patrick Scholes of SunTrust Robinson Humphrey.

Dave White

Good morning, Patrick.

Patrick Scholes – SunTrust Robinson Humphrey

Hi good morning.

Steve Joyce

Good morning.

Patrick Scholes – SunTrust Robinson Humphrey

I just need a follow up on Josh Attie’s question concerning the RevPAR, basically implies in your guidance for August that it's looking to be zero or no RevPAR growth. I know you don’t have the greatest visibility with your bookings, but we are practically in August, is there anything on your books that would indicate that’s it's anywhere close to being zero at this point?

Dave White

Yeah, I mean like Steve said, I mean, our booking window is really short and for the first couple of months of the quarter, say for June and July I mean we’ve been on average roughly in line with what we guided to, that 5% for the third quarter. But I don’t think there is anything right now that we are seeing to August tells it’s going to be close to.

Steve Joyce

But we don’t have August at Zero.

Dave White

Exactly.

Steve Joyce

So, you mean you should think July we are not sure where we are ending, but we think July will be somewhere between three and five. So, if you think about that then you would look at similar numbers for August.

Patrick Scholes – SunTrust Robinson Humphrey

Okay. Thank you.

Operator

And this ends today’s Q&A session. I would like to hand the call back over to Mr. Steve Joyce, President and Chief Executive Officer for any closing remarks.

Steve Joyce

So, thank you. Thank you for joining us on the call. Obviously we’re pleased with the results and we will look forward to reporting more to you in our next earnings call.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a wonderful day.

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