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Choice Hotels International Inc (CHH -0.09%)
Q4Â 2018 Earnings Conference Call
Feb. 15, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Choice Hotels International Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all lines are in a listen-only mode. Please note this event is being recorded.
I would now like to turn the conference over to Mr. Oscar Oliveras, Investor Relations Director for Choice Hotels. Please go ahead.
Oscar Oliveros -- Investor Relations Director
Thank you and welcome again, everyone. It's an honor to join you for the first time as Investor Relations Director. I look forward to meeting and working with all of you. Before we begin, we would like to remind you that during 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 and other SEC filings for information about important risk factors affecting the Company that you should consider.
These forward-looking statements speak as of today's date and we undertake no obligation to publicly update them to reflect subsequent events or circumstances. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of the fourth quarter and full-year 2018 earnings press release, which is posted on our website at choicehotels.com under the Investor Relations section. This morning Patrick Pacious, our President and Chief Executive Officer, will provide an overview of our 2018 operating results. Dominic Dragisich, our Chief Financial Officer, will then review our fourth quarter and full-year results and provide an update on expectations for 2019. Following their remarks, we'll be happy to take your questions.
With that, I'll turn the call over to Pat.
Patrick Pacious -- President and Chief Executive Officer
Thank you, Oscar. Good morning and welcome to Choice Hotels Fourth Quarter and Full-Year 2018 Earnings Conference Call. I'd like to welcome Oscar to the team and I know that he will be a great resource for all of you. I'm pleased to report continuing the positive results for the fourth quarter and for 2018 as a whole. We exceeded the top end of our previously reported full-year guidance for both adjusted EBITDA and adjusted diluted earnings per share. Adjusted EBITDA grew 14% over the prior year to $341 million and adjusted diluted earnings per share grew 34% year-over-year to reach $3.89 per share. Additionally, our core franchising business continues to outperform our expectations highlighted by our full-year results. Choice had our best development year in more than a decade awarding 756 new domestic franchise contracts. This represents a 7% increase over last year.
A strong driver of this development growth was the extended-stay segment. The number of new domestic franchise contracts awarded for our three brands in this segment increased 156% year-over-year. Our total domestic pipeline of hotels awaiting conversion, under construction, or approved for development as of December 31st, 2018 surpassed 1,000 hotels, representing the largest domestic pipeline in the Company's history. We grew the number of rooms in our upscale brands, Cambria and Ascend, by nearly 14% year-over-year and increased our international room count by nearly 6%. Our effective royalty rate continued its growth trajectory with a 14 basis point increase year-over-year. Additionally, we strengthened our mid-scale presence this year through the continued transformation of our flagship Comfort brand and the introduction of our newest brand Clarion Pointe.
Finally, we continued to improve our business delivery capabilities. Proprietary contribution continued to grow. On average, approximately 60% of revenue delivered to our hotels comes from our channels. And our loyalty program drives more than 40% of our reservations revenue, which is complemented by having a third consecutive year of outsize Choice Privileges member growth. Since we revamped the program in early 2016, membership has increased by almost 15 million members. Taken together, these strong results are proof that investing in our current brands, launching brands in segments we know well, and continuing to develop our business delivery capabilities is working. Our performance also gives us confidence in the long-term strength of our brands and the health of our Company.
The strong performance I just outlined is more than a single good year. It builds on years of success and validates that our long-term strategy is working and I do mean long term. Choice Hotels celebrates its 80th year in business in 2019. Our consistent strong performance allows us to make decisions that are in the best interest of our franchisees, our guests, and our shareholders and positions us well for the future. I'd now like to pivot to our year-end performance by highlighting some of our brands. First is mid-scale. Quality, the brand on which Choice was founded, opened its 1,600th domestic property in 2018. That's eight decades of growth for this timeless brand. The brand grew 6% in 2018. As large as Quality has become, our upper mid-scale Comfort brand is still the largest in the Choice portfolio. Specifically, Comfort is progressing on schedule with its transformation.
As of January 28th of this year, more than 700 Comfort Hotels have been certified as meeting elevated brand standards in guest rooms and common areas; 450 hotels are obtaining exterior signage with the new Comfort logo, which signals of the interior transformations; and over 170 hotels have already installed new signs in top markets such as Austin, Texas; Charlotte; and Seattle. Our analysis shows that this investment is already paying off. The Comfort Hotels that completed their renovations are experiencing RevPAR index gains within two quarters after completing the renovations. We anticipate that the entire Comfort brand will experience a RevPAR lift late this year when more than half of the system will be certified as meeting the elevated brand standards. In the second half of the year, we will reintroduce consumers to the new Comfort with a nationwide multiplatform media and ad campaign, which will help our owners reap the benefits of our investment in the brand.
In addition to strengthening the current Comfort system, we are growing the brand with a focus on new construction hotels. We awarded nearly 120 Comfort brand franchise agreements last year bringing its domestic pipeline to nearly 300 properties, 80% of which are new construction. We expect to open more than one Comfort Hotel per week in 2019. Building on our proven record of creating successful new brands, Choice has strengthened our mid-scale presence with the launch of Clarion Pointe. We've been pleased with the reception of this brand expansion since its launch late in the third quarter of 2018. We awarded 21 Clarion Pointe franchise agreements last year giving us a solid foundation for an even better development year in 2019 and the first Clarion Pointe hotel will open by the end of March.
Turning now to upscale. Our Cambria brand remains strategically important to Choice Hotels for several reasons. First, the segment is booming. Upscale has contributed 50% of the industry's new room supply in the last five years. During the same period, demand grew even faster than supply and STR is forecasting a continued growth in demand for upscale products. This presents an opportunity for Choice since upscale is a younger segment in our brand portfolio and we continue to add inventory in markets across the country plus Cambria is the right brand to excel in the market for developers and guests alike. For example, Cambria's low cost-to-build reflects our long-held commitment to maximizing franchisee profitability. And the brand's unique elements like location-specific design and our bar forward concept make it a great choice for today's time-starved modern business traveler.
In fact we have four hotels with the top ranking in their cities on TripAdvisor, further proof that Cambria is resonating with guests and delivering on its promise of a best-in-class upscale guest experience. We awarded 31 Cambria contracts last year, which will add over 4,000 upscale rooms to our portfolio. These new Cambria Hotels are projected to have an average stabilized RevPAR of over $130, making them a strong contributor to our bottom line. On average one Cambria Hotel generates three times the gross room revenue as one Comfort Hotel. Therefore, expanding the footprint of the brand will accelerate the pace of our growth and have a positive impact on our financial performance. Last year we hosted a record number of Cambria ground breaks, 23 of which are active construction projects.
We expect to surpass 50 Cambria Hotels opened and serving guests from coast to coast at the end of the year with an Anaheim property opening this summer and a second LA property starting construction this spring. Finally, an update on extended-stay. This month marks the one-year anniversary of our acquisition of WoodSpring Suites. The brand's first year with Choice has been a success. Since joining the Choice platform, we have increased WoodSpring's website revenue delivery by 24%, its call center conversion rate by 5.5%, and corporate account business delivery by 18%. This has resulted in a 7.6% year-over-year RevPAR increase for WoodSpring. As for the brand's size, we opened 12 WoodSpring Hotels in top markets across the US last year including the Chicago, Seattle, Atlanta, Detroit, and Charlotte markets. WoodSpring now has 250 hotels open with approximately 20 expected to open this year.
And since joining Choice, WoodSpring significantly exceeded the brand record for number of new contracts awarded in a single year. We awarded 75 new WoodSpring contracts last year, 20 of which were in the fourth quarter. We look forward to having around 300 WoodSpring Hotels opened and serving guests across the US by the end of 2020. And with over 115 WoodSpring Hotels currently in the pipeline, we're confident that the brand will grow even further than that. Our expectation that the WoodSpring brand would appeal to yield-seeking institutional investors has been validated and we are seeing cross-pollination between our Cambria and WoodSpring developers. For example, last month we announced an agreement with an institutional real estate developer to develop 27 new WoodSpring Suites Hotels over the next four years.
The WoodSpring acquisition has also reignited interest in our other extended-stay brands, MainStay Suites and Suburban, which also experienced record growth years. Taken together, the pipeline for Choice's three extended-stay brands gives us a healthy mix of conversion and new construction properties. Our success over the past year is attributable to more than a well-segmented brand portfolio. For 80 years Choice has been committed to empowering our owners to be in business for themselves, but not by themselves. We've achieved this by delivering best-in-class franchisee resources. At times, innovation means building these new resources ourselves. This is the case with our central reservation system and distribution platform, choiceEDGE, the industry's most advanced. In the fourth quarter, we introduced several more innovative resources that were created at our technology center specifically to meet the needs of our owners and support their profitability.
We were the first in the industry to launch Virtual Pay capabilities on our website. Virtual Pay allows travel managers to quickly and effortlessly book stays for their travelers without the guest needing to present a personal credit card at check-in. We also launched our Group Management Platform, an online reservation solution that makes planning and booking group travel easier. Groups and small meetings are growing significantly and this tool will enable our hotels to capture more of this business. You all know the importance of loyalty in our industry, which is why we're pleased with the continued growth of our Choice Privileges program. Last year marked the ninth consecutive year of double-digit membership growth and the third straight year of growing by around 5 million members. Choice Privileges is more than 40 million member strong. These guests book longer stays and more frequent stays with us as well as spend more during these days.
They are also some of our best brand evangelists as they rate their stays more highly than non-members. This has helped Choice Privileges become a top hotel loyalty program in USA Today's 10 Best Readers Choice Awards and US News and World Report for three consecutive years. In addition to building technology to fuel our owners' business, we also pursue innovative relationships with world-class digital businesses. Last month Choice announced a decision to migrate over 1,000 applications from our legacy system to the Amazon Web Services cloud. This move is consistent with our cloud first approach which dates back to 2005. We'll be able to create more value for our franchisees and guests by increasing our use of the AWS cloud and improving our system's performance, scalability, and reliability. Choice has also formed a strategic relationship with Google.
At the recent Consumer Electronics Show, Google announced that Choice was the first hotel partner to launch voice-enabled booking via Google's voice-controlled home assistant. In November we enabled Book on Google, which makes it easier for guests to book seamlessly on the Google platform while preserving many of the benefits of booking direct and minimizing drop-off. When it comes to driving owners' profitability, whether by building systems ourselves or choosing the right strategic relationships, we are never done innovating. Our strong results for 2018 position us well not just for the year ahead, but for the long haul. In our long-term view, we measure success by the ability to both maximize shareholder value and fuel our small business owners' profitability through proven brands. Three things tell us we're succeeding.
First, the continuous improvement of our value proposition has driven strong demand for Choice brands in all segments. Second, about 60% of the new franchise contracts awarded last year were with existing or returning owners, which means we're providing an attractive value proposition to those who know us well and those who are new to Choice. Third, we maintained an industry-leading voluntary franchisee retention rate. In other words, our long-term focus shows our owners that we take seriously their decision to trust us with their investment. At Choice, this has always been the case and always will be whether they own one hotel or a dozen.
I'd now like 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. We are very pleased to close out another year with strong financial results and once again these results exceeded our expectations. Our financial performance reflects our continued investments to further strengthen our brands and business delivery capabilities. In fact the strength of our business model and our strong financial performance allow us to continually invest in the business for the long term, grow earnings, and return capital to shareholders. In addition to the full-year adjusted EBITDA and adjusted diluted earnings per share outperformance that Pat highlighted, there are several specifics worth noting at the outset. First, full-year net income exceeded the top end of our previously issued guidance by more than $2 million to reach $216.4 million. This represents diluted earnings per share of $3.80. Second, full-year adjusted income excluding certain items increased 34% over the prior year to $221.5 million.
Third, the Company exceeded the top end of its full-year adjusted EBITDA guidance by $1 million and the top end of its full-year adjusted EPS guidance by $0.03 per share. And finally, total revenues for full-year 2018 increased to 11% year-over-year and now exceed $1 billion. These results are proof that our long-term focus pays off, gives us confidence in the health of our business, and positions us well for future growth. Let's now review fourth quarter results in more detail. Total revenues for the fourth quarter 2018 increased to 11% over the prior period to nearly $245 million and adjusted EBITDA for the fourth quarter 2018 also increased 11% to $76.2 million versus the fourth quarter of 2017. Fourth quarter 2018 adjusted diluted earnings per share were $0.88, a 29% increase over the prior year quarter and also exceeded the top end of our guidance range by $0.03 per share.
This outperformance was driven entirely by better-than-expected revenues from our core franchising operations. In particular, procurement services performed very well. Fourth quarter 2018 procurement services revenue exceeded our expectations and grew 28% over the same period of the prior year. We continue to expand and leverage the procurement services platform by forming new partnerships that benefit both our franchisees and guests. Finally, our recurring effective income tax rate for the fourth quarter was 20.2% and slightly higher than our previous forecast of 18.5%. Choice's long-standing commitment to our franchisees' profitability continues to drive strong franchise operations results. Full-year hotel franchising revenues increased 12% over the prior year to $483.4 million while fourth quarter hotel franchising revenue increased 13% from the same period of the prior year to $114.5 million.
Hotel franchising revenue growth was highlighted by domestic royalty fees, which increased 11% and totaled $354.7 million for full-year 2018. The increase in domestic royalty fees stems from growth in all three of our royalty levers. For full-year 2018 versus the prior year, domestic units increased 6.6%, effective royalty rate increased 14 basis points, and domestic RevPAR increased 1.2%. This topline revenue performance drove adjusted hotel franchising EBITDA growth of approximately 14% and 9% when excluding the WoodSpring acquisition for full-year 2018 versus 2017. We are optimistic that this growth will continue and are forecasting all three royalty levers to increase in 2019. Our first revenue lever, system size, closed out the quarter and the year on a high note. For full-year 2018, the number of units in our domestic system increased nearly 7% to nearly 5,900 while room count increased 9% for a total of over 450,000 domestic rooms.
Two major factors contributed to this domestic unit growth. First is our Quality Brand, which as Pat said, recently surpassed its 1,600th location. The brand added nearly 100 new hotels to the portfolio during 2018, an impressive growth rate of 6%. The other is our domestic upscale portfolio, which increased its room count 14% year-over-year. Today, we have approximately 50,000 upscale rooms open and serving guests around the world. Demand to open a hotel with Choice remains high as 2018 was our best development year in over a decade with 756 new domestic franchise agreements awarded. Of these, 287 agreements were granted in the fourth quarter. In particular new construction domestic franchise agreements awarded in 2018 increased 30% year-over-year. Additionally, we continue to have success in converting existing hotels into our brand portfolio and awarded 434 conversion agreements in 2018.
This healthy balance of new construction and conversion agreements allows us to improve both the size and quality of our brand portfolio in the near term while maintaining a strong well-segmented portfolio of brands for the long term. Our extended-stay and upscale brands in particular contributed to our strong development performance. The ability to continue to successfully enter and thrive in new segments gives credence to our strategy, execution, and future growth prospects. The WoodSpring acquisition combined with favorable consumer demand trends brought renewed interest to our entire extended-stay portfolio. As Pat mentioned, versus full-year 2017 the number of new domestic franchise agreements awarded last year increased 156% for our extended-stay portfolio. Even excluding WoodSpring, our MainStay Suites and Suburban brands saw significant growth with new domestic franchise agreements increasing by 37%.
Another brand fueling our strong development year was our upscale Ascend Hotel Collection, which closed out 2018 by awarding the most franchise agreements in the brand's history. Choice awarded 73 total franchise agreements, 43 domestic and 30 international, fueling the brand's continued expansion in key markets and regions across the globe including Spain, Colombia, Panama, the Caribbean, Canada, and of course the US. At year-end, our overall domestic pipeline of hotels awaiting conversion, under construction, or approved for development reached 1,026 hotels; a 20% increase from December 31st of 2017. This is the largest pipeline in the Company's history and these hotels represent nearly 82,000 rooms or 18% of the current rooms open and operating in our system. Our new construction domestic pipeline grew by 27% over the previous year and will be a catalyst for our long-term unit rooms and RevPAR growth.
In fact, hotel construction starts were the highest since 2009 giving us a solid foundation for future hotel openings. For full-year 2019, we expect net domestic unit growth to range between 2% and 3%. This guidance reflects incremental strategic terminations for underperforming properties throughout 2019. This is aligned with our long-term strategy of ensuring our hotels continue to deliver guests high quality and affordable accommodations. We expect our 2020 unit growth rate to accelerate and believe the terminations will have a positive impact on overall brand equity and future RevPAR growth. The second revenue lever, royalty rate, continues to be driven by the pricing of franchise agreements. Our effective domestic royalty rate for full-year 2018 grew by 14 basis points year-over-year and increased 11 basis points for the fourth quarter 2018 versus the same period of the prior year.
2018 is the third consecutive year of double-digit royalty rate growth. Since 2015, our effective royalty rate has increased by 44 basis points, which equates to over $31 million of incremental royalties on an annualized basis. Given the increasingly attractive value proposition that we provide franchisees and their desire to be affiliated with our brands, we expect continued growth in our effective royalty rate with an anticipated increase between 8 basis points and 12 basis points for full-year 2019. The third and final revenue lever to discuss is RevPAR. Our domestic systemwide RevPAR increased 1.2% for the full year, which was in line with our guidance. Overall, fourth quarter 2018 RevPAR increased 0.7% compared to the same period of the prior year, which was slightly below our guidance. We attribute this primarily to the continued Comfort transformation effect as well as fourth quarter softness due to tougher comps seen throughout the industry.
Based on preliminary results, we are encouraged that our Comfort Move to Modern program is working and is expected to become a net contributor to RevPAR growth in the second half of this year when over half of the properties will have completed the renovations. In fact the properties that completed renovations by the end of second quarter 2018 saw an average RevPAR index lift of plus 50 basis points for the full year. For the first quarter of 2019, we expect RevPAR to remain approximately unchanged against a strong comparable of 3.5% RevPAR growth in the first quarter of 2018. Additionally, we expect full-year RevPAR to grow between 0.5% and 2%. In 2018, we generated significant operating cash flow, which allows us to continue executing against our long-term growth strategy and return capital to our shareholders. Throughout the year, we returned approximately $200 million back to our shareholders.
These returns came in the form of $49 million in cash dividends and $149 million in share repurchases. Even with these capital returns and continued investment in the business, we ended 2018 with a leverage ratio of approximately 2.2 times below our target range of 3 times to 4 times. In closing, our record-setting pipeline, strong brands, and the continued momentum of the lodging cycle allow us to make long-term investments in areas that have been and will continue to be key drivers of our performance. Throughout 2019, we expect continued brand investments with the completion of Comfort's Move to Modern program and key initiatives that will fuel the long-term growth of Clarion Pointe, WoodSpring, and Cambria. Additionally, we will make investments in bolstering our consumer insights and predictive analytics capabilities to better understand our guests and our owners and keep us at the forefront of innovation and hospitality.
We expect these investments to position us well for 2019 and beyond. For full-year 2019, we expect adjusted EBITDA to range between $354 million and $363 million and adjusted diluted earnings per share to range between $4 per share and $4.13 per share. And for the first quarter of 2019, we expect adjusted diluted earnings per share to range from $0.72 to $0.76 per share. We are very pleased with our 2018 success and we are optimistic that our strong performance will continue as we drive results by executing on our long-term strategy and make investments that create additional runway for growth.
At this time, Pat and I would be happy to answer any questions. Operator?
Questions and Answers:
Operator
We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Shaun Kelley with Bank of America. Please go ahead.
Shaun Kelley -- Bank of America Merrill Lynch -- Analyst
Hi. Good morning, everyone.
Patrick Pacious -- President and Chief Executive Officer
Good morning, Shaun.
Shaun Kelley -- Bank of America Merrill Lynch -- Analyst
Maybe just to start with the guidance and sort of the overall earnings algorithm and bridge here. Dom, you gave a lot of good color in your part of the prepared remarks and maybe I think one of the areas -- so we touched on I think RevPAR and what your expectations are around royalty rate growth and why net unit growth maybe a little bit dragged. But when we do the walk or the bridge to get to your EBITDA guidance, I think we're still implying SG&A growth is probably a bit elevated. I imagine this has to do with some of the investments you alluded to in the last part of your prepared remarks. So, could you maybe elaborate a little bit there and give us a sense of how much is SG&A going to be up year-on-year or any discrete items you could call out for us in that?
Dominic Dragisich -- Chief Financial Officer
Sure thing, Shaun. And you hit the nail in the head, it really is the result of some of those investments that we're going to be making the business. Obviously there is also a timing element. When you take a look at the 2018 EBITDA growth, we were about call it 9% or so when you normalize for WoodSpring. That EBITDA growth will decelerate slightly just given some of the timing, just the tougher comp 2018 to 2019. When you take a look at topline revenue, you're continuing the trend that you saw in 2018 into 2019. SG&A growth in particular, it is a little bit elevated call it 9% or so and it does have to do with those investments that we're making in the business; consumer insights, some of these other brand investment opportunities that we see on the horizon. And so when you drag that down to EBITDA, you're talking about call it a 5%. Slightly elevated tax rate also in 2019 comp on 2018, that was just some of the state and local tax flow through. So net net if you do normalize for those taxes as well, if you drag it down to EPS, you're essentially at a normalized call it 7% or 8% EPS growth year-over-year.
Shaun Kelley -- Bank of America Merrill Lynch -- Analyst
Great. That's perfect. And then as we think about that elevated -- those investments, is this something that is going to be more one-time in nature meaning OK, maybe we move up to this level, but wouldn't repeat from a growth rate perspective as we move out to 2020 and beyond or are you seeing something in the business or enough opportunities where you're going to keep attacking these things as they come up? Just to kind of get a sense for a bit of -- again the longer-term algorithm here.
Patrick Pacious -- President and Chief Executive Officer
Yes. Shaun, this is Pat. I think you should look at it as not something that's going to be baked in for the long term. We're at a point in the cycle right now where there's a lot of opportunity for us when we think about the brand launches we've done and the new segments that we're growing where we see opportunity and so there's -- this is the time in the cycle where you want to be refreshing your prototypes. We're doing a lot of research now and actually collecting a lot of information from our guests; in both the upscale, mid-scale, and extended-stay segments; and translating that information into consumer insights that's going to lead to brand amenities or potentially new brand extensions or launches is really what we're looking at right now.
And so, I think you should look at these as sort of the investment back in the product portfolio that we sell and also in the proprietary contribution number, which is our value proposition continuing to capture that guest demand that's out there. So, this is an opportunity time and it's part of the lodging cycle to continue to look at the -- we look at sort of tomorrow's brands and the brands that we have in our portfolio that meet that definition. It's really looking at and continuing to invest in those brands as our unit growth and our RevPAR are expected to accelerate in the next couple of years.
Dominic Dragisich -- Chief Financial Officer
Yes. Just quantitatively speaking, Shaun, what I would say is long term we still probably call it mid-single-digit SG&A growth. Obviously, as Pat alluded to, we will be opportunistic if we see additional opportunity to drive topline.
Shaun Kelley -- Bank of America Merrill Lynch -- Analyst
Great. I think all that makes sense. One more if I may, which is you also alluded to the unit growth -- sorry, the leverage target and where you're at and probably below your normal range. You've been super successful it appears with WoodSpring and the impact that's having across the portfolio. So kind of both between capital return and also M&A, sort of what's the -- kind of what's the -- below the line what's the go-forward algorithm and does the EPS growth contemplate and include any buybacks in 2019?
Patrick Pacious -- President and Chief Executive Officer
Yes. Historically we have not guided to any EPS growth that's attributed to share repurchase. That's because our share repurchase has been more really call it opportunistic as our strategy where we look for where the stock prices is dislocated from our intrinsic value calculation. So you look at our EPS growth year-over-year, the guidance does not include share repurchase. On the M&A side of the house, I think it's -- we have a lot of capital capacity to do a number of things. Invest in our business, which we're doing. When you look across our segments with launching Clarion Pointe, continuing to build Cambria and putting capital to work there, and really helping to fuel the growth of WoodSpring. Because when I look at WoodSpring, that is a brand who if we can help our owners find the right sites, it only adds more excitement and more market opportunity for them. So, that's where the sort of capital investments are going. We're always looking at M&A opportunities that make sense, which fit nicely in our portfolio, and that are asset light. So, we'll continue to look for those opportunities that make sense and would be a nice add to our current portfolio.
Shaun Kelley -- Bank of America Merrill Lynch -- Analyst
Thank you very much.
Operator
The next question comes from David Katz with Jefferies. Please go ahead.
David Katz -- Jefferies & Company -- Analyst
Hi. Good morning, everyone.
Patrick Pacious -- President and Chief Executive Officer
Hi David.
Dominic Dragisich -- Chief Financial Officer
Good morning, David.
David Katz -- Jefferies & Company -- Analyst
I wanted to focus on just Cambria for a minute. I know you made some commentary about getting to 50 hotels or so and in the past we've talked about the aspiration of getting north of 100. Is that still the aspiration and is there any sort of timing or trajectory that we could discuss about that?
Patrick Pacious -- President and Chief Executive Officer
Yes, it's still the aspiration and we feel really good about the progress that we're seeing both in open hotels now at 40. We had 16 ground breaks last year, which was double the prior year. So, we feel good about the progress that we're making on getting new contracts awarded and getting hotels open and through the pipeline. I think when we look at the current pipeline, it's north of 80 I believe. So, the path forward to get up to that 100 units is clearly there and we're seeing a lot of excitement around the brand. We're seeing a pickup in interest at the institutional level and I think we as a company are continuing to support the brand with some of the investments we're making as well. I look at the segment, as we talked about in our remarks, there's significant supply growth in that segment and that's really where there's a huge amount of significant consumer demand as well. So, the industry fundamentals for that sector continue to be very positive and we feel really good about the progress we're making.
Dominic Dragisich -- Chief Financial Officer
Yes. David, and just one good data point is when you take a look, as Pat mentioned, you have 40 open, you do have 23 that are currently under construction today. So when you take a look at that 40, the 23, and then about 80 or so in the pipeline; you could probably hit that 100 number call it within the next three years or so.
David Katz -- Jefferies & Company -- Analyst
Got it. And just back to the subject of terminations in 2019, have you -- and I apologize if I missed it, but have you indicated which brands that is from? Is there a specific catalyst for those terminations? And obviously others in the industry are cleansing certain systems also. Is that a function -- is any of this is a function of maybe intensified competition or anything in that area of thinking?
Patrick Pacious -- President and Chief Executive Officer
No. I wouldn't call out a specific brand. I would call it more in our conversion brands across several of them and I would call it sort of normal or maybe slightly higher than normal this year terminations really around making sure the product is staying relevant for consumers. And what's interesting about our brand portfolio, we proved this with the Comfort turnaround. Many of those hotels that leave one brand, move into another brand in the Choice portfolio that's more aligned with the owner's willingness to put capital into the asset. So even though we may terminate many of those hotels, they will stay in the system as well.
Dominic Dragisich -- Chief Financial Officer
And David, the only thing I would add is if you take out some of those incremental strategic terminations, for 2019 we would have been right around that 3% growth rate and we do expect that to accelerate in 2020 as I mentioned in the prepared remarks.
David Katz -- Jefferies & Company -- Analyst
Got it. Thank you very much.
Operator
The next question comes from Thomas Allen with Morgan Stanley. Please go ahead.
Thomas Allen -- Morgan Stanley -- Analyst
Hey, yes. So, just following up some of those guidance questions earlier. So on the third quarter call you guys said that you expected unit growth to be up over 3% and then your royalty rates to grow mid-single digits in '19. So, I guess what's changed in the past three months to kind of have all these -- or have so many things move around? Thank you.
Dominic Dragisich -- Chief Financial Officer
So I think on the net unit growth front, we just talked about that, primarily it's a result of the strategic incremental terminations. So, we think that's in the best interest of the business longer term. And then on the effective royalty rate, it's just really a refinement of the models. Obviously what our development team goes to market with and the discounts that they're providing, which is very low compared to historicals, and really the mix of the product. So when you flow the mix higher royalty product through the models as well, we do see continued opportunity on the effective royalty rate front. We're still pretty materially below the rack rates. And so, we updated those forecast to call it the double-digit this year and then next year and beyond we still think that we can sustain the historical call it mid-single-digit effective royalty rate increase.
Thomas Allen -- Morgan Stanley -- Analyst
Helpful. And I'm guessing that some of that unit growth in 2019 also fell in the fourth quarter too because if I calculate it correctly, you kind of were doing better -- slightly better than expected. But then just my follow-up question is these investments you talked about, can you help us think about for CapEx for the next few years or so? Thank you.
Dominic Dragisich -- Chief Financial Officer
So, I'd say the CapEx forecast is fairly in line with historicals as well. So, it's right around call it that $25 million to $30 million. We still anticipate being a very cash flow positive company. When you take a look at the EBITDA less the $25 million to $30 million or so, expect it to continue to deliver under the current trends as well and that's why we're at that 2.2 times. But I think your best bet is right around that $25 million to $30 million, which we have been historically.
Thomas Allen -- Morgan Stanley -- Analyst
Okay. Perfect. Thank you.
Dominic Dragisich -- Chief Financial Officer
You're welcome.
Operator
The next question comes from Anthony Powell with Barclays. Please go ahead.
Anthony Powell -- Barclays Capital -- Analyst
Hi. Good morning, guys. Your 30% increase in new infrastructure signings is pretty notable given all the concerns about higher cost of financing in labor and land. Did those shelters have any impact on your signing activity and do you expect them to have any lengthening impact on the construction timeline given the cost of labor and materials?
Patrick Pacious -- President and Chief Executive Officer
No. I think we've sort of talked in the past how that window has probably opened up. It used to be several years ago closer to 24 months, now it's trending more toward 36 months on new construction. I would say on financing when you look at our mid-scale brands in particular, the financing picture there is usually one where the owner is getting either friends and family or financing from local or regional banks and their loan to values are -- and they put a lot of equity into these hotels. So there is an impact, but it's not as significant as maybe in more capital-intensive projects. So, we haven't seen financing be an issue with regard to holding back on new construction programs.
Anthony Powell -- Barclays Capital -- Analyst
Got it, thanks. And on the terminations, do you have kind of normal termination rate every year in terms of rooms coming out of the system and how has that trended over the past few years and how should it trend going forward?
Dominic Dragisich -- Chief Financial Officer
So, they're typically terminations that we initiate. It's typically around 4% of the overall portfolio.
Anthony Powell -- Barclays Capital -- Analyst
And that has not changed materially over the past few years?
Dominic Dragisich -- Chief Financial Officer
It has not. So when we're talking about the incremental that we expect in 2019 and the 50 basis points, that would be over and above. But historically speaking, we've been right around call it that 3% to 4% range.
Anthony Powell -- Barclays Capital -- Analyst
All right. Great. Thank you.
Operator
Okay. The next question comes from Patrick Scholes with SunTrust. Please go ahead.
Patrick Scholes -- SunTrust Robinson Humphrey, Inc. -- Analyst
Hi. Good morning. Going back and looking at some of the commentary from last earnings call, you had indicated your RevPAR for your chain scales to be a little -- for this year to be 2% or 2.2%. I'm wondering now that the midpoint is lower, is that reflective of some -- a little bit of softness in year-end bookings that makes that guidance a little bit lower? Thank you.
Patrick Pacious -- President and Chief Executive Officer
Yes. Patrick, the issue is Comfort Inn and I think when you -- and I think it's a good point. When you look at Comfort Inn, if you take Comfort Inn out of our unit growth story, we grew at 3.6% units on all the other brands in 2018. RevPAR is a similar story, RevPAR was about 3% growth without Comfort. So the Move to Modern, the fact that we're taking rooms out of inventory and renovating hotels has really had, as Dom mentioned, that sort of call it 50 basis point lowering on RevPAR for the year. As we've mentioned, the RevPAR index gains that our Move to Modern hotels that completed the renovation in early 2018 is going the other way, 50 basis points positive. So, it's really a story about Comfort Inn and as we get through the renovations process throughout the year here, it's going to flip to be a real accelerator for our RevPAR growth. I think just -- so you have a sense of sort of where we are in that process.
About 40% of the brand has already completed it, 35% is under way, and then there's that remaining 25% that will begin at some point in 2019. The precision around this isn't really under our control. They all have to complete it by the end of 2019, but individual owners make their decisions based on seasonality of their market, their willingness to start the renovation during peak periods, those types of things that determine when those hotels are taking rooms out of service, doing the renovations, and then reaping the benefits on the other side. The great news is it's essentially not going to have a drag on RevPAR in 2019 because the positive aspects are beginning to catch up with the rooms out of inventory and we do expect in 2020 and beyond it to be a significant driver of our RevPAR.
Patrick Scholes -- SunTrust Robinson Humphrey, Inc. -- Analyst
Okay. I appreciate the clarification on that. Thank you.
Dominic Dragisich -- Chief Financial Officer
Thank you.
Operator
Okay. The next question comes from Jared Shojaian with Wolfe Research. Please go ahead.
Jared Shojaian -- Wolfe Research -- Analyst
Hey, good morning everyone. Thanks for taking my question.
Patrick Pacious -- President and Chief Executive Officer
Good morning Jared.
Dominic Dragisich -- Chief Financial Officer
Good morning.
Jared Shojaian -- Wolfe Research -- Analyst
Good morning. I wanted to go back to the CapEx question and I guess just ask you from the perspective of total development spending. I know you have a lot of initiatives from some of the joint ventures you've announced and obviously the Cambria ramping. But can you just help us think about 2019 from a total development spend perspective? How that breaks out between equity method, financing, other key money and then how we should think about that going forward in 2020 and beyond?
Dominic Dragisich -- Chief Financial Officer
Sure. So, this is Dom and what I would say is fairly in line with what you saw in 2018. So when you take a look at the advances for the Cambria program, we don't provide publicly the breakdown between JV and mezz, et cetera; but it was call it somewhere just south of $100 million overall. I think that's a pretty good proxy for when you just take a look at the outlays into 2019. Key money you also saw actually increase by about call it $20 million year-over-year from 2017 into 2018. The vast majority of that was the acceleration that we saw with the Cambria pipeline. And so, that Cambria figure is baked in that line item in the balance sheet. That's also a part of that overall $100 million figure as well. Net net we basically expect key money for our other brands to remain fairly constant with what it has been historically.
Jared Shojaian -- Wolfe Research -- Analyst
Okay. Thank you. And in terms of the royalty rate increases, I mean, is this highly a function of just new franchisee coming in it at higher rates and that's a positive mix effect depending on the brands or are there other factors to consider like maybe for example, I know some brands will pay -- will offer some sort of incentives where when you book direct, pay a higher royalty versus if someone goes through the OTA, there's is lower royalty. I mean, do you have any sort of structure like that that maybe benefiting you as you have sort of this direct booking campaign going on right now?
Patrick Pacious -- President and Chief Executive Officer
No, we don't -- I mean the royalty rate doesn't depend on the channel mix that comes through the hotels. Other than the fact that the higher proprietary channel mix that we can deliver to our hotels, the more value prop we have and the higher our expectations are around royalty. And I mean if you remember, we talked about this in previous calls, two years ago we raised the royalty rate on half our brands and then a year ago we raised the other half. And so it is a function of -- with our proprietary contribution and our royalty contribution and the quality of our brands all getting better, owners have been willing to pay a higher royalty rate to join the system. That's also reflected in lower discounting. So, all of those things are contributing to the effective royalty rate increases we've seen over the last two years.
Jared Shojaian -- Wolfe Research -- Analyst
Great. Thanks. And just one more for me if you don't mind. Can you just talk a little bit about the RevPAR environment right now? What you're seeing year-to-date and maybe how you would parse out versus business in terms of your RevPAR items?
Patrick Pacious -- President and Chief Executive Officer
Yes. So I think the quarter given the government shutdown, I mean we only really have sort of January numbers, got off to a little bit of a softer spot. I think we think the impact was probably in the month of January 20 basis points to 30 basis points from the government shutdown. We'll get an interesting calendar shift here where Q1 will be helped by the Easter shift. It goes the other way because we're picking up a Sunday in the quarter. So, there's some puts and takes. I think we're guiding to essentially a flat quarter given the Q1 of 2018 was so strong at 3.5%. But there isn't a lot of see-through into really February and March at this point.
Jared Shojaian -- Wolfe Research -- Analyst
Okay. Thank you very much.
Dominic Dragisich -- Chief Financial Officer
Thank you.
Operator
The next question comes from Alton Stump with Longbow Research. Please go ahead.
Alton Stump -- Longbow Research -- Analyst
Thank you for taking the questions. Just a follow up on the share buyback discussion. Obviously a pretty big step-up in buybacks for you guys here in '18. I mean if there is an absence of acquisition opportunities, would you ever consider using your balance sheet to step-up buybacks or would continue to focus on core free cash flow for that endeavor?
Dominic Dragisich -- Chief Financial Officer
So, what I would say to you is when you look at where we want, and I think this goes back to what Pat was saying, in 2018 it really -- we look at it as an opportunistic buyback opportunity for us where we are trading at the intrinsic value. And so, I think you would expect to see some level of buybacks in 2019 as well. As Pat mentioned, we are -- we have quite a bit of capacity on our balance sheet right now. We're going to take a look at it in the context of Cambria, we'll take a look at it in the context of M&A, and certainly return capital to shareholders. So I don't think it's -- I think it's a pretty good assumption that there will be some level of buybacks fairly consistent with what you probably saw in 2018 into 2019 as well absent some of those incremental M&A or internal strategic investments.
Alton Stump -- Longbow Research -- Analyst
Makes sense, thanks. And then just a quick question on the RevPAR front. I kind of read your full-year guidance, would it be safe to assume that you are currently expecting any way for a ramp up over the course of the year obviously as compares get easier moving in the back half?
Patrick Pacious -- President and Chief Executive Officer
Yes. We look quarter-over-quarter at RevPAR strengthening as we get further into the year.
Dominic Dragisich -- Chief Financial Officer
And what I would add there is the -- the comps get easier as well. So if you think about the drag that we had in Q3 and Q4 of last year as a result of the hurricanes, if you look sequentially Q1 into Q2, you're going to see -- we believe based on the model today that you'll see a jump, Q2 into the Q3 probably another jump, and then probably stabilizing right around those levels.
Alton Stump -- Longbow Research -- Analyst
Great. very helpful. Thank you.
Patrick Pacious -- President and Chief Executive Officer
Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Pat Pacious for any closing remarks.
Patrick Pacious -- President and Chief Executive Officer
Thank you, everyone, for joining us today. As you heard, we're proud that our shareholders and owners know we treat their investments just as seriously as we do our own capital and are constantly innovating and creating resources to enhance their profitability. The reputation we built over eight decades clearly resonates with our franchisees who are staying in the Choice system, opening more hotels with us, and proudly flying the flag of one of our brands on their hotel. These factors give us confidence not only for 2019, but for the longer term. I'd like to thank you for joining us today and we will talk to you again in May. Have a great day.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Duration: 58 minutes
Call participants:
Oscar Oliveros -- Investor Relations Director
Patrick Pacious -- President and Chief Executive Officer
Dominic Dragisich -- Chief Financial Officer
Shaun Kelley -- Bank of America Merrill Lynch -- Analyst
David Katz -- Jefferies & Company -- Analyst
Thomas Allen -- Morgan Stanley -- Analyst
Anthony Powell -- Barclays Capital -- Analyst
Patrick Scholes -- SunTrust Robinson Humphrey, Inc. -- Analyst
Jared Shojaian -- Wolfe Research -- Analyst
Alton Stump -- Longbow Research -- Analyst
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