Steve Joyce - CEO Dominic Dragisich - CFO Patrick Pacious - President and COO Scott Oaksmith - CAO

Felicia Hendrix - Barclays Capital Barry Jonas - Bank of America Merrill Lynch Mark Savino - Morgan Stanley Carlo Santarelli - Deutsche Bank Jared Shojaian - Wolfe Research Gregory Miller - SunTrust Robinson Humphrey Robin Farley - UBS

Good morning and welcome to the Choice Hotels International First Quarter 2017 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 Provisions of the Securities Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as Choice or its management beliefs, expects, anticipates, foresees, forecasts, eliminates, or other similar words or phrases. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Please consult the Company's Form 10-K for the year ended December 31, 2016 and other SEC filings for your 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 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 first quarter 2017 earnings press release, which is posted on our web site 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.

Thank you. Good morning. Thanks for joining us today. We are obviously very excited to share Choice Hotel's first quarter 2017 earnings update. Today, I am joined by some of our key leaders, including Dominic Dragisich, who joined Choice as our Chief Financial Officer on March 6. Dominic brings impressive experience in both finance and business administration. He will lead Choice Hotel's financial strategy, as well as play a key role in strategic growth initiatives, with a focus on company performance, and particularly shareholder value. Dominic and I will provide our first quarter earnings update, after which the phone line will open for Q&A, and we will be joined by Patrick Pacious, who is our President and COO; and Scott Oaksmith, our Senior Vice President and Chief Accounting Officer. Today, with nearly 6,500 hotels in 40 countries and territories worldwide, we are one of the world's largest hotel companies. In the U.S., Choice Hotels represents one in 10 hotels. We continue to aggressively expand and reach new markets every day. In February, Choice reported strong fourth quarter and year end results, and I am here and pleased to share, that that momentum is continuing into 2017. There are three key strategic areas that are contributing to our continued success. First, is our strategic efforts to help increase franchisee profitability. Second, it's continued growth and momentum in our development pipeline, and third, is the strength of our core businesses. Our first point, the strategic effort to increase franchise profitability remains vitally important to our business, and we continue to achieve success, particularly, when compared to our competitors. Choice domestic RevPAR is up 3.8% in the first quarter, compared to the industry at 3.4%. RevPAR grew only 2.3%, which further demonstrates that our tools and efforts are working and we are outperforming our competitors. Choice is committed to helping franchisees enhance their operations, by providing industry leading tools, and in turn, drive incremental revenue. On average, hotels that use our revenue management tool see an additional 6% RevPAR lift, which translates into over 6% in annual incremental gross revenues for these hotels, plus hotels using our SmartRates tool are realizing further revenue benefits by optimally pricing their inventory. In addition, royalty continues to be a hot topic, and Choice is one of the industry leaders in this area. On our last call, we talked about Choice Privileges and our program redesign in 2016, the fact that we have more than 30 million Choice Privilege members worldwide and how 4.6 million of those members joined us in 2016, that we were rated number one by USA Today readers. This growth continues on in 2017, as we enrolled 1.1 million new members in the first quarter, outpacing our first quarter 2016 privileges enrollment. In addition to Choice Privileges providing value to both our guests and franchisees, it is helping us achieve a key metric, to continue this success in the future, which is, increasing the contributions from our proprietary channels, and I think you are going to be impressed with the results. In the first quarter, revenue from our proprietary channels was 64.9%, up 530 basis points compared to the same year last year. This was driven almost exclusively by direct reservations on our digital platforms and Choice Privilege member revenue growth. A new version of our Choice Hotels mobile app was also introduced in the first quarter. As the majority of mobile app users are Choice Privilege members, we wanted to ensure that these loyal guests have a state of the art app, that meets their evolving needs. In addition to making bookings simple and quick, the new app makes it easy for our members to enjoy the benefits of their loyalty, by redeeming points for free nights, gift cards and other rewards. The app continues to have more user adoption and engagement, resulting in an increase of over 60% year-over-year revenue growth, plus reservations from the app are up 52%. In addition, we have already hit record reservation thresholds for the year on our proprietary channels. On March 6, our central reservation system achieved a $19 million day. Last year, this milestone was not achieved until June. Furthermore, choicehotels.com achieved six days with more than $7 million in revenue in the first quarter, a first for us. These stats are indicators that our tools are working for Choice, our franchisees and guests, which further supports our optimism. While strategic efforts to increase profitability is one key component of our success, we are equally excited to share our next update, continued growth and momentum in our development pipeline. On the last earnings call, we reported an exceptional fourth quarter and our franchise development strategy continued to generate these strong results. In the first quarter, we saw 106 executed franchise agreements in the U.S., a 51% increase, driven by both new construction and conversion projects. We experienced more than double, in fact 2.5 times more new construction agreements in the first quarter compared to the previous year. This impressive growth is driven by our Comfort brand, as well as our Sleep Inn and MainStay dual brand concept. Our team secured 25 new Comfort agreements in the first quarter, 15 of which are new construction. This development interest results from our efforts to transform the Comfort brand, which continues to deliver great results and sustain all time high guest satisfaction scores. We are also meeting the upper mid-scale segment in RevPAR growth, and stealing share from competitors, recording 30 consecutive months of RevPAR index gain compared to Comfort's competitors. The Sleep Inn Mainstay dual brand concept also continues to gain the attention of developers. There are currently seven open, six more secured in the first quarter, and a robust line of 50 locations. This prototype allows hoteliers to service multiple customer segments under one roof, while delivering construction and operational efficiencies through shared public space back at the house facilities and hotel staff. Developers in the mid-scale segment are really responding to this product, which is another example of Choice's innovation. In addition to the increase in new construction agreements, our Conversion focus brands continue to thrive, with 68 Conversion agreements signed in the first quarter, which represents a 24% increase. Our Quality Inn brand, which is the largest brand in our system, with 1,457 U.S. locations, accounts for a significant portion of these results. Quality Inn RevPAR grew by 3.9% in the first quarter, which exceeded the RevPAR growth of the overall mid-scale segment, and outpaced RevPAR growth of the competitive set, by 150 basis points. What's driving this momentum? Simply put, it's our strong value proposition. Franchisees know, that when affiliating with Choice, they gain instant brand awareness, as well as extensive support and resources, to help increase a property's position in its local market. For example, while our competitors are pulling back on field support, Choice recognizes the importance of face-to-face relationships to help our franchisees. We believe we have the best, more experienced and engaged area directors in the business. In addition, we provide ongoing robust education via the Choice University learning modules. As a result, we are attracting franchisees from our competitors and drawing first time hoteliers to the industry, because of the tools and the resources we provide. We are also creating new franchisee opportunities with our upscale segments. Choice has nearly 350 upscale hotels globally. Specifically, Cambria continues to grow in the U.S., with a focus on top RevPAR markets. In fact, just this week, our first California property opened in Los Angeles at the airport, and we have a second property in the Chicago loop opening soon. Internationally, we opened 18 new properties in eight different markets in the first quarter, and we are excited about our continued international growth opportunities. My final point is the strength of our business model. For those of you who have been tracking our company, you are well aware, we have a consistent, reliable franchising business model, and continue to deliver stable returns for our shareholders. In the first quarter, our domestic royalty fees increased 6.6% and the overall royalty rates increased by 17 basis points. Our business model results in industry leading margins. Investors continue to recognize Choice for its long term exemplary capital allocation, maintaining prudent leverage, using excessive cash flow for dividend programs, and making calculated investments to drive brand growth. So at this time, I'd like to ask our CFO, Dominic Dragisich, to share more specifics on our financial results. Dom?

Thanks Steve and good morning everyone. I want to begin by saying how great it is to be part of such a talented team. Choice has outstanding leadership, and I look forward to contributing to the company's continued success. As you can see from Steve's remarks and the information I will share, I joined Choice at a great time. Our financial strength and tremendous runway for growth, provides us a platform to focus on investments that fuel our core business, as well as new innovative ideas. Right now, let's dive into our first quarter results. Today, we reported diluted earnings per share of $0.51 for the first quarter, which exceeded a previously published outlook for the quarter by $0.02 per share and represents a 38% increase from the same period of the prior year. Reported adjusted EBITDA was $56.4 million, a 24% increase over last year. Our operating performance was highlighted by continued improvement in hotel franchising activities, as well as our complementary adjacent lines of business. As Steve discussed, our focus to help franchisees drive revenues and profitability, benefits both Choice and our franchisees. And key performance metrics continue to be strong. This includes a 9% increase in first quarter franchising revenues to $85.9 million and a 15% increase in first quarter adjusted hotel franchising EBITDA to $57.6 million. Three key performance indicators I will focus on, include one, growth of our domestic royalty revenues; two, continued improvement in our franchise development and relicensing results; and three, continued margin expansion. First, our domestic royalty revenues; the improvement in our hotel franchising revenues for the quarter, were primarily driven by our domestic royalties, which increased nearly 7% over the same period of the prior year, to $64.5 million. This domestic royalty revenue was impacted by leap year, which included an extra day in the first quarter of 2016. The extra day did not impact our RevPAR statistics, but we estimate that year-over-year growth was negatively impacted in our domestic royalties by about 1% compared to the first quarter of 2016. The critical area that drive our domestic royalty growth, all continue to improve in the first quarter compared to the prior quarter, highlighted by our domestic systemwide RevPAR, which increased by 3.8%. Hotel system size, which increased 1.3%, and our first quarter effective royalty rate, which increased 17 basis points. Our first quarter RevPAR growth was driven by a 100 basis point increase in occupancy and a 1.9% increase in average daily rates. Even more impressive, is that our RevPAR results for the quarter, exceeded the overall industry's performance by 40 basis points, as reported by Smith Travel Research. This extends our record of outperforming the industry to four consecutive quarters and 10 of the last 11 quarters. In the first quarter, we also continue to outperform the primary chain scale segments in which we compete. For example, our Comfort and Sleep Inn brands have now recorded 30 and 34 consecutive months of RevPAR index gains compared to their focus competition. The Easter holiday timing also had a positive impact on our 2017 first quarter RevPAR results. Easter fell in the second quarter of this year compared to the first quarter of 2016. As a result, we expect our RevPAR for the second quarter of 2017 to decline slightly from our first quarter results, to a range of 2% to 3%, and we are still maintaining our full year RevPAR forecast of a 3% to 4% increase. Pricing of our franchise agreements also continue to improve in the first quarter, continuing the momentum achieved in 2016. Our domestic effective royalty rates expanded by 17 basis points in the first quarter, to 4.55% and represented an increase to the 13 basis point growth we achieved in the fourth quarter of 2016. We continue to expect our full year rates to increase 12 to 14 basis points, which is an acceleration of the 11 basis point increase achieved in 2016. Next, let's review more detail on our continued success in franchise development. The number of hotels operating in our domestic franchise system, grew by 1.3% compared to March 31 of 2016. Excluding the impact of our Comfort brand transformation strategy, we grew the number of units online and in our domestic system by 107 units net, which represents a 3% increase. Our domestic unit growth was highlighted by our upscale brands Cambria and Ascend, which grew by 13% in the aggregate versus the same period of the prior year. Our Quality Inn brand, which increased by approximately 5% and our Rodeway Inn brand, which increased nearly 8% versus the same period of the prior year. The number of rooms opened in our Cambria and Ascend brand systems grew by 18% and 11% respectively since March of 2016, and the royalties generated from these brands increased 19% and 20% respectively. We opened two new Cambria hotels in the first quarter and expect to open eight to 10 more in 2017 in key travel markets. Accelerating the pace of Cambria openings, provides a positive catalyst to future revenue growth, as the Cambria brand commands higher RevPAR and has higher room count, compared to the company's other brands. The fundamentals that Steve discussed to drive new hotel development and conversion opportunities remain strong. During the first quarter of 2017, we executed 106 new domestic franchise contracts, representing over 7,200 rooms. This 51% increase in our new franchise development was driven by both conversion and new construction activity, and our new construction franchise agreements have increased quarter-over-quarter, for 13 of the last 14 quarters. We believe that favorable industry fundamentals for supply growth will continue, and we expect our new construction franchise agreement growth to continue to accelerate over the strong results we posted in 2016. In fact, in the first quarter of 2017, our domestic hotel pipeline increased 24% over the same period of prior year, highlighted by a 30% increase in new construction and a 13% increase in conversion agreement. As a result of our domestic pipeline growth in the continued industry-wide supply growth, we continue to expect growth for our domestic franchise system size in 2017, and are forecasting an increase between 2% and 3%. In addition, relicensing and renewal activity continues to grow. After improving 11% for the full year 2016 compared to 2015, the number of relicensing and renewal contracts during the first quarter of 2017, was 8% over the same period of the prior year. This is another positive indicator that the hotel transaction and lending environment remains conducive for growth. This moves me to my third point, as a result of items driving our top line franchising revenue growth, coupled with prudent cost management, our adjusted hotel franchising EBITDA margins increased by 300 basis points to 64.6%. This builds on the impressive margin expansion we experienced in 2016 and allows us to continue to return value to our shareholders. Now, let's turn to our outlook for the remainder of 2017; as always, our outlook assumes no additional share repurchases under our share repurchase program, as well as an effective tax rate of 34% for the second quarter and 33% for the full year 2017. Our hotel franchising activity guidance assumes that RevPAR will increase by approximately 2% to 3% for the second quarter and range between 3% to 4% for the full year 2017. The guidance also assumes that our effective royalty rate growth will increase between 12 and 14 basis points for the full year, and net domestic unit growth will increase between 2% and 3%. Excluding the Comfort transformation strategy's impact, we expect our domestic portfolio net unit growth of our other brands to increase by approximately 4.5% in the aggregate. Based on these assumptions, our guidance for the full year 2017 EBITDA from hotel franchising activities is a range between $297 million and $302 million, which represents approximately a 9% increase over the prior year at the midpoint. With regards to our non-hotel franchising activity, we continue to project an adjusted EBITDA reduction and expect full year 2017 to range between $4 million and $6 million. We expect our second quarter 2017 diluted earnings per share to range between $0.75 and $0.77 and our full year 2017 diluted earnings per share to range between $2.78 and $2.84. Our consolidated adjusted full year 2017 EBITDA is expected to range between $292 million and $297 million, representing an increase of approximately 15% over the prior year at the midpoint. These earnings per share and consolidated EBITDA estimates assume that we incur net reductions in EBITDA related to non-hotel franchising activities at the midpoint of the range for those investments. I leave you with one overarching point, we continue to build on our 2016 operating performance in the first quarter, and we are optimistic that 2017 will be another great year. With that, I will turn the call back over to Steve.

Thanks Dominic. We are obviously very excited to have you on our team, and I am already impressed by the value you are adding. Before we conclude, I want to highlight several industry and economic trends, and how these reinforce our optimistic outlook. In the first quarter, industry RevPAR growth was 5.7% for weekends and 2.6% for weekdays. The demand growth continues to be fueled by leisure [indiscernible] and industry research speaks to the strength of the leisure segment. As you know, that's our sweet spot, and this, combined with the fact that consumer confidence remains high, gives us every indication that our business is positioned to capitalize on these economic and industry trends. So as we continue to focus on our strategic efforts to increase franchisee profitability, continued growth and momentum in our development pipeline and the strength of our core businesses, to deliver consistent stable returns for our shareholders. We are well positioned to continue this momentum, and drive excellent results for our company and our shareholders. As I mentioned in my introduction, I'd like to invite, Pat Pacious, President and COO, and Scott Oaksmith, Senior Vice President and Chief Accounting Officer to join Dominic and me in the Q&A. At this time, I am going to open the call up to any questions you may have.

[Operator Instructions]. Our first question comes from the line of Felicia Hendrix from Barclays.

Hi, good morning.

Good morning Felicia.

Good morning.

And welcome Dominic.

Thank you so much, I appreciate it.

And I am going to call you now, because you are new.

And I blocked your number.

I am going to -- I do have a few starting for you, seriously though. On the -- my first one is on the unit growth, just to dig a little bit deeper and you gave us so much detail on that, thank you. So in the quarter, it was up 1.3% and you said adjusting for this Comfort system exits, that it would be 3%. And I think last quarter you said the adjustment, it would be about 3.7. So it seems like there is a bit of a sequential deceleration. Now your domestic pipeline is certainly strong and you reiterated your full year guidance, so I am assuming there is not much to read into that, but I did want to ask about this slightly lower unit growth in the quarter sequentially first?

Sure. So much of the reduction was really driven, as we said, by the Comfort Transportation as well as the Foundation brand. And frankly, quarter one reductions are not uncommon for us, as we tend to clean up the system, due to noncompliance and other issues. But really, it's the strength in our pipeline is what makes us so optimistic, when we take the 2% to 3% unit growth going forward. Given that we have Conversion, up about 13% in our pipeline, and it typically takes anywhere from three to six months to open, we are even optimistic that we will continue to hit those aggressive figures for the remainder of the year, and we are holding to that 2% to 3% guidance.

Okay. But in that range, nothing has shifted for you?

No, it's not.

And then just on the other revenues -- the other revenue line was about 90% higher than we expected in the quarter. So I was just wondering what was driving that?

Yeah, the primary driver definitely shows. We had a onetime program around rolling out our Chip and PIN devices to our franchises. So those would be some revenues this year that you see to the other income, that won't be a recurring revenue stream for us going forward.

Chip and PIN devices, what's that?

The EMV, so basically the credit card devices at the hotel, so a lot of them use the magnetic strip, the Chip and PIN. We are in the process of rolling those to our hotels and there are some revenues associated with that, as well as some costs --

Going forward, we should see a more normalized level there?

Yeah, that will be a 2017 increase, but it won't go on, prior to that.

Okay. But we could see it in -- for the rest of the year.

Yes.

Okay. And then just finally, Steve, with the Cambria brand, I was just wondering, where is the rollout relative to your expectations, and do you think that you can get the brand to the point where, you don't need to offer key money to the developers? And then also, just a few follow-ons to that, when a developer chooses a Cambria over other brands, just what are the main reasons they cite for this? I am really kind of asking that in the perspective of -- with the Marriott Muscle [ph] now behind lost, you now might have a different competitive environment there for Cambria, and then just a little bit different just on Sleep, how you are seeing things vis-à-vis Hilton's new Tru brand?

Okay. Let's start with Cambria. So the answer is, we are obviously creating incentives for people to do those hotels. It's working incredibly well. We are looking at maybe adding 14 this year open. Construction is increasing. Within nine months, I wouldn't be surprised if you saw construction in the 24 to 30 unit range. So it's all going extraordinarily well. We are doing -- basically, we are very much on track with our original plan for Cambria, which was a three year program. The only difference is, we are doing it with larger hotels with bigger revenues. And so, the unit count actually is a little behind what we expected, but the revenues are actually a little ahead because of the size. So that's working incredibly well. They are opening very strong. They are stabilizing within nine to 12 months based on some programs that we are doing. And so the developer community is taking note. And we have got some great projects coming up. We have got two more projects in LA, they are going to open one at LA Live, one on Spring Street, which is going to have the coolest rooftop bar in downtown LA. We got a project in San Francisco, right off in Union Square. The one in Chicago is the Oriental Theater, which is an old Masonic Temple. It's going to be one cool hotel. So it's really exciting to watch the momentum. And then the developers, the reason people are choosing, are for two reasons; one is, we have open urban markets, where buying dirt or putting deals together with partners, we have got a lot of multiple unit partners, so once they do one, they are doing several. So we have got several that are on the verge of doing five or more. And so we are attracting institutional capital for the first time. We have got several [indiscernible] involved in a lot of the hotels. So it's just -- everything is working from that perspective. The performance is backing it, and the reason people choose us, is because; one, they see a brand on the make. Two, they can develop in the territories that they want to develop in. And three, we are providing incentive capital. I don't view the Marriott-Starwood deal as an impediment, I view it as an advantage. I think that's going to drive more deals for us, not fewer. And then on Sleep Inn, Pat, why don't you tell about Sleep?

Sure. Good morning Felicia. So on Sleep Inn, we are very optimistic on the pipeline that we are seeing for sleep. We introduced a new prototype last year, and eight months later, we actually have the first of our hotels that have used that prototype open. So we are feeling very good about where the development side is on Sleep. It's the lowest cost to build in the segment and has the highest ADR. So when you put that combination together, developers are very attracted to it. And so we feel really good about where that's going, and I think as we mentioned earlier, it has 34 consecutive ones as a brand of stealing share from the competition. So I would feel really good about how well we are positioned, with Sleep Inn.

And you haven't seen any kind of -- I mean, I know it's a new brand, it takes a while to build up. But any kind of nipping at your heels from Tru or anything like that?

No, I think it's too early to tell, where Tru is going to end up, where it's actually going to be introduced in the market, where the costs per key is going to come out, and ultimately, how it's going to perform, sort of -- where everybody is sort of waiting to see. And developers we talk to, don't have answers yet. So it's still something that I think needs to be defined in the marketplace.

Okay, great. That was very helpful. I appreciate it.

Thank you. And our next question comes from the line of Shaun Kelley with Bank of America.

Hi guys. This is Barry Jonas in for Shaun. Just a couple of questions. One, just going on the Comfort transformation, can you give us any sense what sort of headwind in unit growth that might be, come 2018 and beyond?

We don't see much of a headwind on Comfort right now. As we have mentioned on previous calls, we have opened up a significant number of markets for Comfort, which is providing opportunity for us, and the value proposition as we have been talking about as well, is really starting to resonate with existing owners, who want to do a second Comfort, or third or fourth with us, as well as attracting new developers to that brand and to the hotel industry in general. So we feel actually pretty positive about the Comfort growth, both this year and beyond.

And I think the key point is, the pruning of the system is essentially completed this year, and we expect the system to begin growing, as we mentioned with the deals we are doing in 2018.

Understood. Then when you think about investments in advances, the $43 million that you invested in the quarter, where do you expect that to end up, and when do you think recycling activity will start to offset some of the incremental investments you are making?

Well a typical cycle -- so we have done this a lot. We have actually recycled significant capital already, through some of the deals that stabilize quickly. So the typical round trip capital that we are putting in, is, call it five years. It's a two year construction period, three years to stabilization, that's when a refi event occurs, and that's when our money comes out typically. It could be shorter. In New York, we got money out in the first year. We got most of the capital in mezzanine loan we put into that now [ph], because they were able to refinance quickly and the hotel is doing incredibly well. It could take -- I have seen deals that I have done previously, that took seven years instead of the five, to get where we want to be for the owner. But I think, what you should think about it, is that cycle goes in, it's a two year investment during the construction period, and then on average, I think you can say, three years of recycle. So you're are seeing a lot of the investments we made earlier, starting to recycle. We have got some loans coming due and other things that are going to occur. But we are going to continue though -- continue to recycle, meaning, we are going to put that capital back out in new deals. So I think the guidance we have given over the years, about how much we are going to utilize, I think it's still probably good to follow. And I think there was a question earlier about, how long will we continue to do that. Our sense is, when we get to 100 hotels, when it's performing well, which will be some time in the latter part of this decade, then we will be able to reevaluate the type of incentive we give, based on the performance and the demand for the product. But right now, we couldn't be happier with where we sit.

I think that's exactly right. We have authorization up to about $500 million. And the beauty of the model is, really, as Steve mentioned, is that we are expected to recycle that money within a five year period, which results in an open hotel, under a similar asset-like models in the rest of our portfolio. So coupling that with the fact that Cambria could command up to five times the royalty to some of our other hotels, makes it even that much more compelling.

Great. And then just one last one for me, it looks like initial franchise and relicensing fees are down about 3% in the quarter. Just when will that fee line item start to pick up and how does that work, relative to the transaction activity you are seeing?

So we couple them together obviously, and I think the good news is, is we saw relicensing fees up 8%, as we mentioned on the call, and this is in addition to the 11% growth that we had last year. And now with initial fees, it's primarily a timing and revenue recognition with accounting rules. So we do anticipate seeing an uptick in this as well.

So typically, you would recognize those fees when a hotel opens on a new construction. And so the average of our new construction 18 to 36 months after a contract execution. So that's when you will see that revenue recognition coming in.

Great, that's helpful. Thanks so much.

Thank you. And our next question comes from the line of Thomas Allen from Morgan Stanley.

Hey, good morning guys. It's Mark Savino on for Thomas. Just as we think about the 3% to 4% full year RevPAR guide, can you just give us, maybe a little bit more color, as to what you are baking in, in terms of broader economic growth?

So I think you know, when we think about RevPAR, obviously we track pretty closely with GDP and [indiscernible]. And so you are still seeing very strong consumer confidence. If GDP was up 1.4% in the first quarter, and still projecting to be up by about 2.2% for the full year, and unemployment is down to 4.5, so that's really a positive sign for us. Disposable incomes continue to -- projected to be up over 2% this year. So we feel like we are going to see a pretty strong RevPAR year, all year. I think Dominic mentioned that there was the Easter shift in our first quarter results. We have prescribed about 60 basis points into that, so the benefit of 60 basis points in Q1 and down in the second quarter, which is why you see a slightly lower RevPAR guidance in Q2. But then for the remainder of the year, we feel like we will be in that 3% to 4% range for the rest of the year.

But I think the way we are thinking about it is, we think it's going to be a strong RevPAR year; because of the way Easter worked, the numbers have jumped around a lot. And if you look at Smith's Travels report on this, it explains all the details why. And so, what we are seeing for May early on is pretty strong, and we are expecting a strong summer. But I think what you will see from us is, we are going to know a lot more sort of -- after -- through May, as we see where it starts settling out. But we are not expecting anything other than a strong RevPAR year, and the question just is, is how strong does it get, which is why we gave you the range we gave you.

That makes sense. And then just switching gears, on the buybacks, noticed you didn't buy back any stock in the quarter, so just wanted to get sort of your latest views on how you are thinking about that?

Sure. And I think as always, we first look internally on how we allocate our capital, right? And if we invest it wisely internally, we do believe that will have outside returns, for our shareholders. Again, I know that we have said this on previous calls, but we will always continue to follow the philosophy that return to shareholders is our top priority. And the beauty is, is we have to look at all of the available options to us. We are deploying capital obviously for Cambria, other strategic projects, and we will continue to consider both dividends and then share repurchases in the future as well.

Great. Thank you very much.

Thank you. And our next question comes from the line of Carlo Santarelli from Deutsche Bank.

Hey everyone, good morning. Just given obviously the growth this year in your effective royalty rates and some of the changes that are going to be made to the portfolio over the year, as well as the portfolio of growth, how are you guys kind of thinking about the growth in your effective royalty rate, as we look out to 2018?

Yes I think -- we have been able to grow our effective royalty rate for a few reasons. Obviously, we have been investing in our brands over the last several years, highlighted by the Comfort transformation strategy and improving our brands, has certainly allowed us to improve the pricing of our contracts. Last April, we did increase the RAC royalty rates on six of our brands, anywhere from 25 to 50 basis points. So that has helped to have a positive lift. And lastly, we are seeing the burn-off of royalty rate discounts that we did, back when the lodging sector was just beginning its recovery. So that's kind of three events have given us these outside effective royalty rate gains here in the last two years. I would expect some of these bigger gains to still continue into 2018, and then as we go forward, we get back into the more historical growth in the system rate, about three to five basis points a year after that.

So you are comfortable with similar kind of 12 to 14 again in 2018?

So I don't have the exact number. There was something more than the four to five that we have seen historically, so closer to that 10 basis point range, I would think.

Got it. Okay. Thank you very much.

Thank you. And our next question comes from the line of Jared Shojaian from Wolfe Research.

Hey everybody, thanks for taking my question. So this was the first quarter in a while that your RevPAR actually missed a little bit the midpoint of the guide. Were you just being less conservative going in, or did you experience any unanticipated issues during the quarter?

We are above the midpoint.

We guided 3.5 to 4.5, we came in at 3.8. I don't think there was anything that we missed, just was a range that we believed, particularly within 20 bps of that, midpoint of the range. We were real pleased with how performed against, both the total industry, which we exceeded, as well as our chain scale segment. So there was no surprises, just now being [indiscernible].

And I think what you should read into it, is we confirmed our guidance for the year, that's what we think.

Right. So okay, so maybe on that then -- maybe you can help me understand a little bit better. The 3.8% you did in the first quarter, you had an easier comp, you had the Easter benefit. And now I think in the second half, you are projecting around 4% for the 3Q and 4Q. Maybe you can help me understand a little bit what I am missing. It feels like a tougher comp, so just maybe curious how -- why you are confident that you are going to be able to get there?

No. I mean, I think at the end of the day, we obviously had a strong Q1, where we never exceeded all the expectations in the levers [ph] of RevPAR. I think when you take a look at the plan that we have set for ourselves certainly in this year, we were more bullish coming into the year, versus our competitors, and we believe we are tracking against that plan. And while we did see -- or are expecting to see a little bit of a dip in April, as a result of the Easter shift. We actually are very happy with the preliminary indicators, and frankly a little bit above our expectations. So we do anticipate seeing continued strength throughout the rest of the year.

Okay. Thanks. And then just one quick last one, can you guys give us an update on SkyTouch and where you stand with that?

Why don't you share the good news?

Sure. So I guess, we talked in the last call, our expectations for SkyTouch this year, to run at breakeven, we are on that pace, and we feel really good about how Q1 went. We are above our sales expectations on that front as well. So right now we have over 300 non-Choice Hotel's customers and the pace in Q1 was better than Q1 last year and the year before, so we continue to see strong momentum. I think it's important to recognize that the spend that we did in the last several years, was really about investment in the platform. That investment is now there. The product is running in Amazon Web Services. We retired a lot of technical debt. So it's really positioned for growth right now, and we feel really good about the guidance we have given on that, as far as running on a breakeven and the sales pace we are seeing. You know, SaaS works a little bit differently. And the beauty of it and the similarity to our current business is, once you sell that contract, it's recurring revenue and we feel really good about the progress we are making on that front.

And as far as your views on strategic alternatives, where do you stand with that for SkyTouch?

We are currently focused on growing the business. We are not actively looking at that. It's always something that has come along, as others have reached out to us. But we feel really good about the business today and where it's headed.

Okay. Thank you very much for the time.

Thank you.

Thank you. And our next question comes from the line of Gregory Miller from SunTrust Robinson Humphrey.

Good morning. Thanks for taking the time. I am online for Patrick Scholes. Wanted to dig in further on your pipeline growth; curious if you noticed any changes in trends, where your domestic franchisees are adding new construction supply within a market, particularly for Comforts and Sleep Inn? How much of the pipeline growth is in the CBD and suburban locations, versus areas that are currently seeing lower levels of supply growth nationwide, such as in highway and rural markets?

I don't know if we have any specific numbers on it. But anecdotally, I mean, the way we feel about it right now, is a lot of the top 50 urban markets, development is slowing down a little bit for those -- for those [indiscernible] because a lot of supply has come in. and now you are seeing a real shift in strength in both the secondary and tertiary markets, which is where Comfort tends to shine. So we are seeing that pickup in those markets. I don't know if we have specific numbers on it, but it's a -- I think the way you might want to think about it is, if you look at our entry into upscale with Ascend and Cambria, that is primarily urban markets. We are doing a few Comforts in urban markets, but most of them, as Pat mentioned, are the secondary and tertiary markets. And the encouraging thing about the pipeline for us is, that had laid the major urban markets -- now the major urban markets, as typical in the cycle is starting to slow, as some of them begin to have supply increases. We don't find it slowing us down in the upscale space, because we are wide open there, and the great thing about our system is, we don't have many rooms in primary, urban dense suburban locations, but we have enormous demand for them. So we are doing these upscale hotels, we know we are going to fill them. So if you think about the rest of it, it would be encouraging to think for us, and the reason we are so bullish on the supply growth for us, is those secondary and tertiary markets are really where the action is, and that's where we do the bulk of our brands. So we are seeing very encouraging signs from that.

Great. That's very helpful. That's it for me.

Thank you. [Operator Instructions]. Our next question comes from the line of Robin Farley with UBS.

Great, thanks. I had a question, I missed the first part of the call because of overlapping calls, so I don't know if you commented; but have you seen any benefit with some of the increased regulation, against Airbnb in some of your markets? I am thinking New York in particular, just some of the changes that started to be enforced there, in kind of January-February. But you have a change in leisure demand there, that you think maybe tied to that?

We don't see much impact at all. As Steve just mentioned, those sort of dense urban markets and destination locations where Airbnb has a lot of supply I guess, if you want to call it that. That's not where our -- [indiscernible] we had a lot of inventory opportunity there. So it's not impacting us directly there. I think it's interesting to look at Airbnb, I mean, they had 3 million listings, but only 1 million of those are actually comparable to a hotel, and most of them are in those, sort of major markets and destination markets. They are also not where our customer really plays, from a price point perspective, nor from a length of stay perspective. So we don't really see an impact from what's happening with Airbnb. I will say that we are pleased to see that the regulators are starting to treat them more like hotel companies. So when you think about fire and safety, those types of issues that hotel are required to adhere to, that municipalities are waking up to that fact that, everybody needs to play by the same rules. So we are encouraged by that development.

I think the other thing that we have talked about on previous calls is, we don't view it as a threat, we view it as an opportunity, which is why we launched vacation rentals by choice, which we are excited about -- the progress of that business. So we think they got to play by the same rules as the rest of the industry. But they are here to stay. We just don't see the impact from it, and -- for all the reasons that Pat mentioned. But we think, the models are worth pursuing and we are pursuing it.

Okay, great. Thank you. And then one other clarification that you may have addressed during your call, but your full year EPS guidance unchanged, but your tax expense is lower, which in theory would have added a couple of cents to the EPS. So I don't know if you can give any color on -- what's driving that lower tax rate, but kind of why that didn't [indiscernible] your EPS guide?

Well I think we have maintained our range, which is a fairly wide range. So we will still maintain within that. The only other item that has been a little bit unfavorable to where we thought [indiscernible]. The timing of some of our Cambria openings, joint venture and partners, some of the upfront costs around opening the hotels are a little bit higher. So we are seeing a little bit below the line and our equity earning numbers that maybe a little bit lower than what we expected at the beginning of the year. But overall, still on target.

Okay, great. That's helpful. Thank you.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Steve Joyce for any closing comments.

Thank you. Thanks for joining us. As always, we appreciate your interest in Choice Hotels. That concludes our call for today.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.