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Choice Hotels International, Inc. (CHH) Q3 2018 Earnings Conference Call Transcript


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Choice Hotels International, Inc. (NYSE: CHH)
Q3 2018 Earnings Conference Call
Nov. 8, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Choice Hotels International third quarter 2018 earnings conference call. At this time, all lines are on 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, 2017, 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 subsequently events or circumstances. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of the third quarter 2018 earnings press release, which is posted to our website at choicehotels.com under the Investor Relations section.

With that said, I would like to introduce Pat Pacious, President and Chief Executive Officer of Choice Hotels International Incorporated. Please go ahead, sir.

Patrick Pacious -- President and Chief Executive Officer

Thank you. Good morning, and welcome to Choice Hotels third quarter 2018 earnings conference call. Joining me this morning is Dominic Dragisich, our Chief Financial Officer. We're pleased to report another quarter of excellent performance, highlighted by reported diluted earnings per share adjusted for special items of $1.24, a 31% year-over-year increase. Our third quarter adjusted EBITDA exceeded our expectations with an 11% year-over-year increase, and our adjusted diluted earnings per share results exceeded the top end of our previous guidance by $0.07 per share.

Our effective royalty rate also continued its incredible growth trajectory with a 12 basis point increase over the third quarter of 2017. Plus, our system-size growth continues to meet our expectations. While our domestic RevPAR performance was lower than our previous guidance, this was driven by short-term and one-time impacts, which Dom will cover in more detail. We expect RevPAR growth to bounce back in the fourth quarter, and have already seen a 2% year-over-year increase for the month of October.

Based on our strong third quarter performance and fourth quarter outlook, we are pleased to announce that we raised our full-year adjusted EBITDA guidance by $1.5 million at the midpoint, and raised adjusted earnings per share guidance by $0.09 at the midpoint. These strong financial results lay a solid foundation for continued future growth.

It's been a year since my first earnings call with you as President and CEO. In reflecting on the past year, I've thought about what sets us apart and what makes us successful. First, we are strengthening our well-segmented and proven family of brands in a number of ways, from launching a new mid-scale brand extension, to transforming our largest brand, to growing in both the upscale and extended-stay segments.

Second, we're have incredible success as a franchisor. In fact, we are on track to have our best development year as a public company as measured by the number of new domestic franchise agreements. Third, we provide tailored franchisee resources to help our owners run profitable businesses by driving their top line revenue and bottom line results.

On my first point, our proven brands, there are four I'd like to highlight this morning. The brand we just launched, Clarion Pointe; the brand we acquired in February and are significantly growing, WoodSpring Suites; the brand we're building, Cambria; and the brand we're transforming, Comfort.

We launched Clarion Pointe this September, and it has been well-received by the development community. Even though we announced the brand extension with only two weeks left in the quarter, we have already awarded over a dozen new Clarion Pointe franchise agreements and have nearly 75 in the development pipeline to date. The first Clarion Pointe is expected to open in the first quarter of 2019. We are hearing that Clarion Pointe is exactly what guests and developers are seeking. When sizing this opportunity, we focused on the markets and the hotels that have the potential to deliver on both rate and amenities for the Clarion Pointe brand, and we believe that the potential universe is significant -- over 1,000 hotels.

Clarion Pointe leverages the global equity of the Clarion brand, but differs from its parent in important ways. Whereas Clarion is known for supporting social and corporate gatherings with meeting and event space and a full-service food and beverage option, Clarion Pointe is a select service concept that fits the expectations of today's mid-scale guests and savvy, limited-service hotel operators. At the same time, we responded to developer demand for more limited-service conversion opportunities in the popular mid-scale segment, enabling owners to capture higher rates and new guest travel occasions. This is why Clarion Pointe is a further catalyst to our already strong development pipeline.

Next is our recent acquisition, WoodSpring Suites, which is growing rapidly. We acquired the brand when it had 238 hotels, and expect to have 250 by the beginning of next year. As of supply 30th, we awarded 55 new WoodSpring contracts, 11 of which were in the third quarter. This means we've already exceeded the WoodSpring brand's record for new contracts awarded in an entire year. Year-to-date through September 30th, we have opened 11 WoodSpring hotels in top markets like Chicago, Seattle, Charlotte, and Detroit. This growth is expected to accelerate in 2019. Additionally, in Q4, we have finalized an agreement with a developer to build more than 20 additional WoodSpring Suites over the next four years.

Turning now to the brand we're building, our upscale Cambria brand is an important component of our growth strategy for two reasons. First, Cambria, along with the Ascend Hotel Collection, has allowed us to expand our upscale footprint to meet guest and developer demand. We're pleased that Cambria and Ascend have been received so favorably. At the end of the third quarter, we have nearly 20,000 upscale rooms open in the U.S., and over 47,000 globally.

Second, Cambria is also a significant contributor to our bottom line. In fact, an average Cambria Hotel produces three times as much gross room revenue as our average upper-midscale Comfort Inn. When you consider that we expect to have more than 50 Cambria Hotels open next year, it's easy to see what an important driver the brand is for choice.

We are fully committed to Cambria's success and are strategically deploying capital to support its continued growth. As a result, Cambria is on track to set a record for openings for the second straight year. By the end of this year, we expect to open our 40th Cambria Hotel. Cambria has a total pipeline of 85 hotels, which will add nearly 12,000 upscale rooms across markets like Houston, Boston, Milwaukee, Minneapolis, Santa Clara, and Napa. Of these, 19 are active construction projects.

The final brand I want to highlight is our flagship Comfort Hotels, which we've been transforming to a $2.5 billion long-term investment with our franchisees. We are on track and steadily approaching the finish line of this multi-year effort. After hotels complete both the public space and guest room renovations, the final step in the transformation journey involves updating the hotel's signage on property and across digital channels with the new Comfort logo which we unveiled in May.

The new signage, which hotels can't display until they've completed the renovations, is a real incentive. Our research revealed the consumers would be willing to pay a higher average daily rate when they saw the updated hotels combined with the new sign. There's promising data to show our long-term investments in the brand will pay off. Comfort Hotels that completed their renovations by the end of the first quarter this year experienced third quarter RevPAR growth of 0.3%, which outpaced the upper-midscale segment by 80 basis points.

In addition to renovating existing Comfort Hotels, we're also placing emphasis on adding new construction hotels to the Comfort system. As of supply 30th, the brand's domestic pipeline is nearly 300 properties, 80% of which are new construction. This will invigorate the brand well into the future.

The power of our brand portfolio has put us on track for a record-setting development year in terms of new franchise agreements awarded. Year-to-date through supply 30th, we've awarded 469 domestic franchise agreements, a 13% increase over the same period of the prior year. Of these, 159 were awarded in the third quarter, a nearly 20% increase over the third quarter of 2017. This record development performance indicates that we are making the right investments and strategic decisions related to our brands.

One of the reasons new owners are drawn to Choice is because we offer them resources aimed at running successful businesses. Central to our ability to drive our franchisees' top line revenue is our Choice Privileges loyalty program, which now has over 39 million members. The program is growing fast, and our active population is the highest it's ever been. We have added more than 4 million members this year through the end of the third quarter. Not only do Choice Privileges members book more frequent stays, they stay with us longer, spend more during each day, and rate their stays higher than non-members. Further, over 90% of our loyalty program members are U.S.-based, so these travelers continue to stay in our nearly 5,800 domestic hotels.

You've heard me say before that we enjoy a particularly close relationship with our franchisees. Not only do we have a voluntary franchisee retention rate of 99%, but half of the new contracts signed through mid-year were with existing or returning owners. One of the major reasons we have such satisfied owners is because we're always refining our distribution strategy to support their profitability and keep up with evolving consumer behavior.

For example, Choice recently made booking a hotel room directly at our hotel-branded properties easier than ever by enabling Book on Google. This is a win/win for guests and owners alike. Travelers can now complete a reservation on Google using their saved Google credentials. Book on Google is also best for our owners, who will reap many of the benefits of booking direct, like lower commission rates than other third-party sites. It also enables us to own our customer data. Additionally, this feature makes it easier for guests to book seamlessly online and helps to minimize drop off, which means better conversions and more bookings.

In addition to our proven brands, standout franchising performance, and unparalleled franchisee resources, I'd like to close with an update on our international growth. We have made exciting progress this year executing against our international strategy to focus on high-quality multi-unit developers and operators for long-term agreements in strategic markets.

In the third quarter, we announced plans to bring seven new hotels to the Middle East under our Comfort and Quality brands, four of which are already under construction. These hotels represent the first tranche of a broader strategy with an affiliate of one of the largest tourism and travel companies in the Middle East to open 30 Choice-branded hotels in the region. In addition, we recently announced the expansion of our European portfolio by adding 13 Comfort Hotels across France, for a total of nearly 1,000 rooms.

We're rapidly expanding our international footprint in Latin America and Spain, where we have 40 hotel openings planned this year. Of these, 25 have already opened through the end of October. In addition to entering Spain and Colombia for the first time, hotels are slated to open in Brazil, Ecuador, Mexico, and Panama, across a mix of our brands. Choice's previously announced an alliance with Sercotel is contributing more than half of the 40 openings expected by year end in Spain and Latin America.

In September, we also signed a multi-unit agreement with a Mexican private equity fund to develop 20 new construction Sleep Inn hotels in that country over the next five years. The agreement is expected to add 2,000 rooms to top markets like Mexico City and Guadalajara and more than triple the size of Sleep Inn's footprint in the country.

In closing, we're pleased with our performance and poised for even more growth. We have a clear strategy. We are investing in growing our well-segmented, proven brand portfolio, for which demand has never been higher, as shown by our impressive development results. And we are an asset-light franchisor that excels at helpings our franchisees with best-in-class resources.

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

Dominic Dragisich -- Chief Financial Officer

Thanks, Pat, and good morning, everyone. As Pat mentioned, we are very pleased with our third quarter results. Today's release marks the third quarter this year where our financial performance has exceeded our expectations. We attribute this strong performance to our franchise business model which provides multiple levers to drive revenue; our investments in and ongoing strength of our midscale and economy-brand portfolio; our continued expansion in the upscale segment, with both the Ascend and Cambria brands, and our relentless focus on franchisee profitability.

Choice's business model provides multiple levers to drive top line revenue growth. These include expanding the number of franchised hotels in our system, increasing same-store sales, improving the pricing of our franchise contracts, or a combination of all three. While our third quarter RevPAR results were below our expectations due to isolated occurrences like weather and calendar events, we continue to increase top line revenue by attracting new developers and adding new hotels to our portfolio, significantly expanding the royalty rates earned from our franchisees, and increasing other revenue stream through offerings within our platform.

Bold initiatives like a state-of-the-art new central reservation system, the Comfort transformation, new brands, and our award-winning loyalty program continue to deliver strong quarterly and long-term results. Now, let's review our third quarter results and outlook in more detail. Our third quarter financial performance was highlighted by revenue growth of 8% over the prior-year period, and quarterly adjusted EBITDA growth of 11% over the same period of the prior year to $103.6 million.

We reported adjusted diluted earnings per share of $1.24, a 31% increase over the prior-year quarter. As Pat mentioned, this performance exceeded the high end of our guidance by $0.07 per share. This earnings per share outperformance was driven by two factors -- our core franchising operation, which exceeded the top end of our expectations by $0.05 per share, and a lower-than-expected effective income tax rate.

Our effective tax rate for the quarter was approximately 21.1%, compared to our initial forecast of 22.5%. This rate was primarily lower due to one-time tax benefits. We are now forecasting our full-year recurring tax rate to be 20.5%, slightly lower than our previous expectation of 21%. Choice's commitment to our franchisees continues to drive incremental revenue to hotels. As a result, our third quarter hotel franchising revenue increased 9% from the same period of the prior year to approximately $135.4 million. This was driven by our domestic royalty fees, which increased 8% to $105 million.

The critical areas that drive our domestic royalty performance include domestic units, which increased 6.8% in Q3 year-over-year; our domestic effective royalty rate, which increased 12 basis points in the third quarter over the same period of the prior year; and domestic RevPAR. We expect these key metrics to grow for the remainder of 2018 and beyond, due to our continued focus on increasing the number of customers booking directly with us and providing resources to help our franchisees optimize pricing and operate profitable hotels.

Our first revenue lever, system size, experienced another strong quarter. The number of units and rooms in our domestic system increased 6.8% and 9.6%, respectively. Our unit growth was fueled by the WoodSpring acquisition, and our Quality brand, which saw 6% increase in the number of units over the prior year. This quarter, Quality Inn opened it's 1,600th hotel in Bellevue, Washington, a noteworthy milestone and a testament to our continued strength in midscale hotels.

Moving to our extended-stay portfolio, our Mainstay brand is capitalizing on the robust demand for extended-stay properties, and increased its unit count by nearly 9%. We expect the strong growth in extended stay to continue for the next several years, as the segment is seeing more favorable consumer demand trends and renewed interest from franchisees, thanks to the WoodSpring acquisition.

We believe our steadfast focus on hotel profitability is driving franchisees to enter the Choice system. As Pat mentioned, the number of new domestic franchise agreements increased by 20%. In addition to our system size growing, it's getting younger. We are especially pleased with the increase in new construction, domestic franchise agreements, which increased 37% for the third quarter and 47% year-to-date over the comparable prior-year period.

As of September 30th, our overall domestic pipeline also increased 29% over the prior year to 968 hotels. This represents an increase of over 19,000 rooms. This robust pipeline is expected to fuel both short- and long-term domestic unit growth. Specifically, our conversion pipeline at the end of September was 19% higher than the same period of the prior year, and we expect these conversion hotels to open within the next 3 to 6 months.

Our new construction pipeline has grown 33% as of September 30th, and will be a catalyst for our long-term units, rooms, and RevPAR growth. In fact, through the third quarter, we have increased ground-breaks by 50% over the same period in 2017, and expect that figure to accelerate in the fourth quarter. We are currently forecasting a more than 70% increase in ground-breaks for full-year 2018 versus full-year 2017.

In addition to the robust new construction pipeline Pat highlighted, our new construction Sleep Inn brand now has 136 hotels in its pipeline, an increase of 14% over the same period of the prior year. It's not just our pipeline that's growing. Our opening pace is also increasing. In fact, in the third quarter of 2018, the company opened 76 new hotels, a 27% increase over the prior year. For full-year 2018, we are maintaining our domestic unit growth guidance and expect it to range between 7% and 8%. We also expect both unit and room growth, excluding the one-time increase due to the WoodSpring acquisition, to accelerate in 2019.

The second new lever is royalty rate growth, which continues to be drive by the pricing of our franchise agreements. Our domestic effective royalty rates continue to expand, increasing by 12 basis points in the third quarter, compared to the same period of the prior year. This growth was higher than expected. Therefore, we are increasing our full-year guidance by 1 basis point at the midpoint, and now expect our effective royalty rate growth to range between 12 and 15 basis points. The value proposition we provide franchisees through strong brands, robust resources, and cutting-edge technology should enable us to continue to improve pricing going forward.

Finally, we'll speak to our domestic RevPAR performance. We reported a 1.4% decline in our third quarter domestic RevPAR, which was lower than our previous guidance. On a dollar basis, this translates to approximately $1.5 million of revenue, which was offset by other revenue levers. The RevPAR decline was driven by lower occupancy rates, which declined by 160 basis points, partially offset by nearly 1% increase in average daily rates. We attribute the declines in occupancy to three primary factors -- weather-related dynamics, which include tougher-than-expected comparables from last year's hurricane activities and the solar eclipse, calendar shift in the Jewish holidays, as well as July 4th falling on a Wednesday, and finally, the Comfort brand's continued renovation activity.

While these investments create a temporary impact, we expect they will yield long-term RevPAR benefits starting as early as 2019. Over 1,000 Comfort hotels are either under renovation or have recently completed their upgrades. This number exceeds our previous expectation, and had a short-term impact on Q3 RevPAR. Today, hotels that have completed renovations are already performing better than the rest of our brand portfolio, and prove that we're making solid progress toward the tipping point in the brand's transformation.

While we anticipate approximately 40% of the Comfort system to complete their renovations by year end, a significant number of Comfort Hotels will continue renovations into 2019, given the completion time required at some hotels. Even with the temporary renovation impacts, we expect our fourth quarter RevPAR to grow between 1% and 3%, and our 2019 full-year RevPAR to increase in line with the industry projections for our chain scale segments.

In addition, in 2019 we expect an acceleration of our domestic unit growth and further improvement in our effective royalty rate that will continue to fuel our royalty growth. We also continue to prudently manage SG&A costs. As a result, our adjusted franchising SG&A expenses increased only 3% in the third quarter of 2018, compared to the same period of the prior year. Our strong operating performance continues to generate significant cash flows, allowing us to both reinvest in our core business, and return excess capital to our shareholders.

In addition to our quarterly dividend, we repurchased an additional $39 million of our common stock in the third quarter. We have now repurchased over $109 million of Choice stock this year through September 30th. Even with investments in expanding out footprint, including the acquisition of WoodSpring, and returning significant capital to our shareholders, our leverage levels remain low. We are pleased with Standard & Poor's recent announcement that our credit rating was placed on positive watch to be upgraded to investment grade levels. Our ability to significantly invest in our business and return excess cash to our shareholders, while maintaining low leverage levels demonstrates the continued strength of our business model.

Before we open it up to questions, I'd like to comment on our outlook for the remainder of the year. Again, our adjusted EBITDA, adjusted net income, and adjusted earnings per share forecast presented in the outlook section of our release were prepared using the new revenue recognition standard and include the impact of the WoodSpring acquisition. However, the outlook excludes the impact of one-time integration and acquisition-related costs, as well as the impact of net surpluses or deficits generated by marketing and reservation activities.

Based on our third quarter results in the outlook for the remainder of the year, we are increasing both our full-year adjusted EBITDA and adjusted earnings per share forecasts. We now expect our adjusted EBITDA to range between $335 million and $340 million, and our adjusted hotel franchising EBITDA to range between $341 million and $346 million. In addition, we are increasing our guidance for adjusted diluted earnings per share to range between $3.79 and $3.86 per share. We expect our adjusted diluted earnings per share for the fourth quarter to range between $0.78 and $0.85 per share.

In summary, we are very pleased with another strong quarter. With healthy GDP growth, rising wages, and some of the higher consumer confidence levels we've seen in a decade, all signs point to go. We're using our strong position to deepen our decades of midscale leadership while continuing our growth in both upscale and extended stay. At this time, Pat and I would be happy to answer any questions you may have. Operator?

Questions and Answers:

Operator

Yes, thank you. We will now begin the question-and-answer session. To ask a question, you may press * then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble the roster. The first question comes from David Katz with Jefferies. Please go ahead, Mr. Katz. Your line is live.

David Katz -- Jefferies -- Analyst

I'm sorry. Good morning.

Patrick Pacious -- President and Chief Executive Officer

Good morning, David.

Dominic Dragisich -- Chief Financial Officer

Good morning, David.

David Katz -- Jefferies -- Analyst

How are you all?

Patrick Pacious -- President and Chief Executive Officer

Good.

David Katz -- Jefferies -- Analyst

I wanted to ask about indications for 2019 and any qualitative way. I know we're not up to the guidance process yet. But frankly, given how pressured the industry has been, I think it might be helpful to get a sense there. Thank you.

Patrick Pacious -- President and Chief Executive Officer

I think that when we look at where the industry is being forecast for our chain scale, David, it's probably a little bit north of 2%, 2.2% sort of on average that we would expect to perform in line with that. The qualitative thing that we've been talking about, which is the Comfort transformation, you've got to think about that impact on it. We'll have a better lens on that when we talk to you all in feedback, as to what that impact's going to look like for 2019.

The way to think about the Comfort transformation is really there's about a third of the brand that's already done the move to modern. There's a third that's involved in it right now, and a third that's yet to begin. We do expect that tipping point where the headwind of renovations will be replaced by a tailwind of better-performing properties at a certain point in 2019. So we'll have a better sense of that when we get to February. But I would expect to our brands to perform basically in line with industry.

Dominic Dragisich -- Chief Financial Officer

Then I think from a units and effective royalty rate perspective, David, we talked about we're anticipating ex-WoodSpring, somewhere in that 3% unit growth range. We do expect that to accelerate into 2019. We expect our effective royalty rate to continue to accelerate as well. Not necessarily accelerate over and above the double digits that you're seeing this year, but certainly in line with that historical, let's call it that mid-single-digit range.

David Katz -- Jefferies -- Analyst

Got it. Just to follow that up, I think you may have indicated that opening pace is accelerating? I wanted to make sure I heard correctly. And just talk about what the forces are that are driving that. I suppose the Devil's advocate might suggest with commodities and labor getting a bit more expensive, and cost of money getting a bit more expensive, that sounds counter-intuitive to me.

Patrick Pacious -- President and Chief Executive Officer

Well, it's two-fold. One, the conversion are easier and obviously you get down to open that pace more quickly. If you look at our Ascend collection, the average day from awarding the contract to opening the hotel is about 100 days. So we have some brands that the pace with which we can literally get a contract awarded and get the hotel in a very short timeframe. We're seeing growth in those brands as well. I think we've been building our new construction pipeline, as Dom talked about, that's starting to accelerate as well. And so that's starting to have an impact as well. As we think about the Comfort turnaround, a lot of that started several years ago with exiting older product from the brand, which opened up markets, which then led to new contracts being awarded over the last couple of years. We're now starting to see those types of hotels come online.

David Katz -- Jefferies -- Analyst

Got it, very helpful. I appreciate it. Thanks for taking my questions.

Patrick Pacious -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from Shaun Kelly with Bank of America.

Shaun Kelly -- Bank of America Merrill Lynch -- Analyst

Good morning, everyone. Maybe just to stick with David's point on the unit growth pipeline, maybe to say it more concretely. We've actually heard some of the larger U.S. brand companies starting to talk about a plateau in their U.S. development side and possibly maybe even modest declines when we look at the supply outlook across '19 and '20. It doesn't really appear that you guys are seeing that activity. Could you elaborate just a little bit more on maybe specifically what you're seeing on the interest level for developers and what's allowing them to build or develop Choice properties at this point in the cycle when other guys are struggling to grow?

Patrick Pacious -- President and Chief Executive Officer

I'll talk about it at the brand level and then Dom can follow in. If you think about what we've done with Comfort Inn, we created a number of open markets in this transformation, so we actually shrunk the brand if you go back and look at it say five years ago. That creates a lot of open markets for a brand that's in very high demand. And so I do think at this point where we are in that brand strategy, we're seeing a lot of demand for that, particularly in new construction Comfort Inns. I also think, when you think about the brand that we acquired, WoodSpring, that is just a brand that once we brought it onto our platform, exposed it to our current franchisee base, it's really increased the interest not just in WoodSpring, but in the extended-stay segment as well. So both Mainstay and Suburban are seeing accelerated even beyond our expectations we had at the beginning of the year because there's a renewed interest within our development community for extended-stay product on the Choice platform.

Then obviously the Cambria and Ascend collection, both of those are upscale opportunities where you look at the number of rooms we have, 20,000 rooms in the U.S., there's a huge number of markets for upscale product on the Choice platform that are available. So I think it's not just that there's developer interest in our brands, but also the opportunity in the brands who are growing into the new segments that's really attracting the type of development results that we're seeing.

Dominic Dragisich -- Chief Financial Officer

Shaun, I would say for Comfort specifically, if you think about the new construction pipeline growing as dramatically as it has in the last couple years, and call it the one-to-two-year timeline for construction, we've had more than 120 new ground-breaks this year alone for Comfort, which is about 40% ahead of where we were last year for that particular brand. Then I just think more on a macro basis, if you think about the profile of our franchisees, and call it that midscale space where they're financing these projects 50% equity up front and only going out and raising 50% debt easier to not run into snags in terms of rising interest rates and some of the tightening that you may see from a loan-to-cost perspective. So we're continuing to see acceleration on that side as well.

Shaun Kelly -- Bank of America Merrill Lynch -- Analyst

Great. Thanks for the color. One or two RevPAR questions, if I could. If you could just in the quarter try and quantify for us, if you could, what you think the impact from the Comfort renovation specifically was? Then as we look out the fourth quarter, most people are pointing us to think that October is going to be the best month of the quarter. I hate to sub-segment your guidance, but if we look at the 2% you said for October, is that your expectation that things can stay there to stick within your guidance range or do you expect that to slow at all?

Patrick Pacious -- President and Chief Executive Officer

No, the 2% we've added a 1% to 3%, and so we do think 2% is the midpoint and October is there. We think we can maintain that as we get into November, December. So we feel pretty comfortable about our Q4 guidance. Regarding the Q3 RevPAR, we've looked a lot at the impact that the renovations in the Comfort Hotels have impacted. We pegged that at about a 60 basis point takeaway if you look at it that way, from the standpoint of where the chain scale should have been. When you take rooms out of service at the level that we're doing as at Comfort, it's probably about a 60 basis point decline on that front.

The calendar shift is probably about a 20 basis point. Dom mentioned July 4th and some of the Jewish holiday shifts. Then really when you look at the hurricane impact, that's probably about 30 basis points. So that one is really hard to predict, just because what's really interesting about these hurricanes is they aren't year-over-year the same thing. If you look at Hurricane Irma from last year, that hurricane was actually almost the impact of two hurricanes because it approached the east coast of Florida and created folks evacuating from the east coast. And it didn't hit it.

If you remember, it swung around the peninsula and hit the west coast of Florida. So we got sort of a lot of people moving from east interior and then from the west coast interior. You didn't have a similar type of hurricane this year. Florence had a long, week-long, people expecting a large hurricane to hit. You ended up with a lot of evacuation zones, so hotels were closing way in advance of any hurricane impact. Many of those hotels and they ended up being outside the impact area. So the hurricanes are really hard to predict.

The final one, which is maybe unique to Choice because of where our product sits, is the solar eclipse. We had Econolodges in the middle of Kentucky in late August having three-night stay minimums with triple-digit ADRs because people were going to see the solar eclipse. There's no way to predict it because you don't sell tickets to a solar eclipse. People just find out where the path is. So that one was probably unique because of the secondary and tertiary markets in the lodging states where we have a lot of product. I think when we look at those impacts, those are sort of the major components to it.

Shaun Kelly -- Bank of America Merrill Lynch -- Analyst

Thanks, everyone.

Patrick Pacious -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from Robin Farley with UBS.

Robin Farley -- UBS Securities -- Analyst

Hi, thank you. This is [inaudible] in for Robin. Did your outlook for Q4 change at all versus what you were looking at a quarter ago? The implied range was quite wide, and it seems like midpoint there [audio cuts out] really changed, maybe only slightly lower in terms of what you're looking at today versus about three months ago?

Dominic Dragisich -- Chief Financial Officer

I think the easiest way to explain it is if you think about the puts and takes from the beat in Q3 folding into Q4. We beat the midpoint of our EPS guidance by about $0.09 per share. A little over two-thirds of that was operational. About one-third of that was tax-related. In Q4, you're picking up a little bit of additional tax benefit, which is why you see that tax rate in Q4 coming down a little bit. We're investing about a million or two more in Q4 for some of our R&D-like activities, etc. So long story short is we expect Q4 to come in line with expectations that we previously had, and we're flowing the beat through from Q3 to Q4.

Robin Farley -- UBS Securities -- Analyst

Thank you. I was sort of more asking for RevPAR in terms of implied wide range. Do you feel that midpoint changed at all in terms of what you're looking at now versus a quarter ago?

Dominic Dragisich -- Chief Financial Officer

Not the Q4 midpoint specifically, no. It really is attributed to those one-time impacts that we saw in Q3. We're maintaining that, call it about 2%-ish trend expected if you normalize all of the one-time impacts as well.

Robin Farley -- UBS Securities -- Analyst

Okay, great. Then the royalty rate is going up on a full-year basis. Q2 was slightly actually ahead of our expectations. Could you break down some of the drivers for acceleration next year and growth in terms of published rates and what's in the books? I know you outlined about mid-single-digit, right, versus going back to double?

Dominic Dragisich -- Chief Financial Officer

That's correct. If you think about mid-single-digit growth in 2019, a lot of it has to do with the tougher comps. That's the reason why we guided where we guided for full-year as well. Q4 in particular has tougher comps because as your pricing increases, it's just tougher to overcome that. In terms of the drivers, a lot of it has to do with what we talked about in previous quarters, which is we increased the rack rate across our entire portfolio over the last 24 months, a few times actually, which just shows the value proposition that we provide to our franchisees. We're continuing to see some of those burn-offs from the discounts that were provided post-recession, post- back in 2008-2009. Those are two of the drivers.

The third is just when you see the success that we've had in the development environment, we just have to go to market with fewer discounts. Those three drivers, in particular, have really been the catalyst behind the double-digit increase this year. We do anticipate continuing to benefit into 2019, not quite to those double-digit rates, but probably somewhere maybe even a little bit better than those historical, call it mid- to low-single digits.

Robin Farley -- UBS Securities -- Analyst

Okay, that's really helpful. Then one quick housekeeping. What is driving the non-hotel franchising loss higher versus last time you guys guided? Thank you.

Patrick Pacious -- President and Chief Executive Officer

What we're doing when you think about the company and the brand launches we're doing and expanding the new product offering, things along the lines of vacation rental, our partnership we have with Bluegreen, there's a lot of additional R&D expense that we're providing that really is showing up in those numbers. That's where things like new prototypes, the Clarion Pointe market research and those types of things that we do in order to identify new growth initiatives for the business fall into that bucket.

Robin Farley -- UBS Securities -- Analyst

Okay, thank you.

Operator

Thank you. The next question comes from Gregory Miller with SunTrust Robinson Humphrey.

Gregory Miller -- SunTrust Robinson Humphrey -- Analyst

Good morning. I'm on the line for Patrick Scholes. I just have a question on Clarion Pointe, Since you mentioned that you're aiming for over 1,000 hotels, and given that the Clarion core brand has about 300 hotels globally, and 166 domestically, I'm curious what drove the decision to choose Clarion's branding as a brand extension versus choosing a new brand name? It seems like you feel that Clarion's brand is well recognized enough to create the brand extension, but could you elaborate on that rationale?

Patrick Pacious -- President and Chief Executive Officer

Sure. Let me first address the 1,000 hotels. The 1,000 hotels is sort of the available market that we look at out there. Say we had 100% market share in the next five years, we would get 1,000 hotels. If you think about our market share in the midscale segment today, it's about 25%. So just as you're thinking about available market and how many Choice will award contracts to and bring onto our system, it probably will not be the 1,000. I'd love it to be. But in that mid next three to five years, it's probably closer to say 250 to 300 hotels is more likely.

The reason for the use of the Clarion name is Clarion has one of the highest brand equities of our brands, of the 12 brands that we have. There is an aspirational concept or mind-shift if you think about the mind of the consumer, and we wanted to leverage that. The second thing is the Clarion hotel owners themselves also have additional product that doesn't have the full-service food and beverage option or meeting space.

So there was interest there from our current Clarion owners in doing additional product within the brand, just not having the food and beverage option and as much meeting space. So that was the reason behind picking a brand extension as opposed to a new brand, which really requires a lot more investment. Actually, when you're selling it to developers, there's really a question mark of is the consumer really going to know what brand X is? It takes years to build brand equity. Leveraging that we think gives us a real opportunity to accelerate the development. And with the early results, we believe that's starting to show up.

Gregory Miller -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks so much. Could you elaborate a little bit on the geographic rollout in terms of urban, suburban, highway locations, what your intentions are?

Patrick Pacious -- President and Chief Executive Officer

For Clarion Pointe?

Gregory Miller -- SunTrust Robinson Humphrey -- Analyst

Sorry, correct, for Clarion Pointe.

Patrick Pacious -- President and Chief Executive Officer

Yeah, it will probably be similar to our other midscale brands, where it'll primarily be focused on secondary markets to begin with. That's where I think the initial hotel we're opening will be in Gatlinburg. You think about those types of markets. But we do expect over time that will push into primary markets in a similar fashion that Clarion has.

Gregory Miller -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks so much.

Operator

Thank you. The next question comes from Alton Stump with Longbow Research.

Alton Stump -- Longbow Research -- Analyst

Thank you for taking my question. I just wanted to ask as you think conceptually about [audio cuts out] '19 builds accelerating, as far as conversion versus new build rate, I would presume that conversions would be a higher percentage of your overall build. How much of that are you seeing? Are you seeing players actually with costs going up, interest rates going up, that maybe some more opportunities for players that are looking to convert into a Choice Hotel brand next year?

Patrick Pacious -- President and Chief Executive Officer

With rising interest rates and some of the other headwinds that you see on new construction, so steel prices, those types of things, it's interesting because you heard that at the headline level, but when I talk to our developers, they're not really experiencing that yet. It's possible it is to come. I was with some owners a couple weeks back and one of our developers just did five Comfort Inns with us down in the Texas market, he's not having trouble finding construction crews and stuff to get the hotels built. It's not something I would just lay a broad blanket across.

Your point though is well taken though, in a market of rising interest rates and higher construction costs, you would expect to see more conversion opportunities versus new construction. I think the good news for us is the number of new construction hotels that are already under way gives us a lot of confidence that those are going to show up as open hotels as we move into '19 and 2020.

Alton Stump -- Longbow Research -- Analyst

Thank you. A follow-up on the RevPAR front. I was surprised to see it snapped back to 2% in October given that there was some headwind year-over-year from the hurricanes last year. Of course, it's just one month of data, but some more color if you can on what drove that pretty steep recovery versus what you put up in 3Q?

Patrick Pacious -- President and Chief Executive Officer

I think part of the October benefit is some of the hurricane aftermath of the two that hit in August and September here in the U.S. I think the other part is some of the move to modern hotels are getting through their renovations. They're putting rooms back in service and that's beginning to benefit us as well. As those rooms come back into service, we're seeing a pickup too in business demand, as opposed to leisure. If you think about Comfort Inn, the more hotel rooms we have open in Comfort Inn, that helps because we're getting a lift in business now in addition to the leisure lift. The same thing is true for Cambria. The sort of lift in business transient is helping our Cambria and our Ascend brands as well, our upscale brands.

On the other side of the house, in the WoodSpring side, that's also a brand that has a higher business to leisure mix than our other brands. That's also what I think may be the positive drivers in October.

Alton Stump -- Longbow Research -- Analyst

Okay. Thank you for your time.

Operator

Thank you. As there are no more questions at the present time, I would like to return the call to Pat Pacious for any closing comments.

Patrick Pacious -- President and Chief Executive Officer

Thank you. Thanks, everyone for joining us today. As you can see, we have a lot to be excited about. Our strong financial metrics are laying a solid foundation for continued growth. We excel at providing our owners with a proven brand portfolio and best-in-class franchisee resources that drive their profitability. This has resulted in greater demand to join the Choice system and put us on a path to set a new company development record. We're pleased with our third quarter and year-to-date performance, and we look forward to ending the year on a high note. So enjoy the upcoming holiday season, and we'll talk to you in the new year.

Operator

Thank you. That concludes the conference call. Thank you for attending today's presentation. You may now disconnect your lines.

Duration: 51 minutes

Call participants:

Patrick Pacious -- President and Chief Executive Officer

Dominic Dragisich -- Chief Financial Officer

David Katz -- Jefferies -- Analyst

Shaun Kelly -- Bank of America Merrill Lynch -- Analyst

Robin Farley -- UBS Securities -- Analyst

Gregory Miller -- SunTrust Robinson Humphrey -- Analyst

Alton Stump -- Longbow Research -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions  for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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This article appears in: Personal Finance , Stocks
Referenced Symbols: CHH



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