Choice Hotels International, Inc. (NYSE:CHH) Q4 2015 Earnings Conference Call February 18, 2016 10:00 AM ET
Steve Joyce - President & CEO
Dave White - CFO
Steven Kent - Goldman Sachs
Katie Wang - JPMorgan
Mark Savino - Morgan Stanley
Ladies and gentlemen, thank you for standing by. Good morning and welcome to the Choice Hotels International Fourth Quarter 2015 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 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 activities, performance, or achievements.
We caution you, do not place undue reliance on forward looking statements, which reflects 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 our in our remarks as part of our fourth quarter 2015 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.
Good morning. Thank you. Welcome to the Choice Hotels earnings conference call. joining me, as always, is Dave White, our Chief Financial Officer. This morning we want to update you on our performance for both full-year and fourth quarter 2015, but also share some exciting company news on the customer loyalty front.
Last week, we announced the biggest redesign of Choice Privileges program in our company's history, more and more travelers, especially the millennials, want instant gratification. We recently concluded a study and it showed that 43% of the millennials want their first reward benefit as soon as they sign up. So, our remodel loyalty program is rooted in helping these travelers get their rewards faster and more frequently than ever before.
For example, we have a new benefit that offers all members extra rewards, including rewards from partners like amazon.com and Shell gasoline right at check-in. This is on top of what is already earned, and it is available right when a member joins the program. These are also new features for customers to earn free nights faster than before and redeem for instant digital gift cards. Also, loyalty points no longer expires as a member stays active in our hotel system. We are already receiving a great response from our members with these changes.
Now, let's move on to our results. 2015 was another great year for Choice Hotels with record revenue, operating income, and net income. Our record performance was driven by continued improvement in our domestic royalty revenues, which were achieved by growth in all three of the critical areas that drive our business, including RevPAR, system size, and effective royalty rate.
Some of the highlights for full-year and fourth quarter 2015 include domestic system-wide RevPAR increased 6.5% for the year. Our RevPAR growth was driven by occupancy and average daily rate increases of 160 bps and a 3.7% respectively.
Our effective royalty rate increased 2 basis points for the year and 9 basis points in the fourth quarter. We achieved a 7% increase in EBITDA from franchising activities in 2015 and expanded our franchising margins by 10 basis points to 67.3%. Overall, our new hotel franchise contract executions for the year were up 11%.
Now, more on the development front. The franchise development growth strategy we have implemented is generating very positive results. Domestic franchise contracts for both new construction and conversion sales continued to strengthen over 2014, and we expect it will result in an acceleration of growth rates for our domestic system size in 2016. Our domestic pipeline of hotels at the end of 2015 increased 19% compared to the same time last year. We’re also seeing strong growth in our new construction pipeline. In 2015, contracts for new construction hotels increased by 9% compared to last year.
We believe that our successes on the development front is being driven as a result of several key initiatives across our brands. We’re continuing to successfully expand into the upscale segment. On the Cambria Hotel & Suites front, 2015 was the year that Cambria took off with 26 deals executed in key travel markets across the country.
The brand enjoyed a wave of brand openings and groundbreakings including two openings in Manhattan, the Cambria Times Square and the Cambria Chelsea; and groundbreakings in top destinations like New Orleans, Los Angeles, and Nashville. We also signed new agreements to bring Cambria to Chicago twice, Philadelphia, Orlando, Seattle, Charleston, and Savannah just to highlight a few.
As we mentioned last quarter, we have started pursuing a new conversion strategy in top urban markets for Cambria. We executed five conversion contracts in a fairly short time frame and believe that this will help bring hotels to market quickly and continue to fuel growth for the brand in 2016.
The Ascend Hotel Collection also continued to be an opportunity for us to expand into the upscale space as more owners of exceptional independent properties in great markets see the benefits of aligning with a global company while maintaining operating independence.
We just announced that we are bringing the Ascend Hotel Collection to the UK with two properties in Edinburgh. In total for the year, we signed 37 new domestic franchise agreements for Ascend.
Now on to Comfort, we’ve been telling you about the Comfort Refresh, and this has been quite a success story. The improvements we implemented for our Comfort Inn and Comfort Suites brands have helped fuel development interest. We signed 127 franchise agreements for Comfort brands in 2015 which is a 34% increase compared to last year. We believe that the increased interest in Comfort is a direct result of our multi-year plan to renovate, remove, or reposition properties from the system that don’t meet the enhanced standards.
Not only are the physical transformations stunning, the likelihood to recommend scores from Comfort guests are now the highest they have ever been. Customers have seen firsthand the impact these changes have made at the hotels and are coming in droves. We are extremely pleased but not surprised. We were deliberate in creating and executing a strategy designed to coincide with this very favorable period in lodging cycle and it’s paying off.
Now shifting to our distribution results for the quarter, the revenue generated by our Central Reservation System continues to grow, and we are breaking records on a regular basis. The revenue contribution of our Central Reservation System increased to 39% in the fourth quarter, up 400 basis points compared to the same time last year and up 700 basis points compared to the fourth quarter of 2013.
We had 16 days of CRS revenue over $12 million in the fourth quarter of 2015 compared to only two in 2014. We had never previously surpassed the $14 million in the CRS revenue on a single day in the previous four quarters until the fourth quarter of 2015.
choicehotels.com continues to grow significantly and generates the largest share of revenue of our distribution channels. choicehotels.com accounts for nearly half of Choice’s domestic CRS revenue. Our direct online channels, choicehotels.com and mobile had 10 days of over $5 million in bookings in Q4 2015 compared to only five in last year.
Bookings via our mobile applications continue to grow at a fast pace and have yielded an increase of 26% in revenue for the fourth quarter compared to the same time last year. Our distribution strategy is delivering great results. We’re staying ahead of guest booking needs and we are leveraging our distribution channels to deliver increasing number of customers to our franchisee’s hotels.
So obviously, we’re very pleased with our fourth quarter and with our results for the year. Let me turn it over to Dave to share more detail about the financial results. Dave?
Great. Thanks, Steve. Our fourth quarter results closed at another strong year for the company. In this morning’s press release, we reported diluted earnings per share of $0.51 for the fourth quarter of 2015 and $2.22 for the full year. These results exceeded our previous guidance to $.047 per share for the quarter and $2.18 to $2.20 per share for the full year. Our full year 2015 franchising EBITDA totaled $256 million and was in line with our previous outlook for that metric to range between $255 million and $257 million.
Franchising EBITDA for the fourth quarter increased 6% over the same period of the prior year, and our franchising margin expanded by 20 basis points to 62.3%. I am also pleased to report that we expanded our franchising margins for full year to 67.3%, which represents an all time high for the company.
Our franchising revenues for the quarter increased 6% over the prior year, driven primarily by our domestic royalties to pay for our relicensing transactions which drove growth in initial franchise and relicensing fees and by procurement services revenues.
Our domestic royalty revenues for the fourth quarter increased 7% over the prior year to $63.1 million driven by growth of all three critical drivers of royalties, RevPAR, system size, and effective royalty rate.
We achieved 4.3% increase in domestic RevPAR, which was driven by a 60 basis point increase in occupancy and a 3.2% increase in average daily rates. Our fourth quarter RevPAR growth was less than our previous guidance of 5.5%, however, our fourth quarter result outpaced the growth rate of the chain scale segments in which we compete, as reported by Smith Travel Research.
Current RevPAR trends, projected industry supply and demand dynamics, and US macroeconomics trends point to continued RevPAR growth in 2016. And we expect our full year 2016 RevPAR to increase between 3.75% and 4.75%.
On the supply front, we were able to growth the number or hotels operating our domestic franchise system by approximately 1% compared to December 31 of 2014, which was in line with our previous guidance. Our domestic supply growth numbers continue to be impacted by a rejuvenation strategy for the Comfort brand family, which we have discussed in past calls. Excluding the impact of this strategy, our domestic system increased by nearly a 150 net units online or approximately 4%.
Our Quality Inn brand has been positively impacted by our Comfort rejuvenation strategy has increased by more than 7% since the prior year as we had success in repositioning many of the hotels previously flagged into the Comfort brand to Quality.
We are also pleased by the growth of our upscale brands Cambria and Ascend. The system size of these brands grew by 14% and 3% respectively, since the end of 2014, and the royalties generated from the Cambria and Ascend brands for 2015 increased 39% and 12% respectively compared to 2014.
Our domestic effective royalty rates expanded by 9 basis points in the fourth quarter to 4.37% and increased 2 basis points for the full year. We believe the improvement of our contract pricing reflects both an improving franchise development environment and the overall desirability of our brands to developers. We continue to see a reduction in the level of financial incentives required to execute conversion franchise agreements. And as you can see from your outlook, we expect the pace of growth in our year-over-year domestic effective royalty rates to accelerate in 2016.
Overall, these factors resulted in our domestic royalty revenues for the quarter being roughly in line with our prior expectations. Our non-domestic royalties for the fourth quarter declined from $6.1 million to $4.8 million primarily on account of the foreign currency impact of the stronger US dollar.
With respect to franchise development, the fundamentals that drive new hotel development and conversion opportunities continue to remain strong. As a result, our initial and relicensing fees continued to improve over our previously reported strong results in 2014.
During the fourth quarter of 2015, we executed 263 new domestic franchise contracts compared to 269 in 2014. And for full year of 2015, our new domestic executed franchise agreements increased by 11%. The success of our franchise sales resulted in a 22% increase in our new construction development pipeline and an overall increase in the pipeline of 19% since the end of 2014.
We are particularly pleased with the acceleration in the growth of our Cambria domestic pipeline, which has more than doubled since the prior year as we executed 26 new domestic franchise agreements during 2015, compared to 8 in the prior year.
And as Steve mentioned, importantly, the growth in our Cambria domestic pipeline has been achieved in primary markets such as Chicago, New York, Los Angeles and New Orleans. We view the continued growth of the Cambria portfolio as an important catalyst for an acceleration of our royalties as Cambria branded hotels typically have higher average daily rates and room counts than our other brands resulting in a higher per unit royalty figure.
As a result of the growth in our domestic pipeline and the continued industry-wide supply growth we expect the pace of growth for our domestic franchise system size to accelerate in 2016 and are forecasting our domestic system size to increase between 2% and 3%. We believe the industry fundamentals are still favorable for continued supply growth and we expect the growth in the volume of our new construction franchise agreements to accelerate over the medium term and we expect our overall 2016 franchise sales activity levels to exceed 2015’s strong results.
Our business continues to drive significant cash flows and we strive to allocate these cash flows to those items that will ultimately return the highest value to our shareholders. During 2015, we generated operating cash flows of nearly $160,000 and we utilized these cash flows to return value to our shareholders through a combination of share repurchases, dividends and investments in our business to drive future growth.
The company paid dividend during full-year 2015 of approximately $45 million and in the fourth quarter we announced that our board of directors authorized increase in our annual dividend rates from $0.78 per share to $0.82 per share beginning with our dividend paid in January of this year.
During the year, in addition to our quarterly dividend, we also completed the opportunistic and accretive repurchase of 1.3 million shares of common stock under our share repurchase program at a total cost of $66 million. And in addition, we continue to utilize our balance sheet to prudently support the growth of our Cambria brand.
Now we'll turn to our outlook for 2016. As always, our outlook assumes no additional share repurchases under the company’s share repurchase program. Our outlook also assumes effective tax rate for continuing operation to be 33.5% for the first quarter and full year 2016. With respect to the tax rate, I would point out that during the fourth quarter of 2015, we recorded a tax benefit of approximately $2 million or $0.03 per share related to certain cost sharing rules and regulations clarified in a court ruling in last year’s fourth quarter and applicable to Choice going back several years.
Our 2016 expected effective tax rate is roughly 100 basis points higher than what we have described in the past as our normalized tax rate primarily on account of changes in the mix of domestic and international earnings which is a key driver of our rate. Our hotel franchising activity guidance assumes that our RevPAR will increase approximately 2% for the first quarter and range between 3.75% and 4.75% for full year 2016.
You will note that our RevPAR guidance for the first quarter is below our annual guidance range as the Easter holiday shift and strong first quarter 2015 growth rates have impacted year-over-year comparisons. Our RevPAR results, thus far in 2016, have been in line with industry results reported by Smith Travel Research.
Our guidance also assumes that our effective royalty rate growth will accelerate and increase between six and eight basis points for the full year and our net domestic unit growth will increase between 2% and 3%.
Excluding the impact of our Comfort rejuvenation strategy, we expect our domestic portfolio net unit growth of our other brands to increase by approximately 6% in the aggregate. Based on these assumptions, our guidance for full year 2016 EBITDA from franchising activities is a range between $270 million and $275 million.
With regards to our non-hotel franchising activities including SkyTouch and vacation rental activities, we are projecting reductions in EBITDA for full year 2015 to range between $16 million and $19 million. We expect our first quarter 2016 diluted earnings per share to be at least $0.38 and our full year 2016 dilutive earnings per share to range between $2.30 and $2.36.
Our consolidated EBITDA for full year 2016 is expected to range between $252 million and $257 million. These EPS and consolidated EBITDA estimates assume that we incurred net reductions in EBITDA related to non-franchising activities at the mid-point of the range for those investments.
We’re pleased with our fourth quarter financial performance and really all of the 2015 performance and we’re optimistic that we’re well positioned to continue to expand our financial performance in 2016.
And now let me turn the call back over to Steve.
Thanks Dave. So to sum it up, truly we’re particularly pleased to report another great year for Choice Hotels with record revenue, operating income and net income. We have enjoyed continued improvement in our domestic royalty revenues achieved by growth in RevPAR, system size and effective royalty rate and franchise development. We’re obviously very optimistic about our business in both the short and the long-term.
So with that let’s open it up to any questions you might have.
And our first question comes from the line of Steven Kent of Goldman Sachs. Your line is now open.
Hi, good morning. Couple of questions. First, on RevPAR, your guide suggested much stronger second half and just give us a little bit more color on what you’re seeing or the thought process just given the very short booking curve that you experience. And then I dug down a little bit deeper and it looks like the fourth quarter performance by brand, The Ascend Collection did decline a little bit more than the overall, if you just -- I know you just covered it a little bit, but maybe you could just throw some more light on that?
Okay. So let’s start with the overall RevPAR guidance. So, yes, absolutely we think that the growth strength as the year progresses, and actually we think that probably the strong point of the year is going to be the summer. So as we look at it today, there are two primary reasons we think, we pick up from where everybody is seeing the weekly results. One is we get out of the first quarter comps which were double digit for us, so much bigger target than we have for the remainder of the year in terms of that growth. And then, secondly, what we’re seeing from all fronts is pointing to relatively strong consumer sentiment and confidence that with low gas prices we think are going to lead to significant summer results on the leisure side.
And then we’re expecting relatively large pick-ups in terms of our business travelers, well we’ve done more RPs this year by a lot than we ever had before, got more actives than we ever had before, and so our room nights were up significantly in 2015 but we’re expecting a big increase in 2016 as well.
So we think two things, one is we think overall the comparisons get easier; secondly we think we’re going to -- obviously our consumers are feeling good about themselves, their jobs, and their financial situations which is we think will lead to a very strong summer. We think we’re picking up a fair amount of business activity as well, and then we think we’re gaining share against our competitors because if you look back every quarter we tend to -- we’re coming out on top of chain scales that represent our properties in terms of overall performance. And so, it’s those combination factors. And if you actually look at the way we’re looking at the year, we’re thinking it strengthens considerably as you get into the second and third quarter and sort of moderates at those levels. So I’ll let Dave answer the question on Ascend.
Yes, just to add what Steve said just kind of remind you the comps, I mean if you look back at 2015 on a quarterly basis, I mean our first quarter was up about 10% from a RevPAR perspective, and then Q2 was up 7%, Q3 up 6% and Q4 up 4%, so obviously to kind of build on Steve’s commentary, the comps get easier as the year progresses. And then, while it’s less of an impact for us than it is, I would say for some of the other competitors out there in the energy markets, the comps in the energy markets in particular are starting in kind of the April timeframe, start to get increasingly easier as this year progresses.
And on the Ascend Collection question, I think what I would attribute that to is considering the size of that brand, considering kind of movement in that brand in terms of new units that came online and units that left the system kind of small changes due to kind of ramp up of the new hotels coming online and the specific properties that left the system really contend to skew that quarterly RevPAR figure more dramatically than some of our other brands which are larger in size.
Yes, it’s probably fair to say that we have more in the ramp up phase than we had previously because we had a really big development year last year and then really big one this year as well. And what happens with that brand is, it takes about six months for us to kick in, in a significant way and lift those hotels’ performance, and by the way that’s when they start shedding the OTAs and the whole thing works really well for them, but it's about a six-month ramp for those properties. And we -- I'm relatively comfortable and can say that we’ve got more in that ramp up phase than we've ever had in the history of the brand.
And just a follow-up. I've been seeing a lot of your press releases on interest in developing a vacation rental platform as well as developing plans for expansion into Cuba. Any timeline on those initiatives or anything we should be aware of from a CapEx need for or any of those initiatives?
I have a timeline, and I don't know that I'm going to share it. But the answer to your question is -- let's start with vacation rental. We're investing dollars in that today, that's in our overall number buying the SkyTouch. We think that's got an enormous opportunity for us. Obviously, we like that space. We've talked about it long-time.
We're working with vacation rental management companies, not with consumers. So it is competitive with Airbnb on some level, but it's also a different take on it. So -- and quite frankly, we’ve got the best technology platform in the business for those companies. The interest in it has been significant. We've already signed three folks, and I think been added about a month. And we've got a pipeline of a lot of rental companies that want to do this.
And we've proven over the last year that we can deliver customers into those week-long rentals and create value for the rental management companies, as well as offering them a technology platform that for the first time would allow them to run their entire business in a professional, efficient manner. So as we look at that opportunity, while we're investing some dollars this year, we would expect that to turn profitable relatively quickly, I think in terms of 12 months.
Yes, and then, Steve, to add on that, I guess it's great that it's kind of raising cost of the CapEx, because at the end of the day, the amount of CapEx devoted to those business lines is really fairly modest, fairly de minimis. And I think really that speaks to the fact that the businesses are very asset -light businesses, which is something I think we've always kind of tracked and we think our shareholders have always kind of tracked, and they certainly tie in nicely to our strong distribution platform. So CapEx is a pretty de minimis amount, I would say, as it relates to those businesses. So our initial investment rate is we're driving early sales, tend to flow through our P&L, right. So in early years, we unfortunately record those as operating expenses until the revenues kind of ramp up, but over time obviously those are asset-light businesses that we think are going to create value for our stockholders overtime.
And then on Cuba, obviously we are very interested like everyone else is. We think there is actually an opportunity for us to participate on a much near-term basis than when Helms-Burton law changes and you can bring down partners to help build hotels. We are not planning on investing any capital in Cuba. But we think an Ascend like arrangement with a number of hotels there makes a lot of sense. And we've been very productive with conversations with government officials along those lines. We are a significant supporter of the efforts to open up Cuba, because our customers want to go there in droves. And we just think it's a great opportunity not only for us but also for the Island and the Cuban people and everything else. So we actually are hoping we're going to be there playing relatively short-term. The financial implications for them are not significant and we're not putting money into it.
Okay. Thank you.
Thank you. [Operator Instructions]. And our next question comes from Shaun Kelly of Bank of America. Your line is now open.
Hey, guys. This is actually Danius out on for Shaun. But --
We would like you better name again.
Always appreciate it. But real quick, just one question for you. So some of your peers actually noted a coloring competition in the mid-scale chain scale brand as a whole and what they pointed in particular was actually like more aggressive points promotions. And is this something that you're seeing in your markets where you're competing? And have your brands been reacting in any way for that?
We have not seen any significant swing up. There is -- in fact, it's sort of interesting. We are accelerating our points program aggressively and what we're seeing mostly is people backing off on their plan somewhat, which is why we think we're going to be able to gain share this year, because the reaction to the changes that we've made is very, very positive.
So in terms of the actual competition we actually think we're gaining more than our share. There is development competition with Hilton's announcement and so we welcome them to the trade, we think we're in a pretty positioned with Comfort to compete. And so -- and based on our development pipeline and construction starts, we think we're in a really good position. And the brand is moving to a point where it's never been, which is going to be -- it's always in talking to development community, I always talk about Comfort's ROI. But it's also resonating in a way that it hasn't in quite some time with the consumer. So we just think we've got a great combination there to play with.
And then we've actually seen some lessening competition in some areas where you've gotten certain brands that are focused and concentrated in some of the oil markets that are really -- that we had viewed as kind of more competitive than we had in the past to sort of dropping of a little. Obviously, we think the play in the CP program with millennials will -- is going to yield us more share, but we also -- we're pretty confident in where the fundamentals for the industry are.
And so while there is always competition we fare very well, particularly in our two biggest brands both Sleep and Comfort. Sleep has run significant premiums we've always had. Comfort is moving up significantly every single month in last 13 months in RevPAR index. So we like where we are in both brands. And we have not really seen any increased competition on the consumer side. On the development side, there is more competition, no question.
Great. Thank you very much. And maybe just a follow-up and kind of changing just a little bit. But it's -- just touching on for SkyTouch, it seems like we're getting closer and closer to that breakeven point on an EBITDA basis. And do you think maybe that -- do you have a timeframe that you'd be willing to share with us on where SkyTouch would be contributing positively to EBITDA, maybe as in what three, five years?
Oh, no, no, no. So -- yes. So we -- and we've talked about this before. Yes, we're very happy with where SkyTouch is going. We're signing up a lot more hotels in a much more rapid pace and it builds every quarter. We are close with several of what we call peer one, so bigger brand companies where we need to sign a couple of those to make the whole thing work. But we're very confident that we've going to. And so as a result, what we've said and what we're working against is we want to be in a position in '17 where it's no longer a drag on earnings. And so we have several plans that are -- we are evaluating in going several different directions as to which one is the best to optimize the value of this asset for our shareholders. But what we've said is we're going to move to a position in '17 where it's no longer drag on earnings and we think it will be -- we think it's going to really positive after that.
Great. Well, thank you very much. That's it for me.
Thank you. And our next question comes from Katie Wang of JPMorgan. Your line is now open.
Hi, guys. This is Katie on for Joe Greff. Thanks for taking my question. So just a couple things. So looking at '16 guidance for net rooms growth, could you just give us little bit more color on what's kind of driving that acceleration so I guess beyond your positive US fundamental, how much of that is fundamental versus just less removables compared to '15?
Yes. So part of it's because we've had such huge years in '14 and '15 in terms of development. And we actually think '16 is going to be better. We're really in the sweet spot of the cycle. And so what you're seeing is a lot of those projects come to bear. And what I think missed frequently is the impact of the Comfort program where we are taking lots of hotels out and some of them are going to Quality as we mentioned. But we -- but it think we've been on a cleanup program for last three years. And by the time we're done we'll have taken out in excess of over 600 properties. But that just -- what that does is create a brand new brand that the consumers are now reacting to incredibly positively. The results are incredibly positive.
The hotels that go through the Comfort reimaging program are typically adding anywhere between 5% and 10% above the above market RevPAR increases they're already getting. So the ROI is very strong. Our franchises are very excited about the program. The consumers are very enthused with what they're seeing. And as a result, are reacting positively both from the standpoint of the numbers of stays and also what they're willing to pay for it.
So in -- so what you get in '15 if you took out the Comfort impact is we're about at 4% and we’ve got that increasing 4 plus --
6%, yes, with our Comfort, yes.
Yes, with our Comfort. And then in this, for 2016, we’re looking at something pretty similar.
For '15-'16 and between two and three deals of our portfolio.
And then maybe I will add a little bit of color if you think about gross openings for 2016, we’re expecting the pace of gross openings in the system to go up by roughly a third, so call it going from around 300 to just under 400 hotels.
And really what's driving that is an expansion of new construction hotels opening up. These are properties that we already of obviously under construction for the most part at this point and then with also an uptick in conversions into the kind of the low 300 area. And so that low 300 conversion figure of gross earnings for 2016 I think one thing kind to think about right if you look at our pipeline we reported this morning, we had 209 conversion properties executed as of the end of the year. So we’ve obviously got a strong position to kind of achieve that gross opening.
On the termination side for the overall portfolio, I'd call it roughly flat for 2016 versus 2015 which as a percentage of the beginning of system size is moving in positive direction from the terminations.
Okay, great, thanks. And then just on the net reductions in EBITDA from SkyTouch and the vacation rental bit, are you guys still expecting vacation rentals to be accretive in '16?
Well in 2016 this is very a launch year for vacation rentals, so we’re not expecting it to be accretive in 2016 but I think we think in - I think we mentioned that we think it would be accretive sort of within a 12 month timeframe. So in some point in 2017 it will start adding to EBITDA.
Okay. And then as the actual reduction how much flexibility is there in that range, so is there what are your thoughts on maybe being less?
Well I mean take a look, we think these are good investments to make to drive shareholder value over time and there is certainly flexibility on both the revenue side if things go better than we expect or in the cost side we can make adjustments. We think about it as over the next several years how do we rapidly expand these business lines and leverage our existing technology, leverage our existing platform and it can really help us grow our business.
But I mean obviously, there is -- we do phase out differently than we expect, we have some opportunity to adjust more on the cost side rate if we think that makes sense. But I would tell you assume kind of the range we gave is kind of the range we’re fully expecting.
Thank you. And our next question comes from Mark Savino of Morgan Stanley. Your line is now open.
Hey, good morning, guys. Just real quick given a lot of the macro uncertainty that is out there, wondering if you could help us think about what your EBITDA sensitivity is to changes in RevPAR, so I don't know if there is a rule of thumb for every 100 basis points of RevPAR, how that flows through.
Yes, if you think about it this way, 100 basis points change in RevPAR is we made no adjustment to the cost structure, right, to compensate for a decline in RevPAR would translates to about $3 million of EBITDA which, from a franchising EBITDA perspective, is somewhere around 1.5%. So that is kind of the way to think about it.
And then I guess that helps me highlight one of the things that I look back on recently on 2015 which I think really speaks to the strength of our business model and the predictability of our business model. If you look back at our outlook that we provided for 2015 back in February of 2015 around unit growth, RevPAR, pricing on the contracts and franchising EBITDA, we literally we hit the low end of the RevPAR range on a full year basis to 6.5%.
And we pretty much hit on effective royalty rate, we hit it on unit growth and our EBITDA ended up right to middle of that range which kind of implies that we’re able to find at the low end of the RevPAR range we're able to find some things on the cost side to help us get to the middle of the EBITDA range.
So I think it really speaks to just the predictability of this business and our ability to manage the levers to achieve our financial goals.
Yes, and I think if you look back over the years to Dave’s point about what our flexibility is in terms of meeting the numbers we put in front, we’re able to look at ranges in RevPAR it still deliver the bottom line results for the shareholders and we’ve done that year in, year out. So it is one of the great things about this model is it’s not that complicated in terms of what goes into it but it is an incredible cash machine and it is very flexible in terms of our ability to live within various RevPAR markets and still deliver strong bottom line results to the shareholder.
Very helpful, thanks guys.
Thank you. And I’m showing no further questions at this time. I would like to turn the conference back over to Mr. Steve Joyce for closing remarks.
So thanks for joining us today. We think we had a great year and we’re looking forward to another great one in 2016. Have a great day.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Have a great day everyone.
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