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GreenTree Hospitality Group Ltd. (GHG 2.71%)
Q2 2018 Earnings Conference Call
Aug. 23, 2018, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello, ladies and gentlemen, thank you for standing by for GreenTree's Second Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded.
I would now like to turn the meeting over to your host for today's call, Mr. Rene Vanguestaine of Christensen, the company's Investor Relations firm. Please proceed, Rene.
Rene Vanguestaine -- Investor Relations
Thank you, Anita. Hello, everyone, and thank you for joining us today. GreenTree's earnings release was distributed earlier today and is available on our website -- IR website at ir.998.com, as well as on PRNewswire services. As a reminder, we also posted a PowerPoint presentation that accompanies our comments today to the same IR website.
On the call today from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Selina Yang, VP of Operations; Ms. Jasmine Geffner, Chief Financial Officer; and Mr. Nicky Zheng, who recently joined as IR Manager. Nicky spent three years in Deloitte Shanghai [ph] as a Senior Auditor, primarily for listed companies in the US, after obtaining a Master's degree in the Hong Kong Polytechnic University. Mr. Xu will present the company's Q2 2018 performance overview, followed by Ms. Yang, who will discuss business operations and company highlights, and Ms. Geffner will then discuss financials and guidance. They will be available to answer your questions during the Q&A session that will follow.
Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as may, will, expect, anticipate, aims, future, intends, plans, believes, estimates, continue, target, is or are likely to, going forward, confident, outlook and similar statements.
Any statements that are not historical facts, including statements about the company and its industry, are forward-looking statements. Such statements are based upon management's current expectation and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. You should not place undue reliance on these forward-looking statements.
Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the US Securities and Exchange Commission. All information provided, including the forward-looking statements made in this conference call, are current as of today's date. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.
It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Alex Xu. Mr. Xu, please go ahead.
Alex Xu -- Chairman & Chief Executive Officer
Thank you, Rene, and thanks everyone for joining our earnings call today. I'm pleased to report our 2018 second quarter results.
After our successful listing on the New York Stock Exchange on March 27 this year, we have continued to execute our organic growth strategies in the second quarter. We now operate 2,434 hotels across eight different brands, from economy, mid-scale to business, to mid-to-upscale limited services segment of the markets. We continue to grow our pipeline and are on track to open more new hotels in the second half of the year. We are also actively searching for appropriate acquisition opportunities, which we believe will build a stronger hotel operating platform and create long-term shareholder value.
In the second quarter of 2018, our total revenue grew 20.3% year-over-year to reach RMB233.4 million. Gross profit increased 23.1% to RMB167.7 million. Non-core GAAP adjusted EBITDA rose 21.2% to RMB139.2 million and the non-GAAP core net earnings increased 24.7% year-over-year to RMB110.9 million.
We were able to continue to improve margins as well. Gross margin improved from 70.2% to 71.9%. Adjusted EBITDA margin improved from 59.2% to 59.6%, and the core net margin improved from 45.9% to 47.5% compared to a year ago. These results were driven by continued organic growth in our F&M hotel network and the improved operating performance at our existing hotels.
During the quarter, we opened 104 new hotels with almost two-third of this new opened hotels in our mid-scale brands and close to 30% in the economy brands. Our pipeline of new hotels increased from 306 at December 31, 2017 to 477 at June 30, 2018. Approximately a quarter of our pipeline is in the business to mid-to-up-scale hotels, including Gme, Gya and VX, which we launched late last year.
We continued to spread our geographic footprint further across China. We now cover 267 cities, up from 263 cities at the end of last year. We believe opening hotels in new cities is very important to GreenTree's growth, especially in Tier 2 and other cities in China. We believe this will further enhance our brand image in those new cities and will attract new business and leisure travelers from those cities.
In terms of our operating performance, we saw steady progress across the board. Average daily room rate or ADR for the quarter increased to RMB164 from RMB156, which was 5.1% up from the same quarter of last year. Occupancy rate had a slight decrease of 0.6% to 82.6% from 83.2% last year, which was related to accelerating new hotel openings in the first half of 2018. And revenue per available room increased 4.6% from RMB130 in the second quarter last year to RMB136.
One of the biggest drivers of both our steady incremental improvement in operating performance and our high overall profitability is our loyalty program. We now have 24 million individual loyal members and over 930,000 corporate members. Out of the 24 million members, over 19 million of them have joined our premium paid membership program. Our strong brand and direct relationship with so many valued customers allowed us to sell direct, instead of relying on selling through OTAs, which is more expensive. In the most recent quarter, we sold approximately 95.4% of our room nights through our direct sales channels.
M&A is one of our key growth strategies. We are actively searching for appropriate M&A targets post IPO. We prefer targets which are brand as well has a geographic complementary to our existing hotel portfolio. We believe the right acquisition as well as the smallest post-acquisition integration will help accelerating our planned long-term expansion.
In conclusion, we are pleased with our performance so far this year. Although there is some more hard work to be done in the coming months, we are confident in our business model, strategic positioning and the long-term growth strategies, and will continue to invest in our people, brand, systems and technology in order to better serve our customers and franchisees and to ensure a long-term healthy development of our hotel network.
With that, I'll pass the call over to Selina, who will discuss our business operations and the company's highlights.
Selina Yang -- GreenTree Hospitality Group Ltd.
Thank you, Alex. If you are following along on our slides, I will skip the overview on slide 5 and go straight to slide 6. Once again the franchised-and-managed model remains our primary strategic focus. In fact, 98.9% of our hotels fall under this category, and as you can see on the chart on the right, F&M hotels have been expanding -- increasing their contribution to our overall revenues. In the second quarter, the percentage reached 71%, which was an all-time high.
Let's turn to slide 7. Another critical area of our business is our loyalty program. Our program differs considerably from most hotel business in the West. We have a paid program to which people sign up to enjoy a variety of premium perks advantage. More importantly, we found that this program has allowed us to foster closer relationship with our guests. Members can book directly with us which has helped us and our franchisees to reduce payout and marketing fees and expenses. And our loyalty members are very sticky customers. Overall, we now have about 24 million members in our loyal program, along with 930,000 corporate clients, up from approximately 22 million and 860,000 as of March 31, 2018 and approximately 21 million and 820,000 as of December 31, 2017. Around 95.4% of room nights were sold through our own direct channel, which includes our individual loyal members and corporate members.
Moving onto slide 8. You can see a RevPAR chart here. Q2 is generally one of the high seasons during the year. In the two charts at the bottom of this page, you can see that on a year-over-year basis, RevPAR for L&O increased by 8.4% from RMB131 to RMB142. And RevPAR for F&M hotels increased by 4.7% from RMB129 to RMB135 for the second quarter of 2018. Both segments showed healthy growth over the second quarter and first half of last year, mainly due to higher ADR.
On slide 9, you can see that we've worked very hard this past quarter to further build our pipeline of new hotels. During the second quarter, we added 31 hotels to our pipeline, while opening 104 hotels. In particular, we're trying to boost the growth and at that time to diversify our portfolio by adding more hotels at the high end and economy segment of the market. Currently, 84.7% of our hotels, really the core of our business, serve the middle end of the limited service market. This ratio continued to trend down this year from 86.6% at the end of 2017. In line with this strategy, during this quarter, we added four new GreenTree Eastern and one VX hotel, which (inaudible) our business and leisure travelers in the business to mid-to-up-scale segment of the market. So the number of hotels in this segment increased to 2.5% of total portfolio.
Meanwhile, the number of hotels in the economy segment grew to 12.8%, with the addition of 31 economy hotels across our Vatica and Shell brands in the second quarter of 2018. We have developed and continued to roll out three new brands at the mid-to-up-scale end of the market as part of our strategy to strengthening our portfolio.
On slide 10, you can see these brands, which we have named, Gme [Foreign Language], Gya [Foreign Language], and VX [Foreign Language]. We are testing around the same price points for all three hotels, but the tariff and positioning of each will be quite different as we cater to the tastes of different segments of the market. Gme hotels are designed to be a traditional Latin American, European styles for business travelers, whereas Gya were much more elegantly designed and fashionable, and VX will be relaxing and artistic, preferably with music and (inaudible) inside the hotel. We have a solid pipeline with more of these hotels opening in the coming months.
With that, I'll pass the call over to Jasmine to review our financials.
Jasmine Xin Yue Geffner -- Chief Financial Officer
Thank you Selina. We delivered another solid quarter of operating and financial results. Moving on to slide 12, we now have a total of 2,434 hotels with 201,275 rooms. On a year-over-year basis, we increased our hotel numbers by 19.6%. During the quarter, we opened 104 new hotels, 68 in the mid-scale segment, five in the business to mid-to-upscale segment and 31 in the economy segment. Of this, we opened seven hotels in Tier 1 cities, 22 in Tier 2 cities and the remaining 75 in other cities in China. In Q2, 2017, we opened 97 hotels, while for full year 2017 we opened 425. Therefore, you could see that we accelerated our hotel openings in Q2 2018, as well as first-half of 2018.
During the quarter, we only closed 24 hotels, so net-net, we added 80 hotels to our portfolio. We closed 16 hotels, due to their non-compliance with our brand and operating standards. We continue to demonstrate our ability to run profitable hotels. We also closed eight hotels due to property-related issues, including rezoning, returning of government owned properties, and expiry of leases, et cetera.
On slide 13, you could see some of our key operating metrics. During the quarter, we continued to see improvements in our operating performance across the board. The key numbers showcased here are the orange bars representing the performance of our F&M Hotels. These hotels make up the biggest part of our business. The performance of our L&O hotels skewed a bit higher because we converted five L&O hotels to the F&M model after the first quarter of 2017, and we opened our high-end GreenTree Eastern Hotel in Shanghai in June 2017.
In terms of our F&M hotels, our ADR improved to RMB163 from -- I'm sorry, from RMB155 in the second quarter of last year. RevPAR increased to RMB135 from RMB129, while the occupancy rate for our F&M hotels had a slight decrease of 0.6% to 82.9%, which was due to the acceleration of new hotel openings in the quarter.
On slide 14, you can see that total revenues grew 20.3% year-over-year to reach RMB233.4 million. The year-over-year increase was primarily attributable to four factors. First, the increase of F&M hotels in our network; second, the opening of a GreenTree Eastern L&O hotel in Shanghai in mid-2017; third, improved RevPAR for both F&M and L&O hotels; and four, growth in our loyal membership. This was partially offset by the conversion of five L&O hotels to F&M model after the first quarter of 2017.
Total revenues from F&M hotels for the second quarter rose 23.3% to RMB165.5 million. Meanwhile, revenue from L&O hotels rose 5.7% to RMB49.7 million, which again shows the impact of the converted hotels. And finally, revenue from membership fees came in at RMB18.1 million, a 43.5% year-over-year increase.
On slide 15, during the first half of 2018, total revenues rose by 21.7% to RMB438.3 million. Total revenues from F&M hotels for the first half of 2018 were RMB309.4 million, grew by 25.5% year-over-year. Total revenues from L&O hotels in the same period were RMB93.9 million, increased by 5.7% year-over-year. Membership fees totaled RMB35 million, a 40.6% year-over-year increase.
Moving over to the expense side of the P&L. On slides 16 and 17, you will get a sense of our operating efficiency. Please look at the three graphs on the right hand side of slide 16. Hotel operating costs for the second quarter of 2018 were RMB65.6 million. The year-over-year increase of 13.7% was mainly attributable to three factors. First, the increase in number of general managers in our hotel network; second other costs associated with the expansion of F&M hotels; third, higher rental costs for the GreenTree Eastern L&O Hotel and other L&O hotels. This was partially offset by reduced rental cost, depreciation and amortization, and operating costs related to the conversion of the five L&O hotels.
Selling and marketing expenses for the second quarter of 2018 were RMB11.6 million. The year-over-year increase of 22.9% in the second quarter of 2018 was mainly attributable to model room construction, exhibition, and other advertising and promotion expenses related to our three new business to mid-to-upscale brands, increased personnel compensation and other costs, i.e., travel expenses of business development personnel as a result of the increased opening of hotels.
General and administrative expenses for the second quarter of 2018 were RMB25.2 million. The year-over-year increase of 38.6% in the second quarter of 2018 was primarily attributable to increased headquarter staff costs, increased share-based compensation expenses, and new IT program expenses. Overall, although, total operating costs and expenses grew 19.6% year-over-year to RMB102.4 million, they grew more slowly than revenues in the second quarter of 2018.
On slide 17, total operating costs and expenses grew 16.2% year-over-year to RMB199.4 million in the first half of 2018. As a result, as slide 18 shows, we'll be able to further improve margins. During the second quarter of 2018, gross margin grew by 1.7% to 71.9%, adjusted EBITDA margin grew by 0.4% to 59.6%, and core net profit margin grew by 1.6% to 47.5%.
Overall, gross profit grew 23.1% year-over-year to RMB167.7 million, adjusted EBITDA increased 21.2% year-over-year to RMB139.2 million and core net income increased 24.7% to RMB110.9 million. Basic and diluted core net income per ADS, non-GAAP, came in at RMB1.09, equivalent to $0.16 in the second quarter of 2018 versus RMB0.97 in the same period a year ago. On slide 19, we show consistent growth and healthy margins during the first half of 2018.
Moving on to slide 20. Our IPO has bolstered our balance sheet further, which was already strong, given our ability to consistently generate strong cash flow from operations. During the first half of 2018, operating cash inflow was RMB199.4 million. Cash and equivalents balance increased to almost RMB1.9 billion. This provides us more resources to consider and evaluate additional capital investments and potential acquisitions.
Lastly, in terms of guidance, we reaffirm a 20% to 25% year-over-year growth in total revenues for the full year 2018.
This concludes our prepared remarks.
Alex Xu -- Chairman & Chief Executive Officer
Operator, we are now ready to begin the Q&A session. Thank you.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. (Operator Instructions)
The first question today comes from Billy Ng with Bank of America Merrill Lynch. Please go ahead.
Billy Ng -- Bank of America Merrill Lynch -- Analyst
Hi, good evening. I have two questions. The first question actually is regarding the opening pipeline and also the opening schedule. We notice that, I think in second quarter, there is some slowdown in the opening compared to what we expect. But at the same time, the company's full year revenue guidance remains the same. So does that mean we can expect the company can catch up in the second half in terms of the opening pace? And also, if you can please explain in a little bit more detail what happened in the second quarter and why there was a slowdown in -- not slowdown, to be exact, because it's still opened a bit more than 1Q, but slower than expected (technical difficulty) ways for the company to catch up. That's my first question.
Alex Xu -- Chairman & Chief Executive Officer
Okay, great. Let me answer this question that -- a great question that we have two things here. First, our pipeline continued the increase to another 71 hotels to 477 hotels in the pipeline, and that's up from 312 at the beginning of the year. So we did experience a slight delay of opening for the second quarter for several reasons. Number one, construction delays that -- a little longer than we anticipated. We're increasing our construction management staff to help our franchisees to deal with the construction delays. (Technical difficulty) Secondly, the government becomes more and more regulation-wise that -- more responsible to enforce the safety and the fire safety regulation as well as zoning compliance. So this will add, I think that -- a little bit more delayed inspection and obtaining the necessary certificates, and we believe that we are able to catch up those in the near future. So, as can be seen in the added pipeline, we have 477. I think that's the highest number in our pipeline in the past. So I hope that answered your question.
Billy Ng -- Bank of America Merrill Lynch -- Analyst
Yes, thanks. But just a follow-up on that is, do you think some of the things that you mentioned, inspection take a little bit longer, and are those more like a structural thing going forward or the new opening will take longer or it's more like a temporary thing?
Alex Xu -- Chairman & Chief Executive Officer
We believe the -- our government has become truly more and more smart in terms of making sure that the properties comply, zoning complies, fire safety. So, just the permitting process I think will be a little bit different. And we think this will add probably some -- add sometimes to the constructions. So we are working. In the long run they should be evened out. And in the -- when the regulation, let's say, it takes effect and sometimes will skew the numbers to the later part of the year or to the next year. So we do -- we think the zoning compliance and the fire safety, all of those, our government is going to pay more and more closer look and attention in the future.
Billy Ng -- Bank of America Merrill Lynch -- Analyst
Okay. And my second question, maybe, Alex, want to get your view is, like, given the macro situations and the outlook may not be as strong as like, let's say, a few months ago. Do you find M&A opportunities in -- particularly in China -- within China? Do you see the valuation become a bit lower than before and as a result may be easier to get some M&A done in the near future or you haven't seen anything change that? And also if you can provide any color or update on the M&A front that will be appreciated too.
Alex Xu -- Chairman & Chief Executive Officer
Okay. So those are two questions that you want. One is the current, our China domestic and macroeconomic environment, and the impact on our business, and also our M&A landscape.
Billy Ng -- Bank of America Merrill Lynch -- Analyst
Yeah.
Alex Xu -- Chairman & Chief Executive Officer
The first question is that we are -- we have received some inquiries from our investors, shareholders regarding the current domestic macroeconomic conditions, but we have not observed any -- that impact on our hotel development and growth. So, our Q2 performance continue -- they continue to improve as we planned and we're really consistent with our past plan and the strategy. So we believe that's due to several factors. One, our Chinese government continue to manage the economy rather well. And secondly, we have gone through -- GreenTree has gone through several cycles in the hospitality in China that gave us a valuable experience that we constantly factor in our evolving strategies. So our strategy is designed to meet the demand for the hard-core business travelers and to making sure there is healthy gross margin for our hotel franchisees to weather any kind of changes in the economy. And thirdly, we believe our strong and growing membership programs ensure our substantial loyalty to our brand and that -- and finally our efficient and cost-effective asset light business model. We are not only talking about our higher gross margin will help GreenTree to weather the storm, we also factor in our franchisee also have a very healthy gross margins.
So with all of those four factors, we believe that we will not going to experience any impact in this marketing environment. And lastly, I mean, it is possible and we cannot voice for other companies' opinions. If other companies believe they have to be cautious in terms of, let's see, that have a tighter power budget or trading down. Then GreenTree will be benefited from those kind of activities, because as I mentioned repeatedly before, our strategy for our brand positioning is to provide value for those hard-core and value-conscious, price-conscious business travelers and leisure travelers. So that's the current macroeconomic condition. So we believe, so far, and combined with the GreenTree's -- the strategy in the past, we have not observed impacts to our growth strategy.
The second question regarding the current M&A and landscape, the M&A is our -- you know that strategy to grow and we will review, evaluate possibilities in the marketplace with a very disciplined approach, because it's very easy to get into that for the sake of expanding our portfolio by acquiring. And, however, as you point out, this market perception may create some further opportunities for GreenTree's M&A. Occasionally, we are -- from time to time we'll be under discussion with potential M&A companies, targets. So we feel M&A will help GreenTree significantly to build a more -- the larger scale, increase our competitiveness in the near future.
Billy Ng -- Bank of America Merrill Lynch -- Analyst
Thank you. Thanks a lot.
Operator
(Operator Instructions) The next question comes from Praveen Choudhary with Morgan Stanley.
Praveen Choudhary -- Morgan Stanley -- Analyst
Thank you. Thanks very much for taking my question. Hi Alex, hi Jasmine, hi, Selina. One question from me only, about the growth prospects in the future. My question is if your openings have been somewhat delayed, meaning in the second half you will open more hotels than first half, and assuming that economic outlook has not changed, i.e., your RevPAR growth remains similar to what we have seen, then should we assume that in second half your growth in profit or EBITDA be better than first half? Thank you.
Alex Xu -- Chairman & Chief Executive Officer
Okay, Praveen, I missed the part of the question, you said assuming the -- there is a delayed opening and also assuming the same growth of the RevPAR. So I'm a little bit -- I didn't get the question clearly, so I apologize.
Praveen Choudhary -- Morgan Stanley -- Analyst
Yeah, I'll ask again. My point was that second half unit growth is faster than the first half because you're opening more hotels and your RevPAR growth is similar than first half. So, I am assuming that in the second half your growth, both in revenue and profit, should be faster, meaning you're accelerating your growth in the second half. Is that fair to assume?
Alex Xu -- Chairman & Chief Executive Officer
Listen, I believe so, even though we have not break down into those numbers, because the construction delay is going to be across the board, but we should anticipate that there will be catch-up in the second half of the year. And if you just look at the pipeline, beginning of the year, it's 312, at the mid of the year it's 477. And with the RevPAR, I think the growth we should anticipate to be in line with our plan. So with those assumptions, I would say it is safer to assume that.
Praveen Choudhary -- Morgan Stanley -- Analyst
Thank you very much. One more question, if I may, about your M&A strategy. The question I have is, if you were to acquire another company tomorrow, would you use your extra cash that you have generated from business, as well as from listing or would you use equity to do acquisitions? Thank you. And also if I may ask, will the acquisition be mostly focused in China or overseas? Thank you.
Alex Xu -- Chairman & Chief Executive Officer
Thanks Praveen, and I'll take this question again. Yes, I'm actually personally in charge with my team for the M&A. And so we will use our cash preferably unless our -- that potential target prefer part of them as the debt equity, because we want to -- we think our -- the cash on the balance sheet should be primarily used for M&A. So that is our preference. But we also want to respect some of our -- the desire from our future partner and future team members. So we are very sensitive because that's affecting our post acquisition integration and management. GreenTree will be very responsible to make sure that when we acquire companies, invest in companies, we have a similar culture and that there will be less integration risk. And as I said, we will be very disciplined.
And the second question, yes, our -- all our focuses right now are primarily focused in domestic China. We are very confident, the growth prospect of the domestic business and leisure travelers, so that -- but if the surrounding countries and regions have that potential targets, we wouldn't rule out the possibility to evaluate them. So those are company's plan right now.
Praveen Choudhary -- Morgan Stanley -- Analyst
Thanks very much and again congratulations on good numbers.
Alex Xu -- Chairman & Chief Executive Officer
Thanks, Praveen.
Operator
(Operator Instructions) The next question comes from David Li with Lizard Investors. Please go ahead.
David Li -- Lizard Investors -- Analyst
Thanks Alex, thanks team for taking my questions. I want to ask you about just the franchisee fees, F&M fees. I thought membership fee is up quite significantly. Can you explain what really drove that membership fees, other than maybe pricing and obviously I'm assuming membership growth as well? And also within the franchise, outside of the initial fee, the recurring fees, is there any mix shifts in that recurring fees? Thank you.
Alex Xu -- Chairman & Chief Executive Officer
You want to pick that or you want me to pick that?
Jasmine Xin Yue Geffner -- Chief Financial Officer
Hi David, it's Jasmine. Our -- you could probably see that on our press release that we have a breakdown of initial franchise fee and recurring franchise fee. Our initial franchise fee increased, because due to our acceleration of gross openings of 104 hotels in the second quarter of 2018, as compared to 97 hotels opened in the second quarter of 2017. Then the recurring franchise management fees, that's primarily due to RevPAR growth of 4.7% and also growth in central reservation system usage fees, annual IT and marketing fees, hotel manager fees, et cetera. This is all because of the result of the increased numbers of hotel and hotel rooms in operation.
David Li -- Lizard Investors -- Analyst
Okay. And also just -- but the membership fees in general, that's up quite significantly [ph] -- that was up 44% year-on-year. I'm curious, any price increases across these different fee structures?
Alex Xu -- Chairman & Chief Executive Officer
Good question, I will pick that up, David. A great observation. The membership has a compound, I believe, growth rate over there. And first, we have more, you know, hotels who generate membership. So the hotel numbers increase. There you can see the revenue, I think on the F&M, increased 25% in the sector. The L&O increased 7%. So the hotel number increased I think roughly about 20% or so. And meanwhile, each hotel, the membership mix, they depend on the customers -- the types of -- we have three levels of premium paid memberships, the regular and the gold and the platinum, and we did observe, there is an increase in the demand for our gold and platinum memberships. So as a result, the revenue for both our franchisees and as well as for GreenTree also increased. If you recall, I think we reported to you in the past, we split -- we share the membership fees with our franchisees. 70% of it goes to franchisees and 30% goes to GreenTree. So, we always experienced some higher growth rate of the membership growth than our hotel number growth.
David Li -- Lizard Investors -- Analyst
Okay, great. And also can you -- maybe going back, just talk a little bit about -- I mean a couple of analysts asked this question already. But what are your thoughts on this, in general, like, obviously, the industry is seeing a little bit of slowdown in some of its Tier 1 cities. Some of the others, maybe higher mid-scale are up, right. Can you just talk a little about like, what are some of the things that your competitors are seeing that's sort of not applicable to you. Obviously, the beauty of your model is that you don't have to deal with lot of the issues, you don't see that directly in your P&L. Can just help us understand, like, any of the issues that's really kind of unique to some of the peers, but not really affecting you, and what might -- or cause for that?
Alex Xu -- Chairman & Chief Executive Officer
Okay, David, that's a great question again. We are very different in a way from most of the other players. I think that, first of all, our geographic coverage that we are growing more naturally, organically. So we more weather the -- kind of a match with the economic shift -- condition shift. So our portfolio is more balanced between the first, the second and the third and the other tiers. And so, even if there is a one small sector that has, let's say, Tier 1 experience, certain regions experience slowdown, we may not get that much impacted. And that's the first. The second is, even in the first tier city, second tier city, we still have a lot of properties over there. But if we recall, as you know, that we have mentioned earlier that when we select a property, we balance the ADR with the rental cost. So we pay close attention to the operating margins, operating leverage to our franchisees, to ourself. So our location -- hotel location, even among the top-tier cities, first and second-tier cities, we believe are strategically located. So they will be less impacted by, let's say, the prime location properties, pricing changes, slowdowns. So that's the second -- the second difference.
And the third, we use also value pricing and we want to make sure that to our loyal memberships GreenTree's pricing means value to them and bigger return, they will have a more repeat business from them. And so, you can see, even though our membership volume seems to be 24 million, it's smaller than some of our peers. However, our direct sales is 95.4%. So that number really means that our loyal members are very, very frequent visitors. So, their visit will be less impacted by the change in terms of any geographic or economic condition shift. So we have -- I think those factors contributed to -- we're less sensitive or we're less get affected by the current reported concerns or changes.
David Li -- Lizard Investors -- Analyst
Okay, great. And I have another question about the CapEx. I understand you guys -- it was an opportunistic purchase. When should we see CapEx coming down significantly, because I think the first half is over RMB100 million, right, and this quarter is over RMB50 million. When should we see that sort of coming down dramatically?
Alex Xu -- Chairman & Chief Executive Officer
David, can you repeat the question?
David Li -- Lizard Investors -- Analyst
Yeah, when are you going to see -- because I understand the CapEx is due to an opportunistic purchase of a property, right. And just kind of curious, when is the CapEx going to come down sharply? Is it in the second half or next year?
Alex Xu -- Chairman & Chief Executive Officer
The CapEx will come down -- I wasn't -- the capital expenditures in those kind of opportunity -- opportunistic investment purchases may or may not come down, David, because those kind of purchases, I think, comparing with our L&O model or direct leases, which provide really a very, very favorable returns to our shareholders and can weather also the kind of -- there are some concerns, there is foreign currency that exchange rate changes. So we believe those properties will -- first of all, they all financially will perform well. Secondly, they are in a very -- transportation hub that provide great advertising for the company. And thirdly, those assets will appreciate. We believe those assets will appreciate very nicely in the future.
So when we see those opportunities in the future, I think we'll continue to seize those for our shareholders. And -- you were referring to a couple of properties we purchased near the second-tier city, are important (inaudible) within the transportation hub, which overall cost, I think, roughly less than -- I believe the first floor commercial space, it's less than RMB5,000 per square meters in a great location. So it was just a rare opportunity. So we do not know, but we strongly recommend, I even recommend to the board and shareholders, when we see those opportunities we should seize those.
David Li -- Lizard Investors -- Analyst
Okay. And one last one. Sorry, I didn't mean to hold the line. You have total about eight brands now. For the medium term, do you feel like eight brands are enough for you to keep growing or for you to double, at what point of the size of the business in terms of units would you need more than eight brands?
Alex Xu -- Chairman & Chief Executive Officer
We believe we should have 15 brands. So we still have seven more to go in the past. So because we, as a brand, should really target to a given price range. And then we're not even talking about decor [ph] just like Selina said. But if we combine, basically the brand that should consist of two major components. I think one is the price range, exactly what our travelers and customer can afford. Secondly, what kind of pace. So there are two dimensions to the brand. So with two dimensions there may be even more variety, and -- but we will -- and the M&A, we will take that into consideration, David. So as our team, internally [ph] we all know, the M&A target would have to be both brand as well as geographic coverage. They have to be complementary to GreenTree and the existing brand and portfolio. We do not want to do something that cannibalize each other.
David Li -- Lizard Investors -- Analyst
Okay, got it. Great, thank you so much.
Operator
The next question comes from Xin Chen with UBS. Please go ahead.
Xin Chen -- UBS -- Analyst
Good evening Alex, Jasmine and Selina. I have a question. My question is that may I know the second quarter RevPAR growth in Tier 1, Tier 2, and the lower cities separately and trend in the second half of this year?
Alex Xu -- Chairman & Chief Executive Officer
Selina or Jasmine. Jasmine will have the second quarter Tier1, Tier 2, Tier 3 cities rough numbers.
Jasmine Xin Yue Geffner -- Chief Financial Officer
Yes. In our second quarter 2018, our Tier 1 cities, the RevPAR growth is low double-digits, primarily driven by ADR growth. Our Tier 2 cities is in -- around 7% in Tier 2 cities. In Tier 3 and lower cities is in low single-digits. Does that answer your questions?
Xin Chen -- UBS -- Analyst
Thanks. May I know the trend in the second half of this year?
Alex Xu -- Chairman & Chief Executive Officer
So the trending forward, we have -- we believe the trend will continue to be consistent with what we have reported and planned earlier. So in the past that I believe, we said the full year, we will anticipate our RevPAR growth is between 4% to 6%. And so we continue to see that the trend in that regard and in the light of even -- in light of some of the investors concern of the current economy.
Selina Yang -- GreenTree Hospitality Group Ltd.
And as you see, we also see Chinese government is trying to enhance [ph] the economy, in order to revitalize smaller cities. So we believe (inaudible) leisure travel growth, we see a lot of opportunities to grow RevPAR due to our (inaudible) and brand positioning.
Alex Xu -- Chairman & Chief Executive Officer
Good comments, Selina. So the first -- I think the last couple of years, we see some RevPAR increase in the first tier cities and then spread in second tier cities. I think that the next catch-up, I think, should be more third or fourth tier cities because you know that once you have a dramatic growth, then the growth rate tends to slow down and then there is -- like a wave spread into the other cities, eventually, evenly. So it's like that our current CPI. So that we believe our current mix and the current mix of the portfolio will ensure that we will have a very healthy growth in that RevPAR.
Xin Chen -- UBS -- Analyst
Got it, thank you very much.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Selina Yang for any closing remarks.
Selina Yang -- GreenTree Hospitality Group Ltd.
Thank you, operator. In closing, on behalf of the entire GreenTree management team, we'd like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting us in China, please don't hesitate to contact us. This concludes the call. Thank you all.
Alex Xu -- Chairman & Chief Executive Officer
Thank you.
Operator
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect
Duration: 62 minutes
Call participants:
Rene Vanguestaine -- Investor Relations
Alex Xu -- Chairman & Chief Executive Officer
Selina Yang -- GreenTree Hospitality Group Ltd.
Jasmine Xin Yue Geffner -- Chief Financial Officer
Billy Ng -- Bank of America Merrill Lynch -- Analyst
Praveen Choudhary -- Morgan Stanley -- Analyst
David Li -- Lizard Investors -- Analyst
Xin Chen -- UBS -- Analyst
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