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By Michelle Chang, CFA | 11-05-2010 05:14 PM

Choice Hotels: Leisure Travelers Back on the Road

Choice Hotels CEO Steve Joyce has been pleasantly surprised by the strength of leisure travel in the second half of 2010 given the elevated unemployment level.

Michelle Chang: Hi. This is Michelle Chang. I'm a stock analyst and we are here at the Morningstar Stocks Conference and joining me today is Steve Joyce, CEO of Choice Hotels. Thanks for joining me today.

Steve Joyce: Good morning, Michelle.

Chang: So, we like Choice Hotels because they have a great asset-light business model, produces great margins and returns on invested capital, and we think that deserves a narrow economic moat. Can you tell us a bit more about the business and what else gives Choice a competitive advantage over its rivals?

Joyce: Yeah, we think our pure franchise play position, because that's all we do is franchise, gives us the opportunity, and now that we have developed really a massive scale – we're at 6,000 properties worldwide. That allows us to generate a lot of value for our franchisees, but it also – we can do it without investing a lot of capital and so the margins that we run both on our business of the franchising it and our return on investment is really quite impressive.

That allows us to provide a lot of value to our franchisees, to grow the business without putting a lot of capital into it and then seek out new opportunities where our scale can help us. So, one of the things we've got a big push on now is internationally, and the nice thing about our business is, we do both new build and conversions.

In this cycle for the next couple of years, we believe all the action is going to be in conversions. We think that puts us in a really good place to capture more than our fair share, continue to grow our share of not only the U.S. market, but also hopefully some internationally as well. And to look to continue to grow our base of franchisees and properties.

Chang: Sounds great. Also, as you mentioned, the sort of new development market is slowing down, financing is tough for franchisees to find. Dig into a little bit more detail about the commercial markets. Do you see that both domestically and internationally?

Joyce: Yeah, where we're focused and where the markets that look the same are really, if you look at the U.K. and Europe and you look at the U.S., very similar characteristics of pretty tough environment financially, pretty tough financing environment. Construction financing really not available, but lots of independent or other branded properties that are looking to upscale their property to make an investment, hopefully, make their hotel more revenue and profit intensive.

So, we see real opportunity over the next couple of years for our brands, particularly for Quality, Econo Lodge and Clarion, with our single advantage that we've got, which is our above property management system. We've got the only really truly Internet-based systems out there that are massively distributed. And so that's going to give us a real advantage because our cost to conversion for an individual franchise is lower as a result of the fact that they don't need to buy equipment and cabling and all those other stuff.

Basically if they've access to the Internet, they've got access to our systems. That's going to really help us in that conversion market and we are also well known for our brands. People know that when they convert to our brands that we are going to generate real business for them, that's not true for the rest of the brands.

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