Choice Hotels International Inc

NYSE:CHH

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Choice Hotels International Fourth 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. Actual results may differ materially from those indicated in forward-looking statements and you should consult the Company's Form 10-K for the year ended December 31, 2016, and the Company's other SEC filings for information about important risk factors affecting the Company that you should consider.

These forward-looking statements speak as of today's date and we undertake no obligation to publicly update them 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 fourth 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 Pat Pacious, Chief Executive Officer of Choice Hotels International Incorporated. Please go ahead, sir.

[Pat Pacious, President and Chief Executive Officer]

Thank you. Good morning. Welcome to Choice Hotels' year end 2017 earnings conference call. Joining me this morning is Dom Dragisich, our Chief Financial Officer. 2017 was a transformative year for Choice Hotels, proof that our strategy is working. Last year we increased our pipeline of new hotel franchises. We increased the percentage of Choice proprietary revenue delivered to our hotels and this allowed us to increase the pricing of our franchise agreements. We also invested in our future by acquiring a growing brand WoodSpring Suites. Focusing on our current brand that delivered great return to our owners and reinventing our technology infrastructure. 2017 was our best development year since 2007. And we awarded 704 franchise agreements.

We also accelerated the growth of our domestic system size. Choice opened nearly one hotel per day in the US for a total of 346. Our development results were achieved through an ideal mix of current and new owners. 60% of our new franchise agreements in 2017 came from existing or returning franchisees. This means that our focus on franchisee profitability is both retaining current owners and growing our owner base by attracting new capital to our system.

These results reinforce the fact that our efforts to increase Choice proprietary revenue delivered to our hotels are working. Proprietary contribution continued to grow in 2017, on average nearly $6 out of every $10 of revenue come from our proprietary channels. Choicehotels.com continues to be the focus of our distribution strategy and as a result, our websites delivery grew faster than all other channels.

The initiatives that are helping us increase our proprietary contribution include our award winning hotel loyalty program. Choice privileges added more than five million new members in 2017, that's nearly 10 million users added in the last two years. Guests' love this program. USA Today recently rated it The Best Hotel Loyalty Program in the US for the second year. Our 35 million strong member base is a powerful driver of demand and guest retention for our franchisees.

Reservations and revenue also continue to increase from the Choice Hotels mobile app. We are making it easier than ever for consumers to connect directly with us on mobile and are creating a more experiential interaction. We recently launched our partnership with delivery.com giving guest the ability to order services on their Choice mobile app and get rewarded with points. Our industry leading tools and powerful distribution channels are fueling growth and attracting new capital. This enables us to increase the pricing of our franchise agreements.

In 2017, our effective royalty rate grew by 19 basis points. In fact all three of our royalty levers rooms, revenue and royalty rate experienced growth. Delivering sophisticated revenue management tools is essential to our value proposition and helping franchisees drive RevPAR. In 2017, we more than doubled the usage of our price optimization tool SmartRates. Through year end Comfort Hotels representing 60% of the brands revenue are now using our revenue management service. On average hotel's using this service for at least six months realized RevPAR premiums and gains in RevPAR's index compared to Comfort's not using the service.

The majority hotels at our enrolment system had been on it for less than six months. So we do expect continued upside for RevPAR as the true benefit of these services is realized. Another significant accomplishment in 2017 was the agreement to acquire the WoodSpring Suites brand and franchise business. The acquisition was completed this month and fits perfectly into our well segmented family of brands as a new construction economy extended-stay brand.

Heading into 2018, we see opportunity in this segment. Extended-stay has reported some of the most impressive gains in demand lead the hospitality industry in annual RevPAR growth in 2017, with the strongest gains coming from economy extended-stay. With the addition of the WoodSpring Suites brand Choice nearly tripled the size of our footprint in extended-stay and now offers more than 350 properties. WoodSpring is a brand of tomorrow. Still in the early growth stage of its brand lifecycle and joins our other new construction focus brands including Cambria, Sleep Inn, Mainstay and Comfort. All of which have a robust pipeline.

WoodSpring is expanding into major markets across the country. Most recently a hotel opened in Redmond, Washington near the Microsoft campus. Other recent openings include Miami, New York, Chicago and Dallas with a pipeline of new properties opening soon in Los Angeles, Washington DC, Portland, San Francisco and San Antonio. We like the WoodSpring product, its performance, market presence and business model. These are all newer hotels the average WoodSpring was built within the last seven years. And the brand experienced 25% unit growth, 21% RevPAR growth and 48% gross room revenue growth over the last three years.

WoodSpring Suites is a brand that has demonstrated ability to drive franchise development and franchisee success. In connection with the completion of the acquisition we've already added 19 newly executed franchise agreements under this brand by converting formally company-owned pipeline projects into third-party franchise commitments. There are 17 WoodSpring suites expected to open in 2018 including two that already opened in January. With the continued acceleration of openings planned in 2019.

WoodSpring is perfectly tailored for growth oriented development and aligns closely with our community of Cambria owners who have significant capital growth. Also fueling our growth in the extended-stay segment is our Mainstay suites brand. Mainstay had its best year ever [technical difficulty] 2017 doubling the number of executed contracts [technical difficulty] over the previous year.

In the mid-scale and upper mid-scale segments, we continued to be proven leaders as demonstrated by Comfort's strong results in 2017 and the Move to Modern initiative ensuring up-to-date design at every Comfort Hotel. Our commitment to this brand has resulted in a major renaissance and a healthy growth pipeline. Comfort opened more than one hotel a week in 2017 and we awarded nearly 150 new franchise contracts. The pipeline now totals nearly 300, more than 80% of which is new construction.

In 2018, Comfort openings are expected to accelerate even beyond the impressive 2017 level. Choice also continues to be strategically focused on the upscale segment as a key growth pillar. In the upscale segment Cambria Hotels and the Ascend's Hotel Collection have aggressively expanded our presence with executing contracts up 32% year-over-year. Our strategy to open in high visibility locations in key markets is attracting new developers to Choice and provides another option for existing franchisees looking to expand their portfolio.

Our domestic upscale room count is nearly 18,000 which is up 28% from the previous year. Cambria has been one of several true growth engines for Choice. In 2017, we had the most Cambria opening in a single-year ever, including a beautiful new property in the Arts and Warehouse District of New Orleans, just a short walk from the French quarter and the Convention Center.

We also recently opened a new property in the heart of music city, Nashville. Cambria now has hotels opened or in the pipeline in 38 of the top 50 US RevPAR markets. We continue to invest in Cambria resulting in the largest pipeline in the brands history. The Ascend Hotel Collection is also experiencing an exciting expansion trajectory with one of its best growth years in 2017. The first and largest soft brand and a concept Choice pioneered. Ascend opened over 50 new properties in 2017. We currently have more than 200 Ascend Hotels open globally with more than 50 in the pipeline. Combined the global pipeline for Cambria and Ascend exceeds 17,000 rooms.

Finally Choice also invested in making sure we have the industry's most advanced technology bar none, choiceEDGE is the first new global reservation system from a hotel company in over 30 years. We take great pride that we currently have the newest and most technically advanced platform in the lodging industry. This 100% cloud-based, state-of-the-art distribution platform is built to handle effectively the current and future volume on digital channels. It also leads the way for the industries acceleration towards global digital communication and guest experience personalization through data analytics.

Today the platform successfully manages all distribution for Choice Hotels. Optimizing rate, inventory, availability, shopping, booking and reservations for its website, mobile apps, call centers and third-party distribution partners. In summary, our 2017 results prove that our strategy is working. As we build on our foundation we're committed to growth. We will continue to expand our footprint aggressively with our core brands in midscale and upper midscale. Growth share in upscale by adding more properties in key markets and build on WoodSpring success in the attractive extended-stay segment. This all fueled by a commitment to our franchisees profitability and our ability to leverage the industry's most advanced technology.

I'd now like to turn it over to our CFO. Dom Dragisich who will share more on the specifics of our financials results. Dom?

[Dom Dragisich, Chief Financial Officer]

Thanks Pat and good morning, everyone. I'm happy to report that 2017 was another year of robust growth for Choice Hotels. Once again we posted record results for revenue, operating income, adjusted EBITDA and other key metrics and we expect this momentum to continue into 2018. Our strategy which is fueled by our growth pillars is working. Most notably, we continue to strengthen our core brands and our momentum in the upscale segment continues to accelerate. We also acquired a new brand that provides significant runway for future growth.

Before we share our results, I'd like to touch on tax reform and the recent completion of our WoodSpring Suites acquisition. We are very encouraged by the impact tax reform will have on our corporate results and the potential benefits it may provide to our franchisees. The reduction of our corporate tax rate to 21%, the creation of a territorial tax system in the immediate capital expensing of certain qualified property is expected to lower our annual effective tax rate to 23%. This represents a $25 million reduction in annual cash tax payments.

In addition we're projecting access to an additional $25 million in cash annually related to foreign earnings. Finally, the mandatory repatriation provision of the tax reform legislation resulted in a repatriating approximately $20 million of foreign earnings in the first quarter of 2018. These repatriated earnings were used towards funding our acquisition of WoodSpring Suites which we're excited to welcome to our family of brands.

The acquisition of the WoodSpring Suites franchise business bolsters our presence in the extended-stay segment and will allow us to build on the new construction growth of our Mainstay suites brand which - as Pat has mentioned had its best year ever in 2017. We're impressed with the system-wide occupancy of the WoodSpring portfolio that averages nearly 80% and serves a range of guests in new business travel segment that complement our existing leader strength.

Combining WoodSpring with our existing extended-stay portfolio would have increased our 2017 proforma royalty revenues by $18 million and increase our EBITDA by approximately $15 million. And both of these figures are expected to accelerate. The value of this acquisition will be further enhanced by the pipeline of new openings in 2018 and beyond. Near term development commitments and the tax structuring benefits we expect to achieve. To sum it up, tax reform and our acquisition of WoodSpring suites position us well to further accelerate our growth trajectory in 2018 and beyond.

Now let's discuss our fourth quarter and full year performance in more detail. Please note that the discussion our 2017 results excludes the impact of the tax legislation signed into law on December 22 and other items. A complete reconciliation of our adjusted results to the comparable GAAP measures can be found in Exhibit 6 of our earnings release.

The enactment of tax reform requires us to record a one-time charge totaling approximately $40 million in our fourth quarter results. these charges primarily relates to one-time mandatory transition tax on previously deferred foreign earnings and the effect of changes in income tax rates on the deferred tax assets. While the one-time transition tax impacted our fourth quarter results, the actual cash tax payments will be paid over an eight-year period.

As you can see in our release today, we reported adjusted diluted earnings per share of $0.63 for the fourth quarter. Our result exceeded the midpoint of our previously published range by $0.02 per share and the top end of the range by $0.01 per share. The adjusted earnings per share performance for the quarter reflects a 13% increase from the same period of the prior year and our full year adjusted diluted earnings per share increased 14%.

Our fourth quarter financial performance was highlighted by revenue growth of 14% over the prior year period and adjusted EBITDA for the quarter of $64.5 million, a 15% increase over the same period of the prior year. Next, our commitment to franchisee profitability by driving incremental revenues to hotels and providing tools and resources to efficiently manage their operations has continued to result in strong operating performance for our hotel franchising business.

As a result, our fourth quarter hotel franchising revenues increased 11% from the same period of the prior year to approximately $102.9 million. The growth of our hotel franchising revenues reflects improvement in all revenue streams including royalty revenue which increased 8% to $79.6 million in the fourth quarter compared to the same period of the prior year. And our initial and re-licensing fees which increased 16% over the prior year quarter.

Domestic royalties continue to pose strong growth increasing 8.5% to $74.2 million in the fourth quarter compared to the same period of the prior year. Our fourth quarter domestic royalties continue to be fueled by the improvement of all three critical levers that drive growth. These include our domestic system-wide RevPAR which increased 2.2%, hotel systems size which increase 2.6% and our effective royalty rate which increased an impressive 19 basis points versus the prior year quarter.

Our RevPAR growth of 2.2% for the fourth quarter and 2.5% for full year 2017 was in line with our expectations which considered potential one-time impacts. As we discussed in our previous guidance due to a lower percentage of our portfolio located in the Texas area, our RevPAR performance benefited less than the overall industry from the lift [ph] provided by Hurricane Harvey due to the displacement of residents and the influx of workers helping to rebuild the devastated areas.

Alternately, our fourth quarter 2016 RevPAR benefited from the impact Hurricane Matthew had on the Carolinas where a larger percentage of our portfolio resides, resulting in our fourth quarter 2016 domestic RevPAR increasing 5% over the same period of the prior year and creating tougher comparable results.

The current business environment and labor conditions remain robust and we believe these conditions will continue to have a positive impact throughout the year. In addition, and as Pat had mentioned we continue to increase the number of Comfort's enrolled in our revenue management program and expect to complete the rollout to all Comfort Hotels in 2018 which is expected to improve RevPAR. Based on current RevPAR and macroeconomic trends and the continued implementation of pricing tools by our franchisees we're forecasting continued RevPAR growth in 2018 and expect our full year 2018 RevPAR to increase between 1% and 3%.

Growth in our royalty revenues also continues to be driven by the pricing of our franchise agreements. Our domestic effective royalty rates expanded by 19 basis points in the fourth quarter and also increased 19 basis points for the full year 2017. The growth in 2017 built on the already impressive growth posted in 2016 when our effective royalty rates increased 11 basis points for the full year.

In fact, the 30-basis point increase in the domestic effective rate over the last two years equates to over $21 million in incremental royalties on an annualized basis. Our ongoing focus on improving business delivery to our franchisees should allow us to continue to improve the pricing of our franchise agreements. Effective royalty rate growth will continue in 2018 and we expect our full year rates to increase between 7 and 9 basis points.

At Choice we have a long-term view. We continue to invest in strengthening our core brands and accelerating our growth in the upscale segment. This includes efforts to increase our proprietary contribution, implement industry leading tools, focus on franchisee profitability and harness the power of our well segmented brands to fuel development growth. During the fourth quarter of 2017, we executed 289 new domestic franchise contracts and 8% increase from 2016. In total, 704 domestic franchise agreements were executed in 2017, a 9% increase over the prior year. This represents the highest number of agreements executed since 2017.

We're particularly pleased with the increase in number of new construction domestic franchise agreements which increased 23% for the full year 2017. Our exceptional new construction and overall development results are highlighted by the success of our Comfort and upscale brands. New domestic franchise agreements execute in 2017 for the Comfort brand increased 19% over the prior year and we executed 81 new agreements for our upscale brands. Cambria and the Ascend Hotel Collection.

In fact the executed agreements for full year 2017 in the upscale category increased 31% from the prior year and the our domestic pipeline for the upscale brands exceeded 135 hotels at December 31, 2017. These 704 agreements represent over 50,000 rooms including over 8,500 rooms in the upscale segment, an 18% increase over the prior year for that segment. Sleep Inn also continues to deliver results for our franchisees and developers are taking notice. After posting 50% increase and new domestic franchise agreements in 2016, we executed 64 new domestic franchise agreements for full year 2017, a 25% increase over the prior year.

Overall, Choice's domestic pipeline increased 18% in 2017 over the prior year to 853 hotels representing over 65,000 rooms. We are also excited to welcome WoodSpring Developers to the Choice family. We expect our new relationships with these developers to benefit our line-up of new construction focused brands and will allow us to expand WoodSpring's footprint.

Furthermore, as industry fundamentals remain favorable we expect continued supply growth and robust 2018 franchise sales activity. Our robust pipeline translates to the continued growth of our domestic franchise system. We were able to accelerate the number of hotels opening in our domestic franchise system by 2.6% for the year ended 2017 compared to the 1.6% growth reported for the year ended 2016. Excluding the impact of the Comfort brand transformation strategy the number of net open units grew on our domestic system by nearly 170 which represents a 4.5% increase compared to the prior year.

During 2017, we opened 346 new domestic franchised hotels compared to 299 in 2016 representing a 16% increase. We more than doubled the growth of our Ascend Hotel Collection which opened 44 US hotels during 2017 compared to 17 in the prior year. Based on these development results and industry-wide supply growth projections we expect growth for our domestic franchise system size excluding WoodSpring Suites to increase between 2.5% and 3.5% over 2018.

Considering the WoodSpring acquisition the increase in our domestic franchise system-size is expected to range between 7% and 8%. The success of these critical growth factors results in a top line franchising revenue growth as well as improvements in our adjusted hotel franchising EBITDA which increased 7% from the prior year fourth quarter and 9% for full year 2017 compared to the same period of the prior year.

Finally, I'd like to share our outlook for 2018. As outlined in our earnings release the company adopted the new revenue recognition standard on January 1 using the full retrospective method. While the adoption of the standard will not change our cash flows or cash available for return to shareholders. It does impact the timing of revenue recognition in the classification of certain items within the income statement. The forecasts presented in the outlook section of our release were prepared utilizing the new revenue recognition standard and include the impact of our WoodSpring Suites acquisition. However our outlook excludes the impact of integration and acquisition related costs as well as the impact of net surpluses or deficits generated by marketing and reservations activities which will now be reported as a component of net income under the new standard.

To facilitate the review of our 2018 outlook against our 2017 results, the company also calculated its 2018 forecasted results excluding the impact of the new revenue recognition standard. Excluding the impact of the new standard and other items, the Company's adjusted EBITDA is projected to range between $330 million and $341 million, a 14% increase at the midpoint. And our adjusted diluted earnings per share is projected to grow 26% at the midpoint.

In summary, we're very pleased to report another record setting year. We're optimistic that our strong performance will continue in 2018 as we drive results by executing on our strategy and making investments that create additional runway for growth.

At this time, Pat and I will be happy to answer any questions.

[Operator]

[Operator Instructions] our first question is from Anthony Powell with Barclays. Your line is now open.

[Anthony Powell, Barclays Capital]

Can you talk about your overall brand mix and I guess M&A in particular? You've expanded into the economy standard [indiscernible] WoodSpring. What other chance the other segments do you think you could add to your portfolio and would you rather acquire brand or build it from scratch?

[Pat Pacious, President and Chief Executive Officer]

And so I think if you look at our portfolio today. I mean our real focus right now organically is on growing in the upscale segment. That leads open for us in the future upper upscale, it also leaves open for us the upscale extended-stay part of the industry as well. So there's significant current gaps in our portfolio that we could fill in the future. As you know right now we're focused on the upscale segment and seeing a lot of progress with our two, the Cambria and Ascend Hotel Collection on that front.

We look at M&A, we do look for opportunities from a tuck-in perspective WoodSpring is a great example of that, where we bring a fantastic growing brand onto our platform, that fits nicely into that segment and really allows us to bring the distribution power that we bring, the marketing and reservations activity, the technology to these owners and help them improve both their same-store sales and their return on investment. So you know we do have a - if you look at the 12 brands that we have is an interesting mix there or brand we've grown organically and brands we've acquired over the years. And so we do look at M&A and non-organic growth we're really looking for those things that drive the best returns for our shareholders and can drive the highest return on investment for our owners.

[Anthony Powell, Barclays Capital]

Got it. Thanks and one more in SG&A, it was a lot higher than we thought, it was going to be in the fourth quarter was that, anything one time and how do you expect to your SG&A spend to kind of trend going forward?

[Dom Dragisich, Chief Financial Officer]

The two potential impacts that we saw come to fruition in the fourth quarter one of which was just the robust development quarter that we had, obviously that triggered some variable compensation expenses result of those sales as well as there was a one-time timing as it pertains to our international convention which happens on an every other year basis, so you saw a slight spike in Q4, 2017 versus 2016.

[Anthony Powell, Barclays Capital]

Great. That's it from me. Thank you.

[Operator]

And our next question is from Thomas Allen with Morgan Stanley. Your line is now open.

[Thomas Allen, Morgan Stanley]

First question a big picture question. Your guidance to 1% to 3% RevPAR growth for 2018 that's kind of in line with your competitors or your peers. What are you thinking are kind of gives and takes that could drive you to have better than peers growth versus it could kind of hold back your growth a bit? Thank you.

[Pat Pacious, President and Chief Executive Officer]

I think, Thomas the things that can exceed that range or be in the top end of the range. It really comes down to the tools we're putting in place. As we mentioned, the number of things we're doing on the revenue side of the house. The SmartRates tool and our revenue management service that more of hotels are coming onto. I particularly point to the number of Comfort Inn's that joined that service back in the fourth quarter. what we see in those hotels, is it takes about six months for them to work with the revenue manager that they're working with to really begin to see the benefits and begin to accept many of the recommendations on rate and so I think when you look at that opportunity as more of those hotels come online, more of those hotels begin using the revenue management service. We see potential on that side.

On the downside, it really comes to. I mean if you look at sort of what happens when you have these natural disasters depending on where they hit and the type of activity, those things can have a significant impact on the business. I think with looking back on last year, the eclipse had a nice uptick for the industry in certain locations. So there is some interesting sort of which is called natural phenomenon that can impact you both on positive one and the negative front.

[Thomas Allen, Morgan Stanley]

Helpful. Thank you. And then just a couple of questions. I just wanted to clarify few things on unit growth. So you've increased your pipeline by 102 hotels in the fourth quarter, is that all organic or did that include WoodSpring's in there and then just another question around your unit growth guidance of 7% to 8% including WoodSpring. I calculate WoodSpring alone will be around 6% and then your guidance - I think 2.5% to 3.5% excluding, so what am I missing there? Thank you.

[Dom Dragisich, Chief Financial Officer]

So on your first question that is all organic. It does not include the impact for the WoodSpring acquisition. As it pertains to our growth impact or our growth estimates for 2018. It is 2.5% to 3.5% to call off midpoint 3% or so which is what we've talked about in the last quarter. With regards to the Comfort transformation strategy, we do not anticipate a drag in 2018. We expect that portfolio to remain flat and then obviously in 2019 and beyond, as the new construction pipeline comes to fruition was typically about 18 to 36-month window to get some of those hotels opened. You should see some of that unit growth accelerate back to our historical levels.

[Thomas Allen, Morgan Stanley]

And then just how many incremental rooms or hotels are you going to add from WoodSpring? Or rooms would be helpful for WoodSpring in 2018?

[Dom Dragisich, Chief Financial Officer]

So we're adding about 240 hotels as of today and we anticipate another 15 or so openings in 2018.

[Thomas Allen, Morgan Stanley]

Okay, I'll follow-up offline. Thank you.

[Operator]

Your next question is from Shaun Kelley with Bank of America. Your line is now open.

[Shaun Kelley, Bank of America Merrill Lynch]

Dom, I think maybe it was last quarter or two quarters ago. You guys mentioned in the royalty like a little bit of a target around the royalty rates and as we look at your guidance for 2018. I think you're in a 7 to 9 basis points, but I think we were thinking that number was going to be little higher. Could you just give us a little bit of a bridge there? And what might be moving in that and or did you pull some of that forward into some of that growth forward into 2017 that will be harder to drive in 2018?

[Dom Dragisich, Chief Financial Officer]

It's exactly right. It's what you said at the tail end of the comment there. You know at the end of the day, last quarter we have talked about 17 to 19 basis points or so, we actually came in at the high end of our expectation which created a bit of tougher comp phenomenon. So we had always said that we were going to be somewhere in the low, double digits or high single digits in terms of effective royalty rate growth. But really what it is, it's the tougher comp against 17 [ph].

[Shaun Kelley, Bank of America Merrill Lynch]

Got it. Can you just elaborate a little bit on what is still - what's the biggest tailwind of driving the royalty rate growth that you sort of have left I guess as you think about 2018 and what will be the impact of WoodSpring as well on the kind of effective royalty rate?

[Dom Dragisich, Chief Financial Officer]

So in terms of tailwinds you essentially have some of the burn offs obviously. I talked about in the past calls really three drivers, one of which was we increased the rack rates across the board. So as we continue to sign new contracts those contracts have higher pricing obviously associated with them. The second is the burn offs on the discounts that came out of the recession in 2018. In terms of WoodSpring. WoodSpring's effective royalty rate is actually anticipated to have a positive impact overall. It commands a much higher royalty then the rest of our portfolio.

[Shaun Kelley, Bank of America Merrill Lynch]

Great and sort of last question for me. But just as - lot of people have been talking about the RevPAR outlook for 2018. It seems like they're sort of a general industry-wide upside buyers even though people are kind of keeping, trying to keep expectations a little bit lower. So just kind of for your guys specifically. When you look at your mix of hotels and things that could drive performance to be a little bit better. Specifically where do you see some areas of opportunities, do you think it's a little bit more on the leisure side, do you think it's a little bit more on the corporate side? Any specific indicators or things that you think is particularly important to Choice as we think about your portfolio for 2018?

[Pat Pacious, President and Chief Executive Officer]

Yes I think if you look at who our customer is and you look at the employment numbers in particular really over the last two years. A lot of those folks have come back into the workforce; you're seeing wage increases as well starting to sort of finally make their way into the broader economy. Particularly in the segments in the middle class segments that drive a lot of the core demand into our hotels. So in that front that continues to be a positive. You look at the long-term demographic trends 10,000 baby boomers retiring every day. Those people have a lot more discretionary income. They're spending that income on experience and less on durable goods. So we do see the long-term trends on the leisure front to be particularly a powerful story for our segments and our brands in particular.

And I think the impact of some of the tax reform items that you're seeing, you're seeing bonuses, you're seeing some things that impact people's ability to have more discretionary spend, so that's a positive and then I would say on the business side of the house, business travel. We did see last year a 3% growth in our GDS business, we're seeing our mid-week occupancy which is a good indicator of business transient travel improved and with the addition of WoodSpring we're going to be bringing more business traveler type segments to the portfolio. Think of skilled nursing and people who are traveling for training, military basis those types of things. Those people who go to places for that sort of two to three-week or month long stay. We - with the addition of WoodSpring I think we're going to be able to bring more product that will help overall lift our business travel and mix.

[Shaun Kelley, Bank of America Merrill Lynch]

Thank you very much.

[Operator]

And our next question is from Joseph Greff with JPMorgan. Your line is now open.

[Joseph Greff, JPMorgan]

With respect to your 2018 domestic unit growth guidance, that's 7% to 8% including WoodSpring that's a hotel count growth rate? What does that translate on a room's basis?

[Dom Dragisich, Chief Financial Officer]

Yes, so to be honest with you. We typically do provide guidance from a unit's perspective it is roughly in line from a rooms growth perspective, just to comment on the discrepancy between rooms growth and unit growth that you saw in 2017, a lot of that had to do with the mix of hotels. Obviously our Comfort transformation strategy we talked about existing a number of larger hotels out of the system which is why you see a bit of gap between our room's growth and our unit growth in 2017. As the Comfort transformation strategy winds down, we do anticipate in combination with much more of a focus on our upscale segment for our room's growth to mere our unit growth into the future.

[Pat Pacious, President and Chief Executive Officer]

And just looking at the Comfort pipeline for deals that we executed back in 2016 versus what we executed in 2017. There's a higher room count in those new constructions from 2016 to 2017 as well.

[Joseph Greff, JPMorgan]

Great and then my final two questions. With respect to your 2018 EBITDA guidance, how much of the total amount of WoodSpring Suites synergies have been there and how much do you have left on the share in terms of dollar amount? I guess both for 2018 and what would be beyond 2018 then; my final question would be what's the cash tax rate. These are the effective tax rate for 2018 would be 23%, the cash tax rate 18 and maybe how to think about it for beyond 18 [indiscernible]. Thank you.

[Pat Pacious, President and Chief Executive Officer]

Okay, Joe let me start and then I'll have Dom fill in. so when we bought WoodSpring we didn't have a significant synergy number that we had to achieve. We're actually looking to make a few investments on that front. So it was not an acquisition that was based on achieving a bunch of cost synergies on that side of the house. I think when you look at our - your second part of the question was really around the EBITDA question. Dom, you want to fill in the?

[Dom Dragisich, Chief Financial Officer]

Yes and I think the best way to describe the EBITDA guidance a very basic bridge. When you take a look at our 2017 EBITDA on apples-to-apples basis, we're growing that EBITDA by about 9% year-over-year. WoodSpring adds about $15.5 million of EBITDA in year, we expect that obviously to accelerate as we see a lot of these near term development contracts come to fruition and whatnot. So we expect that contribution to be even higher. In terms of our cash tax, our cash rate for 2018 obviously we had to pay the one-time repatriation tax over the course of, an eight-year period about 8% of that repatriation is in 2018. So our effective rate is right around 23%. I would say somewhere in the ballpark of about 25% in terms of the cash tax rate.

[Joseph Greff, JPMorgan]

Great. Thank you.

[Operator]

Our next question is from Robin Farley with UBS. Your line is now open.

[Robin Farley, UBS]

I wonder if, I guess about a year ago you talked about the royalty rates being higher in 2018 and then kind of going back down to a lower rate of increase in 2019 because you would be getting past the benefit of the contracts during the recession burning off. I'm wondering if that's still your expectation for 2019 and then also I don't know if I missed in your opening comments, as you quantify any impacts from hurricane regions in Q4. Thanks.

[Dom Dragisich, Chief Financial Officer]

Sure. So in terms of the effective royalty rate, that is correct. We had said last quarter that we were somewhere in the high single digits, low double digits in terms of 2018 and then slightly lower rates in 2019. We expect to be somewhere in probably in the mid-single digits in 2019. Obviously we'll have to see how 2018 plays out in terms of comps and whatnot. Now in terms of our Q4 RevPAR of 2.2%, there were two major impacts associated obviously with the Texas and the 2016 Carolina hurricanes. So in Texas we have a under penetration which I talked about in my prepared remarks, we think that could have actually created almost 90-basis point gap in terms of the industry and then those hurricanes in Carolinas for 2016 created probably 30 to 40-basis point gap against the industry. So right there from a one-time perspective our RevPAR could have been closer to call it 3.5% to 4%.

[Robin Farley, UBS]

Okay, now that's great. Thanks and then lastly, I don't know if you commented lately on SkyTouch and whether SkyTouch itself is it a breakeven rate or not? I know it's lumped in with other non-hotel EBITDA, but just some on a standalone basis, is SkyTouch at breakeven yet? Thank you.

[Pat Pacious, President and Chief Executive Officer]

Yes, I think we're really pleased with the pace of sales that we've seen in SkyTouch. So in 2017 we've finished the year north of 500 commercial hotels that are on the platform closing in about 40,000 rooms that are currently using the system. I think when you think about breakeven again this is a - because it's Software as a Service you get incremental cost upfront regarding sales and commissions and that type of thing and then it's a recurring revenue stream. You see a recurring revenue in the out years, but I think by the end of 2018, by Q4 of 2018 we do expect SkyTouch to be at breakeven.

[Robin Farley, UBS]

Okay, great thanks.

[Dom Dragisich, Chief Financial Officer]

To quantify the impact in 2017, Robin. It was only about $2 million drag on our EBITDA. As Pat had mentioned we expect that to actually improve into 2018 and be right close to that breakeven point.

[Robin Farley, UBS]

Okay, great. Thank you very much.

[Operator]

[Operator Instructions] our next question is from Jeff Donnelly with Wells Fargo. Your line is now open.

[Jeff Donnelly, Wells Fargo]

Maybe I could just circle back, maybe to the M&A question that was asked earlier, just ask it differently. I'm just curious, do you think WoodSpring is the first of potential future external growth investment opportunities or do you really kind of think of it was just one off opportunistic purchase?

[Pat Pacious, President and Chief Executive Officer]

Yes, I would say we look at lot of things that either come for sale or in a case of WoodSpring was something I think, when I look how that deal came to fruition. It came through a discussion with the current or the previous owner and really looking to make sure that we look on opportunity that fits nicely with our current model. So as you can see, we did not get into the management company business as a result of that opportunity and it fits very nicely with our core business. So I think a lot of it has to do with the timing, a lot of it has to do with us getting a deal that makes sense for Choice Hotels, makes sense for the abilities we have to bring business into these hotels and drive returns for these owners. You know I think when you just think about longer term there where there are other opportunities out there, we look at lot of things, we look at lot of things in the hotel space, we look at lot of things in adjacencies as well. it comes down to what's best for our shareholders and what can we do from a same-store sales and return on investment for the actual owners of these assets.

[Jeff Donnelly, Wells Fargo]

And - sorry.

[Dom Dragisich, Chief Financial Officer]

I was just going to say the only thing I would add is that, our strategy does remain to be same. We're going to be disciplined and opportunistic in terms of what we go after. When you take a look at the balance sheet, the truth is we have enough capacity for most importantly internal investments first, but we certainly have enough capacity for an organic growth as well. And we're going to consider anything that is really a financially attractive deal.

[Jeff Donnelly, Wells Fargo]

And how do you think about that, you going into the management business. I know that might not be something - do you want to sort of tiptoe into maybe if the right deal comes along, you guys would consider it? I'm just curious what might be required for you to look at that segment of the business. I think the prior CEO always [ph] indicated to the extent Choice moving towards an upscale or full service strategy that would be mandated. Is that something that you guys would be willing to entertain?

[Pat Pacious, President and Chief Executive Officer]

Yes we entertain a lot of things. So if you look at what's available out there, we have looked in the past that opportunities that included that as part of it. So it's never - we will not get into that business decision. It's more of what's right for our shareholders and what makes sense from a growth perspective.

[Jeff Donnelly, Wells Fargo]

And just for me, change topics just quickly on unit growth. What are you hearing from owners out there in terms of the availability or construction refinancing? Is it been pre-consistent for them just given loan size and the type of maybe markets they're in or is it becoming a little more challenging?

[Pat Pacious, President and Chief Executive Officer]

Yes I think what you're seeing is, in certain markets so take we just talked about Texas. I was with some owners a couple of weeks ago, who are building in that market right now. So I think if you look at labor cost, you look at construction, financing and some of these markets. It's more on a market-by-market basis where you see differential, but by in large I think when you think about sort of where we are from an interest rate and debt perspective. Owners are getting their projects financed and getting it build. So I think you can look at some markets or better than others, but I wouldn't say there is a broad brush [ph] opinion to be taking nationally.

[Jeff Donnelly, Wells Fargo]

Great. Thanks guys.

[Operator]

Thank you. I'm showing no further questions. I would now like to turn the call back over to Pat Pacious for any further remarks.

[Pat Pacious, President and Chief Executive Officer]

Great. Thank you all for joining us today. Thank you Dom and everyone have a great day.

[Operator]

Ladies and gentlemen. Thank you for participating in today's conference. You may now disconnect. Everyone have a good day.