Steve Joyce – Chief Executive Officer Patrick Pacious – President and Chief Operating Officer Dominic Dragisich – Chief Financial Officer

Shaun Kelley – Bank of America Thomas Allen – Morgan Stanley Harry Curtis – Nomura Jared Shojaian – Wolfe Research Anthony Powell – Barclays David Katz – Telsey Group

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the Choice Hotels International Second 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 expects, anticipates, foresees, forecasts, estimate, or other similar words or phrases. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those implied. Please consult the Company’s Form 10-K for the year ended December 31, 2016 and other SEC filings for information about important risk factors affecting the Company that you should consider. Although, we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We caution you, do not place undue reliance on forward-looking statements, which reflect our analysis 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 2017 earnings press release, which is posted on our website at choicehotels.com, under the Investor Information section. With that being said, I would now like to introduce Steve Joyce, Chief Executive Officer of Choice Hotels International Incorporated. Please go ahead sir.

Thank you. Well, good morning and thank you for joining us for Choice Hotels second quarter earnings conference call. Today, I’m joined by Patrick Pacious, President, Chief Operating Officer; and Dominic Dragisich, our Chief Financial Officer. By now, I’m sure that you have heard or hopefully you’ve heard that a few weeks ago, the Choice Hotels Board of Directors announced our CEO succession plan. I have always believed that great companies change before that change is required, and while I have enjoyed every minute as Choice’s CEO. I believe 10 years is about the right amount of time for sitting CEO and, therefore after a significant succession process, I will be stepping down and Pat has been appointed President and Chief Executive Officer, effective January 1, 2018. After I stepped down, I will assume the role of Vice Chairman of the Board. So Pat’s appointment as President and CEO is really the culmination of a thoughtful, deliberate, long-term succession planning process, focused on maintaining leadership continuity and direction. The board selected Pat, because the directors, including myself, are confident in his ability to deliver on the company’s current business objectives, while driving new ideas that results in positive business growth now and into the future. Pat has exceptional vision and has spearheaded a lot of the innovations that have cemented our position as an industry leader and we are both committed to a seamless and smooth transition. He has been my partner for the last 10 years and has done an exceptional job for the company, so this is well deserved. I know Pat is a familiar face and voice to most of you. So without making anything bigger out of it, I’d like to introduce our incoming President and CEO, Pat Pacious.

Thank you, Steve. Appreciate your support and I’m honored by the confidence that you and the board have placed in me. This is an exciting time at Choice. Today, I’m happy to share that our momentum continues with strong results again this quarter. Our overall strategy to focus on franchisee profitability and fuel our strong development pipeline is working. That strategy and a focus on three key pillars enable us to deliver positive results for our investors. These pillars are first to strength of our core brands. Second, our momentum in the upscale segment. And third, a focus on our international operations in growth. All of these efforts are fueled by our commitment to create cutting edge technology tools for our franchisees. Franchisee profitability is a cornerstone of our business and we continue to achieve success compared our competitors. Choice domestic system-wide RevPar was up 2% in the second quarter, compared to the same time last year, which outpaced other branded hotels across the industry and continues to reflect increases in both occupancy and average daily rates. These results demonstrate that our efforts are working to drive incremental revenue and Choice is effectively helping franchisees enhance their operations by providing industry leading tools and services. For example, our Choice Privileges loyalty program and our book direct efforts continue to drive guest to our franchisees hotels. The CP program recently surpassed 32 million members and has added more than 2.5 million new members already this year. Specifically, the Choice Privileges exclusive member rates booked directly on our website or mobile app provide the highest profitability to our franchisees and our increasing contributions generated by our proprietary reservation channels. Revenue from proprietary channels was 51 – 58.1% in the second quarter, that’s up 360 basis points compared to the same period last year and is a new record for a second quarter. Choice also continues to help franchisees drive incremental revenue by providing industry-leading revenue management services and tools. Domestic hotels are using our revenue management service, where revenue management expert works one-on-one with the hotel to drive RevPar through pricing and inventory management. Specifically, for our Comfort brand, about 25% of hotels are using this service. These hotels on average see a 6% incremental RevPAR lift versus properties that don’t use the service. Because of this success, we are extending a version of this program to all domestic Comfort brand hotels and more than 600 additional Comfort hotels will be on boarded between now and October. In addition, our SmartRates tool continues to help hotel optimally price inventory and over 4,400 hotels are using it. Since the beginning of the year, these hotels have seen it’s ease-of-use and impact, providing a 2% to 4% incremental revenue lift. Therefore, usage of the tool has doubled. Our tools are working and are helping our franchisees increase profitability. These efforts have created a direct correlation to our next update that continued growth and momentum in our development pipeline. Franchisees have recognized that we have the strongest value proposition in the industry. For second quarter of 2017, 176 new domestic franchise agreements were executed. That’s a 20% increase when compared to second quarter of last year. In fact, the first six months of this year has been one of a strongest for our development team in our company’s history, as new franchise agreement increased 30% and new construction agreements increased 65% versus this first six months of 2016. Further evidence of our strong value proposition is echoed by the increase in our relicensing agreements. In second quarter, relicensing agreements are up 19%, resulting in a 59% increase in revenue compared to the same time last year. In addition, many franchisees are signing up for longer, new contracts when reaching their renewal windows. In addition to executing new franchise hotel contracts and keeping our existing hotels on our system, we are also pleased with the speed at which hotels are moving from our pipeline to open properties. In the first half of this year, we opened 162 domestic hotels, more openings than any first half since 2009. As I mentioned in my introduction, there are three key strategic pillars that enable us to deliver these positive results: the strength of our core brands, our momentum in the upscale segment and a focus on our international operations in growth. Let me touch on the each of this before Dom gets into the specifics of our financials. Our strength in the mid-scale and upper mid-scale segments is driven by our core brands and Choice is the dominant player in these segments. In the U.S. alone, Choice has 3,500 mid-scale and upper mid-scale hotel properties, a quarter of the overall share. Our brands, Comfort, Quality and Sleep Inn continue to have strong RevPAR performance compared to our competitors as well as a very strong pipeline. At Choice, we are focusing on the strength and growth of our established successful brands. Specifically, Comfort is beating the upper midscale segment in RevPAR growth and gaining share in the U.S. recording 33 consecutive months of RevPAR index gains compared to its competition. There are more than 2,100 Comfort hotels open globally with plans to open 56 hotels in the U.S. alone in 2017 including top markets like New York and Austin. The Comfort brand value proposition has never been stronger as loyalty contribution is at an all-time high and the Choice revenue management services providing incremental RevPAR lift. As a result, our development team secured 32 new Comfort domestic franchise agreements in the second quarter, representing a 39% increase over the second quarter of last year. The Sleep Inn brand has 400 hotels that are open globally with a pipeline of more than 120 hotels. Sleep Inn is the lowest cost way to build a new construction hotel in the mid-scale segment and it has a proven track record of success, with domestic RevPAR index gains outpacing its competitors in 36 out of the last 37 months. In addition, the modern, timeless design of a Sleep Inn prototype appeals to both the guests of today and tomorrow. Developers know this. Sleep Inn had a 42% increase in new franchise agreements this quarter compared to second quarter of 2016. Finally, as the dominant conversion brand in the mid-scale segment, Quality Inn is another success story for our franchisees and our shareholders. Quality has grown to become one of the largest brands in our system with more than 1,800 hotels open and Quality’s success continues. In the first half of the year, domestic RevPAR was up 3.3% and we added 98 net hotels in the U.S. compared to the second quarter of 2016. Moving onto the momentum in upscale. The story continues to be strong. In the first half of the year, 28 Cambria and Ascend hotels opened around the world. Domestically, there was a 37% increase in new franchise agreements across our upscale brands compared to the first half of 2016. Choice now has 31 open Cambria Hotels, including three that opened in the second quarter, one in the Chicago Loop which is our second property in Chicago. One in Los Angeles at LAX and in Newport, Rhode Island. The new construction pipeline for the Cambria Hotels brand now stands near 70 hotels. Cambria achieved a 22% increase in new franchise agreements in the second quarter versus the second quarter of last year. This is highlighted by Cambria’s expansion in California. In addition to the state’s first Cambria Hotel opening near LAX, we signed agreements to bring five more Cambria Hotel to California, including Long Beach, Burbank, Glendale, Napa and Calabasas. New contracts were also executed in other major markets across the country including Charleston in South Carolina, Houston, Milwaukee, Phoenix, Staten Island New York and Tampa. The Ascend Collection open 16 hotels globally in the second quarter and experienced a 50% increase in new domestic franchise agreements compared to second quarter of 2016. Contracts were executed to bring hotel to key markets in Hilton Head, Hawaii, New Orleans, Philadelphia, San Francisco and Tampa. As you know, Choice pioneered the soft brand concept before any of the other major hotel companies and has 186 open Ascend properties globally. That’s more hotels than the top three soft brands combined. In addition to the impressive growth of the Ascend Hotel Collection, we are even more pleased to share that independent hoteliers who joined the Collection are recognizing our value proposition, which includes plugging into our industry-leading technology, robust distribution channels and rapidly expanding loyalty program. As a result, our Ascend agreements are seeing longer terms with better effective royalty rate. Specifically, effective royalty rates increased nearly 20% in the first half of the year compared to the previous year. Moving onto international growth, our international business is focused on adding larger, more profitable, high-quality hotels in key markets. In the first half of the year, we opened 37 hotels, representing 5,166 rooms across 14 countries outside of the U.S. We also expanded our upscale portfolio in global markets, opening 13 upscale hotels in new markets including China, Denmark and Germany. Europe continues to be a particularly strong growth opportunity with so many independent hotels that could benefit from our business delivery expertise. We currently have 406 hotels opened in Europe with 51,566 rooms, an increase of 5,168 rooms over the past two years. Recent strategic partnerships, including agreement with Star Inn, had added nearly 2,400 rooms in the last 15 months with one of the most recent hotels being the quality Hotel Star Inn located in Hanover, Germany that brought 179 rooms into the system. We’re also seeing interest in new build Comforts across key German markets, totaling another 648 rooms in our pipeline. As you can see, we have a lot of exciting news. Now I will turn it over to our CFO, Dom Dragisich, who will share more specifics on our financial results. Dom?

Thanks, Pat, and good morning, everyone. I want to start by congratulating Pat on his recent appointment and thank Steve for a phenomenal 10 years as Choice’s leader. As the newest member of the executive team, I can confidently say that the thoughtful, strategic, succession planning process is one of the many things that is impressed me about Choice and it is great to see it come to fruition. I admire the leadership and partnership that both Steve and Pat exhibit and note that our shareholders, franchisees, partners and associates are in great hands as we continue to deliver on the company’s current business objectives and drive our future vision. As Pat highlighted and simply put, our momentum continues. The investments we have made in our brands, the tools we continue to provide our franchisees and our reservation delivery capabilities continue to strengthen our financial performance and this is evident in our second quarter results. Today, we recorded diluted earnings per share of $0.79 for the second quarter, which exceeded the top end of our previously published range by $0.02 per share. This earnings per share performance also reflects the 16% increase from the same period of the prior year. Our strong second quarter financial performance was highlighted by continued revenue growth and prudent cost management, which resulted in adjusted EBITDA for the second quarter of $81.1 million, up 15% increase over the prior year. Additionally, we achieved a 10% increase in our hotel franchising revenues and an 11% increase in second quarter adjusted hotel franchising EBITDA. Next, let’s dive into three key performance indicators of our franchising business. Specifically, domestic royalty revenues, franchise development and relicensing and franchising margins. You will see that all of these metrics experienced impressive growth and continue to fuel our results. First, our domestic royalty revenues. Increases in our hotel’s franchising revenues for the quarter were primarily driven by our domestic royalties, which increased more than 7% over the same period of the prior year to $87 million. The critical areas that drive domestic royalty growth all continued to improve in the second quarter compared to the prior year quarter. These include our domestic system-wide RevPAR which increased 2%; our hotel system size which increased 2.6% and our effective royalty rate which increased 19 basis points. As discussed in our first quarter earnings call, we expect that the Easter holiday timing to have a negative impact on our 2017 second quarter RevPAR results since Easter fell in the second quarter of this year compared to the first quarter of 2016. The timing of the holiday reduced our RevPAR growth for the 2017 quarter by approximately 60 basis points. Even with this calendar shift, we experienced a 2% growth in our domestic RevPAR driven by a 30 basis point increase in occupancy and a 1.5% increase in average daily rates. Excluding independent hotels, our 2% growth exceeded the results reported by branded hotels by 30 basis points, according to Smith Travel Research. In addition, the Comfort brands RevPAR performance continues to outperform in the upper mid-scale segment and has recorded 33 consecutive months of RevPAR index gains compared to its focus competition. As we look at our RevPAR forecast for the remainder of the year, we expect RevPAR increases to range somewhere between 1% and 2% for the third quarter versus the same period of prior year. Additionally, we expect RevPAR to strengthen in the fourth quarter over the third quarter due to improve transient leisure and business travel. Based on our six-month results and our updated forecast for the remainder of the year, we are forecasting full year RevPAR to increase between 2% and 3% over 2016. Growth in our royalty revenues has also been driven by the pricing of our franchise agreements. We continue to see impressive growth in our domestic effective royalty rates, which accelerated further in the second quarter. In fact, our domestic effective royalty rates expanded by 19 basis points in the second quarter to 4.58%, this represents an improvement over the 17 basis point increase reported in the first quarter. As a result of this strong year-to-date performance, we are increasing our forecasted growth in our full year domestic effective royalty rate to a range of 17 to 19 basis points, compared to our previous guidance of 12 to 14 basis points. In 2016, domestic royalty rates increased a 11 basis points, and this reforecast of 17 to 19 basis points represent a meaningful acceleration as each one basis point expansion of our effective royalty rate results in over $700,000 in incremental domestic royalties on a full year basis. In other words, our updated guidance provides a potential incremental increase of over $3.5 million in domestic royalty revenue. Next, let’s review our continued success in franchise development. During the second quarter, we opened 113 new domestic franchise hotels, including 46 in the month of June, which represents one of the highest rate of openings the company has posted in June. Overall, the number of hotels operating in our domestic franchise system at June 30 of 2017 grew by 2.6% compared to June 30 of 2016. This represents an acceleration from the 1.3% growth, we reported in the first quarter. Excluding the impact of the Comfort brand transformation strategy, the number of net units online grew in our domestic system by 180 units, which represents a 5% increase. Domestic unit growth was highlighted by our upscale brands, Cambria and Ascend, which grew by 18% in the aggregate versus the same period of prior year, our Quality Inn brand, which increased approximately 7%, and our Rodeway Inn brand, which increased 11% versus the same period of prior year. We opened three new Cambria Hotels in the second quarter, including a hotel at LAX and our second hotel in downtown Chicago. In total, 5 new Cambria Hotels have opened in 2017 and 5 to 7 more are expected to open this year in key travel markets. The number of rooms opened in our Cambria system grew by 34%, since June of 2016 and the royalties generated from this brand in the second quarter increased 14%. The Cambria brand commands higher RevPAR and has higher room counts compared to the company’s other brands, creating a positive catalyst to future revenue growth as more hotels open. On the development front, second quarter performance builds on our strong first quarter results. In the first quarter, we reported 106 new domestic franchise contracts, a 51% increase over the comparable period of 2016. This momentum continued during the second quarter of 2017, where we executed an additional 176 contracts, representing over 13,000 rooms. We achieved a 20% increase in new domestic franchise development contracts versus the second quarter of 2016, which was driven by both conversion and new construction activity, which increased 14% and 33%, respectively. New construction domestic franchise agreements have now increased quarter-over-quarter for 14 of the last 15 quarters. In particular, we are pleased with our development results for our Comfort and upscale brands. New domestic franchise agreements executed in the second quarter for our Comfort brands increased 39% over the prior year and new contracts for our upscale brands, Cambria and Ascend, increased a combined 33% over last year. We are optimistic that the favorable industry fundamentals will remain in place and continue to expect our new construction franchise agreement growth to accelerate over the strong results we posted in 2016. Our strong development results in the first half of the year have also fueled the growth of our domestic hotel pipeline. At June 30 of 2017, our domestic pipeline increased 22% over the same period of the prior year to 721 hotels, representing over 55,000 rooms. The growth of our domestic pipeline is highlighted by a 30% increase in new construction hotels. Based on our development results and industry-wide supply growth projections, we continue to expect growth for our franchise system size in 2017, and we are maintaining our forecast of a 2% to 3% increase. As Pat mentioned, we are also pleased with the growth of our international rooms online, which increased 1.8% over June 30 of 2016, and we now have over 6,800 rooms in our international pipeline. Our domestic relicensing and renewal activity also continues to yield strong results. The number of domestic relicensing and renewal contracts executed during the second quarter of 2017 increased 19% over same period of the prior year, resulting in $1.5 million of increased revenues. Second quarter activity had meaningful growth, over the 8% increase, we reported in the first quarter, and is another positive indicator that the hotel transaction and lending environment remains positive. This takes 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 100 basis points to 70.5%. This builds on our impressive margin expansion in 2016 and the first quarter of this year and allows us to continue to return value to our shareholders. Finally, I’d like to share our outlook for the remainder of 2017. Our outlook assumes no additional share repurchases under our repurchase program. Additionally, it assumes an effective tax rate of approximately 33% for the third quarter and full year 2017 and does not factor in any potential costs that may be associated with our announced succession plan. In addition, our earnings per share and consolidated adjusted EBITDA estimates assume that we incur net reductions in adjusted EBITDA related to non-hotel franchising activities at the midpoint of the range for those investments. Guidance for full year 2017 adjusted EBITDA from hotel franchising activities is a range between $299 million and $303 million, which represents approximately a 10% increase over the prior year at the mid-point. For our non-hotel franchising activity, we project adjusted EBITDA reductions and expect full year 2017 to range between $5 million and $7 million. As a result, our consolidated adjusted full year 2017 EBITDA is expected to range between $293 million and $297 million, representing an increase of approximately 16% over the prior year. We expect our third quarter 2017 diluted earnings per share to range between $0.90 and $0.92 and our full year 2017 diluted earnings per share to range between $2.81 and $2.86. Overall, we continue to prove our high-performing franchise business model with financial and operational results that build on our strong first quarter, and we remain optimistic that we will close the year strong. At this time, Steve, Pat, and I would be happy to answer any questions you may have.

[Operator Instructions] And our first question comes from the line of Robin Farley of UBS. Your line is open. Please go ahead.

Hi, thanks. This is actually [indiscernible] in for Robin. Just wanted to go over RevPAR for a second. So Q3 guidance implies, you’ll probably need around say 3% RevPAR in Q4 to hit the mid-point of that 2% to 3% guidance for the year and probably closer to 4% to 5% to hit the higher end of that range. Just wondering if you could go over the drivers of that acceleration in Q4? I know there are some holiday shifts between Q3 and Q4, but outside of that, what else are you seeing that could drive RevPAR to that range from 1.5% in Q3? Thank you.

Sure, thanks for the question. I think there’s really three driver that we expect in terms of our Q4 RevPAR increases. The first, you mentioned it, right, it’s the timing of the Jewish holidays into Q3, right. You do have a bit of timing shift there, which obviously, depressing Q3 RevPAR and we’re expecting higher Q4 RevPAR somewhere in the magnitude of probably 30 to 40 basis points. I think the second is when you take a look at booking data that is reported by TravelClick, it is improved – it is recording an improvement in those transient leisure and business travel in Q4. And then as Pat has mentioned in his prepared remarks, the last lever that we see is just our internal programs that we are rolling out. We had mentioned that we have about 25% penetration in terms of the revenue management programs. We are now mandating that for our Comfort portfolio. So we have about a 75% penetration runway there. A lot of that is going to show up in 2018, but you could start to see some of those impacts in Q4 as well.

Okay. Do you have any updates what you are seeing in the oil region in terms of trends?

Sure. I could tell you that in Q2, we saw no impact. Oil track very closely to our overall reported RevPAR.

Thank you very much.

No problem.

Thank you. Our next question comes from the line of Shaun Kelley of Bank of America. Your line is open. Please go ahead.

Hi. Good morning, everyone and Pat congratulations on the announcement and appointment.

Thank you.

Maybe we could start with the unit growth side of the picture. Obviously, in the quarter and so far year-to-date the Comfort and repositioning continues to drag on sort of your overall portfolio unit growth. And obviously, that’s a sort of very directed initiative. Is the plan still to want that down or want down some of those repositionings overtime? Or could you give us an update on how long we should expect the continued negative contribution from what’s going on with Comfort?

Yes. It’s Pat, and thanks for your congratulations. Yes, I think on Comfort, as we talked about in the past, this is the final year where that impact will continue to have its effect on us. As I mentioned in my prepared remarks, the development pipeline for Comfort is very strong. And so our strategy long-term has been as we remove some of those hotels well to open up new markets and we’re having a lot of success in backfilling those markets with new construct – contracts. So we feel very good about what the system size will look like 2018 and beyond. So yes, I think as we guided to in the past, 2017 is sort of the final year, where that you’re going to see that termination impact.

Yes. And the only thing that I would add to that is, just given the fact that a lot of those new Comfort properties or new construction, typically takes about 18 months. Anywhere from 18 to 36 months, so you will see a more dramatic uptick in 2019. And that’s what I would expect to hit those historical run rates. Obviously, you’ll see some of that coming to fruition in 2018, but call it anywhere in that 4% range in 2019.

Sorry. To be clear, we are talking on that latter metric for Comfort specifically, or for Company overall?

Company overall. You’ll return to higher growth level, call it 4% to 5% or so.

Okay. But more by 2019 because I think the last few times has come up and appreciate that, you guys don’t provide totally refined guidance. But I think the last few times it has come up, it was more like 4% to 5% for 2018.

So we had always talked about the fact that there is a bit of a tail, associated with the Comfort strategy just given the fact that is new construction and with those new construction, you will some of the interact – you won’t see a decline, obviously, on the Comfort side in 2018, that’s winding down in 2017. I think when you talk about new Comforts opening, given the fact that so many are new construction. You could see an 18 to 30 month tail, in terms of those openings.

Got it. So difference between where we started the year and end the year – and how that impacts the blended average kind of thing?

Yes. I think in terms of our 2008 projections, we still are 4% or so for the full system.

Got it. Okay, and then maybe switching gears a little bit. The effective royalty rate is showing dramatic improvement in – could you just – I think you mentioned in the prepared remarks that Ascend, specifically, you’re seeing a big bump in what’s in there effective royalty rate. What else is driving that? Is it mix of contracts? Or is it new Cambria debuting? I mean what’s the general number there? What’s the mix shift that sort of moves that? Or is it no free ramps that are rolling off? Or what is it – that is moving that royalty rate?

We’re really seeing it across the entire portfolio. And I think it goes back to really improved pricing given the strong value proposition that our franchisees are seeing. There is really three levers in particular. The first, when we talked about this on the last call. We increased the RAC royalty rates for six brands in 2016. We increased another handful of brands in 2017 on the RAC. And we’re not seeing any slowdown in terms of our development statistics, obviously, given the results that we reported. I think the second is just the ability to negotiate better pricing with fewer discounts, as we are seeing the value proposition improved for our franchisee, we are seeing much, much lower discounting levels. And I think the last is really the older discounts that we provided post-recession are beginning to burn off, and that’s why you are seeing those higher effective royalty rates. I think, Ascend in particular you are seeing much better value proposition resonating with the franchisees as well. And so I would say that when you take a look at your effective royalty rate for the remainder of 2017, obviously, we provided that guidance. I think in the 2018, we’re still going to improve at a higher pace than our historical levels. Maybe somewhere in the lower double digits, but we’ll share more details in later guidance.

Okay, that’s great. And last question is a strategic one. But you guys laid out your three – kind of your three key pillars for strategic growth going forward. Not among those was acquisition. So kind how do you think about the focus on organic growth? And obviously, you’re putting a lot of your capital or available capital back into I think ramping up the Cambria brand, what you are doing at the development side. But can you help us in a way, what is going on in development versus what’s going on – or potential opportunities that could present themselves in acquisitions?

Yes, sure. I mean, we’ve always had an opportunistic approach to acquisitions, and we’ve looked at a lot of things over the last several years. For us, it’s got to make sense in two fronts. It’s got to make sense for our owners of this business, our shareholders and it’s got to make sense for the owners of the hotels or the brands we’d be acquiring. There’s a lot of opportunity out there. But we always look at those two initiatives as sort of the thing that drives our decisions on that front. We are very comfortable with 11 brands that we have. We are a company that’s already at scale having own out of every 10 hotels in the U.S. And we’ve got great growth opportunities in front of us, in upscale, in international and in our core mid-scale business. So we feel really confident about the growth prospects. If you look at our portfolio of brands though, of our history, half of them are ones that we started organically and the other half are ones that we’ve acquired. So the company, from time-to-time has been opportunistic and has looked for opportunities to do that. And we will continue to do that. But as I said, it’s got to make sense from both the shareholder and a hotel owner perspectives, when we make those decisions.

And for the owners the criteria is what, just not overlapping too much with their economics? Or what’s going on in their markets? Or what would be the dictating factor from the ownership perspective? I think we get from the shareholders that accretion would probably be a key consideration.

It goes back to our core strategy for our current owners, which is return on investment. So if I can improve that owner top line and improve their bottom line as well through some of the tools we bring and some of the cost efficiencies we bring that’s what we look for on the ownership side.

Thank you very much.

Thank you. Our next question comes from the line of Thomas Allen of Morgan Stanley. Your line is open. Please go ahead.

Hi, good morning and Pat congratulations, again. Just on the revenue management and SmartRates initiatives, are those also affecting royalty rates? Or did the franchises get those for free?

So we do charge a minimal fee, basically a monthly fee for some of those revenue management services. The return on investment, I haven’t looked on it – looked that in a while, but we roll those programs out for every dollar they’re spending they’re getting something like $8 or $9 in revenue on a returns basis. So the program in several – play, but they are significantly improving overall revenue versus what’s going on in the marketplace. So those revenue management services do apply that. SmartRates, it’s little bit different. SmartRates is a mandated program for most of our hotels. And so again, that’s a tool as opposed to a service. And again, there is a small fee, but it provides – it’s sort of offset the fee they were spending anyway, which collect market intelligence. So for most of our franchises, it was pretty much a wash on a cost perspective.

Okay. And I guess, the reason I’m asking that question is really to think about how your effective royalty rates are going to increase in 2018 and understanding and so I guess addressing that question would be helpful. Thanks.

Great. I mean, I think it really shows up in the RevPAR increase. That’s ultimately the ROI that you get, it’s not necessarily coming up. Now obviously, it improves the value proposition…

Yes. A long-term, it improves overall value profit, that Comfort is going to outperform another competitive hotel in the marketplace. It’s allowing us to improve the effective royalty rate in charge more for our value proposition that we are delivering upon.

Helpful, thank you. And then just my follow-up, your RevPAR growth kind of came in at the low end of your guidance range this quarter. You’re not unique, that seems to have happened with some of your peers, too. Can you just talk about how you feel about the general operating environment? Thanks.

Yes. I think, before you look at the still softening of the RevPAR, I mean I think on all the other metrics, effective royalty rate, unit growth, all of the other metrics, we feel really good. In fact, we are actually moving the bottom end of our EBITDA guidance up. So we feel really good about the performance this year. I think there is a bit of an industry softening that we are seeing, but we are still seeing occupancy gains and ADR index gains or ADR rate gains. So from an industry fundamentals perspective, we still feel really positive about 2017 and about the performance this year. Dom covered some of the calendar shifts that we expect to occur. I think with July 4 slipping from Monday of this year to Tuesday, again, that will be a different that has – had a little bit of an impact on some of the RevPAR guidance that we are providing, but it’s – we feel really good about where we are. And we feel really good about sort of the – maintaining the guidance that we’ve got out there in that 2% to 3% range.

Are there any specific cohorts of your business that you can kind of call out that have been coming in all weaker? I mean, you did lower your full year guide, too, so…

I would say that the downtick, when you look at Q2 coming in at the lower end of the range. Pat alluded to it, he’s got a bit of a downtick throughout the entire industry. Consumer spending came in a little weaker than we had expected in Q2. You’ve got the Easter shift. I think one of the other things that we are seeing internally that we see as a long-term value lever is that we are underpenetrated in a few of the key regions, where you saw broader industry RevPAR growth, right? And when you talk specifically to some of other region, new England and Pacific in particular performed very well. We have a runway for growth in Pacific. And when you take a look at what we are doing with Cambria in California and some of our other brands in California specifically, we do anticipate capitalizing on that RevPAR growth in most likely in the 2018 timeframe.

Great, thank you.

Thank you. Our next question comes from the line of Harry Curtis of Nomura. Your line is open. Please go ahead.

Good morning. I wanted to follow up on that last response and ask the question really more on from a 30,000-foot perspective on supply growth. Has the appetite to develop in the limited service kind of mid-scale and upper mid-scale began to either plateau or decline given that mid-scale without food and beverage RevPAR really in the last few months has been very limited, sort of 1%-ish?

No. I think, we were not seeing that at all. I mean, we just went through some pretty strong unit growth numbers and pipeline development numbers for our mid-scale brands. I think what you’re seeing is a shift in the development world to more secondary and tertiary markets, which we are benefiting from because that’s again a sweet spot for our brands and for our footprint. So we’re not seeing a slowdown in development for mid-scale or upper mid-scale.

In fact, I think that’s going to be opposite.

Okay. And my second question related to free cash flow. Which after we deduct the dividend annually, we are in the 100 – we’re estimating somewhere around $100 million to $150 million but that’s before mezz financing and equity contributions. Can you give us a sense of what you expect for your mezz financing and equity contributions this year and next?

So I can tell – we’ve got the $261 million is currently outstanding, I think, for the remainder of the year we’re going to come in somewhere in that $40 million to $50 million range in terms of those managing equity contribution for the Cambria brand.

Okay. And are there any incremental uses of cash among the other brands as well?

No, not.

If the answer is no then, then that answers it for me. Thanks.

Yes.

Thank you. Our next question comes from the line of Carlo Santarelli of Deutsche Bank. Your line is open. Please go ahead.

Hi, thanks. Good morning everyone. You guys commented earlier about some of the forward booking data improving in the fourth quarter for transient leisure and business travel. And I was just wondering, is that the kind of improving relative to current trend? Or is that improving relative to prior expectations or a specific period of time? If you could just put some more context around that statement, I would appreciate it.

I think the answer is both. When you take a look at the trend from Q3 to Q4, certainly improving pretty dramatically over Q3 on the transient leisure side of the house, you got Q3 at call it 1.6% growth, Q4 is estimated about 4.2% growth trending business. Q3 is actually expected to decline by about 3.4% with Q4 rebounding to about plus 2.1%. It’s also a little bit higher than our previous expectation, frankly. So I think the answer to your question is both.

Great, thank you. That’s helpful.

Welcome.

Our next question comes from the line of Jared Shojaian of Wolfe Research. Your line is open. Please go ahead.

Hey, good morning everybody.

Good morning.

Good morning.

So just to stick on the RevPAR here for a second. How much of your guidance cut is just the mix impact from adding Cambria to the comparable number? And I guess to ask a differently, would you still cut your guidance if you weren’t Cambria and if so by how much?

No impact at all. It is – when you take a look at the majority of the portfolio it’s obviously our other brand. It really was not driven by the Cambria shift.

Got it. Okay. And I think you said in your prepared comments, you’re out performing other brands. But you also underperformed the STR average. So I guess how do you reconcile those two points? And I see that Ascend was done quite a bit in the quarter. And I guess, we don’t have the data for Cambria. But what’s driving that gap to the STR average, is it just the non-branded?

So to answer your first question, it basically when I talk about brand, it removes independence. And the reason for that is just the number of hotels that actually reported their data to STR. It’s about 11% that report. It’s the mix of those hotels being larger in upper upscale and it’s the regions that those hotels operate. So we felt that – a proper comparison looks to remove independence. To answer your question on Ascend specifically, it’s really it’s a mix issue and it’s a new hotels ramping issue. When you take a look at the same-store growth of the Ascend portfolio, RevPAR actually increased by about 4%, and so as we’re continuing to sell new hotels obviously, and bring these hotels online. There’s a ramp associated with those hotels. So same-store growth is 4%. So we are very happy with the progress that we are making on Ascend.

And some of the additional Ascend is our original Ascend really were in more key urban markets. So we moved to more destination and other locations. So I think is also having that impact. So Dom mentioned the mix, that’s what he was speaking to.

Got it. Okay and Pat congratulations on the new role. I guess just a follow-up on Shaun’s M&A question. I guess, how should we view this managerial transition from a strategic perspective? And I guess – what I’m asking is would you be less likely to take on in M&A-related type of project during this transition period? And then if you could, I’d love to hear any thoughts if you’d look at the looking at all?

Let me just answer that. We’ll look at an M&A transaction during this transition, absolutely, I mean, this is one of the analysts right after the announcements, this succession plan than hiding in play insight. I think, if you look at how the company has handled this process, Steve and I have been working together for 10 years. I’ve been here for two years longer than that and been responsible for strategy and the company’s growth for during that full period. We’re going to continue to do the three things that we mentioned. That Steve and I have been working, which is expand our great business we have in mid-scale, we’re going to capitalized on the significant momentum we’ve got going in upscale. And we’re going to look at international growth as a real opportunity for us. So you’re not going to see significant shift in strategy. I mean, the strategy that Steve has led over the last 10 years and that have been working with him on – we feel really confident about it, so does our board and we like the growth prospects associated with that. I’m not going to comment on the specific M&A opportunity. But I think it goes back to those tenants that we look to which is got to be accretive for shareholders. And it’s got to be – it’s got to make sense from the standpoint of how we can help those individual hotel owners improve their businesses.

Great. Thanks very much.

Thank you. [Operator Instructions] Our next question comes from the line of Anthony Powell of Barclays. Your line is open. Please go ahead.

Hi, good morning guys and congratulations, Pat. Question on the Cambria spending, you spend about $62 million net year-to-date and I believe you said you are spending $40 million to $60 million for the rest of the year, that’s about $100 million. Is that recurring number? Does that go down next year? Do you get that’s was back – can you just go over the cash flow implications of that over the next few years? That would be great.

I apologize, if that was unclear. It’s an annual target of $40 million to $50 million that we deploy for that brand on a yearly basis, certainly this year and probably early into 2018. And at the end of the day, we have $475 million authorized to deploy in step brands. So obviously, depending on the pipeline, we do have a pipeline of about 70 properties, we talked about that. The goal would be ultimately to get to that 100 units and if that point in time, we can begin to ratchet it back on some of the investments we are making. But the annual target, net investment out is about $40 million to $50 million for the year. Or we can flex up and down obviously given that we have the authorization to do so.

Okay. So you’ve done $62 million year-to-date. Does it mean you expect to get some money back over the balance of the year? Or is that $62 million kind of where you’re going to be for the rest of the year?

We do anticipate a recycle, and we are starting to see some of that recycle. And obviously the recycle lenders anywhere from three to five years, but I think given where we are, the net investment will far outweigh the recycling buildings for the next two years.

Okay. And just you guys have been pretty innovative in terms of looking at new opportunities like your Vacation Rentals and just like SkyTouch. Is that going to continue going forward with the new management team?

Yes. I think we like where we are in the amount of spend. We put into what we sort of call R&D. Most of it, all of the investments we make are in adjacent businesses that make sense for us. Whether it be Vacation Rentals or SkyTouch, these are asset light businesses. They perform very much like our franchise agreements do, meaning there are sort of recurring monthly fees. So we really like the business model as well as the adjacent markets that we are moving into. So we feel pretty good about where we stand with that, and I think the investment we have in alternative growth options this year is probably something that we’ll continue to look at in the future.

Great, great. That’s it for me. Thank you.

Thank you. Our next question comes from the line of David Katz of Telsey Group. Your line is open. Please go ahead.

Hi, good morning. Congratulations, I guess, everyone. Steve, too. My question is, and I think you may have just in part addressed it about where you would consider critical mass to be in the Cambria brand. It sounds like something happens or there is some inflection point when you get to 100 hotels. In the past, I heard other companies and so forth and the industry people talk about 300 hotels being kind of a critical mass for franchise brand. What happens at 100? And how are you thinking about that critical mass? And lastly, just the timing of when you recapture the money that’s out for investment to support that growth?

Yes. I think on the critical mass, as you look at it, it depends on the segments you are operating in and it depends on the locations of where those bands are. So the mid-scale or economy brand, you may need 300 to get critical mass. When you are talking about upscale, particularly where we are locating our Cambria, so I think we have an open hotel or one in the pipeline in 35 of the top 50 RevPAR markets. You don’t need to get to 300. So we have looked at that sort of 75 to 100 hotel range as sort of the point at which you’ll get to critical mass. The other thing around our development strategy is we’ve entered markets like California and like Texas in a big way. Once you get that first flagpole or tent-pole Cambria in that marketplace, like we do in New York City in Time Square, it then provides that sort of you get an added benefit of brand awareness and developer awareness and consumer awareness that all comes from that benefit. So I think when you think about critical mass, it differs by the segment that you are looking at and also about where the hotels are located. Dom, you want to address the other.

Yes. So in terms of recycling the money, the goal is three to five years. I think this year there’s a couple of potential opportunity to recycle, we could see maybe $10 million or still coming in, as I had mentioned the $40 million to $50 million this year deploying is the target on the net investment front. But on average, the goal would be somewhere in that three to five-year range in terms of recycling the capital.

So is there a point at which after the 100 hotels, I suppose, do we stop seeing money going out the door and start or does it become just a net inflow? Or is it a total inflow?

No. I think the way that I would answer that is once you get to that critical mass, the level of investment that’s required to partner with a franchisee would be reduced. It doesn’t mean that we are going to just stop investment that is the life switch and just cut it off at 100 hotels. But just the level of investment that will be required is just dramatically reduced.

Understood. Thanks very much for taking my questions. Good luck.

No problem.

Thank you. And our next question comes from the line of Jared Shojaian of Wolfe Research. Your line is open. Please go ahead.

Hi, thanks for taking my follow-up. I just want to get some more color on the RevPAR comments, because obviously you responding today. Dominic, I think you said fourth quarter RevPAR is going to strengthen because of improved leisure in business. Are you already seeing that acceleration and improvement? Or is it just your expectation that, that’s going to materialize? Or is this just timing with the holiday shifts and not really comment about core demand?

I think it’s a little bit of both. When you take a look at TravelClick data specifically, I think we are confident in that uptick in quarter four, when you take a look at the traction of our – what I said, our revenue management program, we are seeing – with revenue management an uptick of 6% for the hotels that are using revenue management. So we are confident that as we continue to roll that out, I think it would result in an uptick. And then obviously with the timing shift, you are talking about 40 basis point shift from Q4 – excuse me, from Q3 into Q4 certainly benefit us well.

Okay, great. Thanks guys.

No problem.

Thank you. And this does conclude our question-and-answer period. I’d like to turn the conference back over to Mr. Steve Joyce for any closing remarks.

Thank you all for joining us. Thank you, Pat and Dom. As you can see, we’ve enjoyed a strong quarter and first half of the year and we’re excited about what is coming in the latter half. We continue to provide the right tools and services to help increase franchisee profitability, which then fuels our development pipeline and the pricing of our brands. The strength of our core brands continues to demonstrate a strong, consistent business model for our shareholders. Our momentum in upscale is surging and international operations are growing. Finally, with the appointment of Pat as my successor as President and CEO, we will continue to deliver on the company’s current business objectives while driving new ideas that result in positive business growth now and into the future. This optimism is on our continued long-term growth prospects and our ability to drive excellent results for our company and our shareholders. As always, we appreciate your interest in Choice Hotels. That concludes our call for today. Thank you very much.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Have a great day.