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GreenTree Hospitality Group Ltd. (NYSE:GHG)
Q3 2019 Earnings Call
Nov 20, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome to GreenTree Hospitality Group Limited Third quarter 2019 Financial Results Release Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Rene Vanguestaine. Please go ahead.

Rene Vanguestaine -- Investor Relations

Thank you, Andrew. Hello, everyone, and thank you for joining us today. GreenTree's earnings release is still being processed and will be available on our IR website at ir.998.com soon as well as on PR Newswire services. We have posted a PowerPoint presentation on that same website that accompanies our comments today and that you can use to follow the call.

On the call today from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Megan Wang, Director of IT Department; and Mr. Nicky Zheng, IR Manager. Please note that Ms. Selina Yang, Chief Financial Officer is currently on Maternity Leave. Mr. Xu will present the company's third quarter 2019 performance overview, business operations and company highlights; and Ms. Wang, on behalf of Ms. Yang, will then discuss financials and guidance. They will be available to answer your questions during the Q&A session that follows.

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 U.S. 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 expectations 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 filing with the U.S. Securities and Exchange Commission. All information provided including the forward-looking statements made during 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 S. Xu -- Founder, Chairman of the Board of Directors and Chief Executive Officer

Thank you, Rene, and thanks everyone for joining our earnings call today. As already mentioned, Ms. Selina Yang, Chief Financial Officer is currently on Maternity Leave. So you can see on Slide 3, we now have a new member in our management family, and her name is Iris, and will say hello to everyone and apologize for causing some delay through year this time.

Now please turn to Slide -- Page number 6, I'm pleased to report our 2019 third quarter results. Our seventh consecutive quarter of solid operating and financial performance. We grew our geographic coverage to 309 cities across China by the end of September, up from 278 cities by the end of September of 2018, a 11.2% year-over-year growth. We now have 3,102 hotels in operation, a 21.3% year-over-year increase across 12 spanning [Phonetic] the economy, mid-scale, mid-to-upscale and luxury brands.

Total revenue grew 20.1% year-over-year to RMB292.1 million. Gross profit increased 21.4% to RMB204.9 million. Non-GAAP adjusted EBITDA rose 11.6% to RMB177.1 million and the core net income per ADS, that's basic and dilutive non-GAAP improved by 16.5% to RMB1.3, which is equivalent to USD0.18. Operating performance also remained solid, especially compared to the overall performance of the Chinese hospitality sector according to STR Report. Our blended average daily room rate increased by 4.2% year-over-year to RMB174. Occupancy rate had a slight 1.3% decrease to 85.9% primarily due to 250 in existing hotels in renovation, seen accelerated a new hotel opening in the quarter as well as a lower occupancy rate in our luxury segment. However, revenue per available room increased 2.7% year-over-year to RMB149.

Moving to Slide number 7. At the end of the quarter, we operated 3,102 hotels, 21.3% higher than a year ago. 30 of these hotels were leased and operated, or L&O hotels and 3,072 franchised and managed, or F&M, hotels. While the mid-scale segment remains the core of our business with more than 73.8% of our hotels, we are diversifying our portfolio by adding hotels in both the higher end and the economy segment of the market. The number of hotels in the luxury segment and mid-to-upscale segment increased to 6.2% of the total portfolio and the economy segment grow to 20%.

Turning to Slide Number 8. We opened 181 hotels compared to 146 in third quarter of 2018. That's a 24% increase. Three of those new openings were in the luxury segment, 20 were in the mid-to-upscale segment, 92 were in the mid-scale segment and 66 were in the economy segment. 16 of newly opened hotels were in Tier 1 cities, 32 (sic) [38] in Tier 2 cities and the remaining 127 in select Tier 3 cities and other cities in China. Meanwhile, we closed 34 Hotels, 15 due to brand upgrade and 13 due to non-compliance with our company's brand and operating standards, the remaining six due to property-related issues. So net-net, we added 147 hotels to our portfolio. We are proud that we actually only closed 19 hotels in this quarter because almost all franchisees have been benefited from our operation and support.

Turning to Slide Number 9. Our pipeline of new hotels also increased from 596 on June 30 to 652 on September 30. Around 26.8% of these hotels are in the mid-to-upscale and the luxury segment, 39.6% are in mid-scale and around 33.6% in the economy sector.

Slide Number 10 summarizes some of our key operating metrics. We continued to see improved operating performance across the board. The key numbers to look at here are the purple bars, representing the performance of our F&M hotels. Our F&M hotels' ADR improved 4.2% to RMB173. RevPAR increased 2.6% to RMB149, while the occupancy rate decreased from 87.5% to 86.1%. The performance of our L&O hotels also with ADR up 6.8% to RMB224. As certain L&O hotels come back online after the completion of the renovations.

Slide 11 shows our RevPAR trends. We delivered a 7.5% year-over-year increase in RevPAR for our L&O hotels to RMB164, while RevPAR for our F&M hotels increased by 2.6% to RMB149.

Let's turn to Slide 12. Another critical area of our business is our loyalty program. Ours is a paid program, in which members enjoy a variety of premium perks and benefits. Especially after the company created membership programs with several partners, including Da Niang Dumplings, Gourmet, Noodle House, Yibon Hotel Group and so on. This enables members to use the membership points and benefits interchangeably. Our loyalty program helps us foster closer relationships with our guests, who can book with us directly, therefore reducing sales and marketing fees and expenses.

Overall, we now have about 39 million individual members and 1.45 million corporate members, up from approximately 36 million and 1.38 million as of June 30, and our members are very loyal customers. During the quarter, around 93.1% of all room nights were sold directly, primarily due to our individual and corporate members.

Now, let me talk about a few recent developments that you can find on Slide Number 13. We added a 23 mid-to-upscale and luxury hotels, including Argyle, GreenTree Eastern, Gem, Gya, Vx and Ausotel hotels. At the end of this quarter, we had 21 Argyle, 22 Gem, 18 Gya and 19 Vx hotels in the pipeline as we continue our accelerating expansion into the mid-to-upscale and luxury segment.

In conclusion, we are very proud of our company's strong performance, in particular, the meaningful increase in sales and strong guest preference delivered by our diversified brand portfolio, especially in the light of the shifting Chinese economy. We remain confident in our business model, strategic positioning and long-term growth strategies. We will continue to invest in our people, brand, system and technology in order to better serve our guests and franchisees and then ensure the healthy development of our company for the long run.

With that, I will pass the call over to our Director of IT, Megan Wang, who will summarize our financial performance for the quarter three.

Megan Huang -- Director of IT

Thank you, Alex. Let me refer you to Slide 15, where you can see that our combined total revenues grew 20.1% year-over-year to RMB292.1 million, primarily due to three factors: the opening of 180 F&M hotels and one L&O hotel, improved RevPAR both in F&M and L&O hotels and growth in our loyalty membership program. Growth was partially offset by the renovation of six L&O hotels during the quarter.

Total revenue from F&M hotels rose 19.2% to RMB219.6 million, while total revenue from L&O hotels rose 22.9% to RMB72.6 million. On same slide, during the first nine months of 2019, total revenues rose by 20.6% to RMB802.4 million, total revenues from F&M hotels were RMB617.5 million, up by 21.2% year-over-year and total revenues from L&O hotels were RMB184.9 million, up by 18.5% year-over-year.

Moving to Slide 16, the cost and expense side of the P&L. Hotel operating costs were RMB87.3 million, up 17.1% year-over-year which is mainly attributable to costs associated with the expansion of our F&M hotels, including staff cost, consumables, higher depreciation and amortization, higher one-time renovation costs related to the renovation of six L&O hotels and 250 F&M hotels as well as the operation costs of Argyle. These were partly offset by the closure of one L&O hotel. For the first nine months of this year, hotel operating costs were RMB246.2 million, up 21.6%.

Selling and marketing expenses were RMB20.8 million, up 71.3% year-over-year, mainly attributable to the incentive bonus to hotel staff and operation team. The operation of the newly added hotel brands, such as increased advertising and the promotion expenses to improve our brands recognition and increased personnel, compensation and other costs. Selling and marketing expenses for the first nine months of 2019 were RMB61.8 million, up 84.4% year-over-year.

General and administrative expenses were RMB39.9 million, up 64.6% year-over-year, mainly because of increased IT research and the development cost. Headquarter staff costs, legal, DD, M&A and other consulting fees, increase of share-based payments as well as the G&A expense of Argyle. General and administrative expenses for the first nine months were RMB105.4 million, up 51% year-over-year. Overall, combined total operating costs and expenses grew 33.4% year-over-year to RMB148 million.

On Slide 17, you can see that gross profit grew 21.4% year-over-year to RMB204.9 million, gross margin increased to 70.1%, adjusted EBITDA increased 11.6% year-over-year to RMB177.1 million and adjusted EBITDA margins decreased by 4.6% to 60.6%.

Moving onto Slide 18. In this quarter, net income decreased 28.4% to RMB102.2 million and net margin was 35%. The decrease was primarily due to market fluctuation in our investment portfolio and increase in total operating costs and expenses. Core net income increased 16.5% to RMB134.8 million and core net margin decreased by 1.4% to 46.2%.

Let's look at Slide 19. Net income per ADS basic and diluted decreased by 28.4% to RMB1.01 equal to USD0.14, while core net income per ADS basic and diluted non-GAAP improved by 15.9% to RMB1.32 equal to USD0.18. In the first nine months of this year, net income per ADS basic and diluted improved by 9.9% to RMB3.6 equal to USD0.50 while core net income per ADS basic and diluted non-GAAP improved by 12.7% to RMB3.46 equal to USD0.48.

Moving onto Slide 20. During the first nine months of 2019, our operating net cash inflow was RMB395.5 million. As of September 30, we had cash and cash equivalents of almost RMB2.1 billion. This provides us with ample resources as we continue to evaluate additional potential investments and acquisitions and we do not anticipate the need to raise additional capital at this stage.

Lastly, in terms of guidance, we expect total revenue for the full year 2019 to grow 20% to 25% from 2018. The change was due to delayed consolidation of urban and speed up of our renovation program.

This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thanks.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Ken Chong of Jefferies. Please go ahead.

Ken Chong -- Jefferies -- Analyst

Hi management for taking my question and congratulation on the results. And I just want to ask about the RevPAR outlook toward the fourth quarter. It's good to see that in the third quarter we still deliver positive blended RevPAR growth. I'm just wondering for the fourth quarter now we are already in late November, do we have any colors on the RevPAR trend quality like when we have a breakdown by room rate and occupancy? And second question is more from the threat from the industry peers like OYO and there's been so many economy hotels on soft brands and do we see the need to open more in our side as well to sustain our market share? Thank you very much.

Alex S. Xu -- Founder, Chairman of the Board of Directors and Chief Executive Officer

Thanks, Ken. Great questions. And the -- let's talk about the first -- the fourth quarter first. At this moment, because we discussed before, we have value-priced business model and we're trying to work really hard to focus on the direct sales. We have a loyal customer base as a result and we see our RevPAR will be -- continues to be stable or will be improved slightly for the fourth quarter of this year. And that, however, we will speed up renovations because after renovations we clearly see the major improvement after the capex and after the slight upgrade in certain hotels. So during the renovation period we may see some negative impacts toward occupancy and ADR. And so -- and excluding the impact of that, we should be able to see some gradual and so small slight increase of the performance over the same quarter last year. So, so far, we have not been negatively impacted by some of the concerns from our customers.

And on the second question, regarding the soft brand, the entry to that, we did see -- there's a lot of change in that area. However, our belief is still the brand should have certain value that is standardized or quality services to your -- both to your guests and to your franchisees, and so that both of them have to be very happy. And so we will maintain a higher, as you know, that high quality in that end. So in order to make sure we have a sustainable growth and we certainly do not want to have up and down for our future growth, so we have been really careful in terms of monitoring that progress, and the market is very -- the market of China, the hospitality is huge. So I think that there is ample opportunities and whoever can do a job consistently and in the same high quality, I think eventually will succeed.

So that's why Ken we have continued to maintain our standard in our development. We have not added a lot of non-soft brand products. But as I said that we are monitoring that, we're evaluating that and we also added some development personnel as well as operation personnel and we are training them to see whether we need to add more, just in case, if we need to add more soft brand [Indecipherable] from existing franchisees for the next year.

Ken Chong -- Jefferies -- Analyst

Sure. Thank you very much.

Operator

[Operator Instructions] The next question comes from Nate Deng of China Renaissance. Please go ahead.

Nate Deng -- China Renaissance -- Analyst

Hi management and thank you for taking my question and congratulations to the great result and congratulations to Ms. Yang with Iris. I have three questions, if I may. The first one is about the operating metrics. Can you maybe give us a little bit color on the same hotel RevPAR growth in this quarter and what it is like by [Indecipherable] maybe the first one comes first.

Alex S. Xu -- Founder, Chairman of the Board of Directors and Chief Executive Officer

The same hotel, when you take a look at the numbers, because -- so the same hotel, I believe we have a RevPAR, the mid-scale is up 2.3%, economy up to 3.6% and the mid-to-upscale and luxury was down 3.7%. So that's basically the RevPAR like-for-like growth and that's our organic. But our consolidated is based on by the following, the luxury, we have stayed flat, mid-to-upscale 0.2% decrease, mid-scale is 2.3% increase and the economy is a 3.6% increase. That's on RevPAR.

Nate Deng -- China Renaissance -- Analyst

Okay. Thank you. And the other question is about operating expense hike, because we have seen a significant increase in SG&A cost. So maybe -- can you give us a little bit more color on EBITDA of, say, IT development cost, the staff bonus cost and marketing for new brands, how much is it? And going forward, shall we -- what is the kind of normalized EBITDA margin shall we expect?

Alex S. Xu -- Founder, Chairman of the Board of Directors and Chief Executive Officer

Okay. So thanks, Nate, for those two questions. So the selling and marketing expenses we have basically three components there, the -- mid -- one component is the Argyle consolidation and that has contributed to about 21% of the increase and we think that factor will be gone by the next year. And then the following 50% roughly about we had one-time selling expenses because we have -- this is 15 years anniversary, we have done some promotions and that roughly has 1 -- close to RMB6 million in that expenses. And then, I think that's up 47%. Excluding those two major items and then there are miscellaneous activities. Our core sales and marketing -- regular sales and marketing expenses only increased 2.9%.

And so regarding to the G&A, again, that's about three areas. One is Argyle consolidation which contribute to about 7.1% increase out of that total number. And then the R&D, this quarter, we spend RMB5.7 million and so we amortized that, but even with that, we have increase of RMB4 million in the R&D. So that's like 16.7% about 17%. So deleted all of that, I think then we also have a part, as I mentioned to you, the cost of adding the development and operation in preparation for the next years and the higher speed of growth. But we did not -- we think that's regular expense and that the growth at the speed of increase will be slowed down, so excluding those, it's going to be less than 47%. Then we also have the continuous evaluation like consulting fees, TDs and that various advisory costs that's little bit higher because we're evaluating systematically some opportunities and that is a 10% increase. So deleting all of that. So the net core G&A is about 30% increase, OK. So Nate, that's our break down.

Nate Deng -- China Renaissance -- Analyst

Okay, thank you. Thank you, management for detailed explanation and congrats on the results. Thank you.

Operator

The next question comes from Colin Yao of Goldman Sachs. Please go ahead.

Colin Yao -- Goldman Sachs -- Analyst

Thanks, management, for taking my questions and congratulations on the strong results. I basically have two questions, the first one would be regarding on the same hotel RevPAR. So comparatively speaking since GreenTree has been delivering very resilient performance in terms of same hotel RevPAR. I would like to know comparing to your peers, how -- why GreenTree overperformed comparatively speaking? And also my second question would be on the further expansion in mid-scale and upscale segment. Since you are still seeing ample cash resources, would you be considering open out more lease and owned hotels or seeking some mid to high-end hotel investment opportunities both domestically and globally? Yeah, so here are my two questions.

Alex S. Xu -- Founder, Chairman of the Board of Directors and Chief Executive Officer

So the first question regarding our performance comparing with our peers. We really have not compared with our peers that closely because we think that we use business model that value pricing, I think is our key and pay attention to the need of a loyalty members, our profit memberships with their need. So we do not, for instance, adjust our price constantly and we have basically a value pricing model and because of the economy at the shifting of the change -- because of the change of the shifting of the economy. I think that both corporate travelers as well as individual travelers are that in contrast within the travel budget. So we have always believed, in the end, value price the products and services will be in a great demand.

And secondly that we have as we have said to you before and we developed -- strengthened our membership development the programs. We strengthened our marketing programs. We targeted our -- the membership, sales and marketing. We also have one of a kind, because our parent company has a restaurant chain which we have more than close to 100 million and 100 million visitors per year where we can use the point of contact to market our brand. And so a combination of all of that and meet the sales and marketing programs more effective. I think that has also stabilized and in the more volatile market, our ADR occupancy and therefore the RevPAR. So I think those are the key factors.

And with regard to the second question. We are evaluating opportunities and trying to deploy our cash responsibly in to further grow our China market. So we are monitoring that and we think there will be great opportunity ahead, and so that if we have strategically located properties and also well priced, we will, to selectively our own leased and operated hotels or own hotels. So that's -- globally, we believe our strength -- management strength and the core competencies are based in China. So unless those opportunities are coming to us from our franchisees or from our customers, we would not diverse our focus to elsewhere. And I think the opportunities here in China and also the fear of influence such as nearby China. So our focus of growth for the next few years are continuing to be focused in domestically. We think the market has been -- will be really, really good and there will be ample opportunities.

Colin Yao -- Goldman Sachs -- Analyst

Okay. Thank you very much and congratulations, again, on the strong results. Thanks.

Operator

The next question comes from Jisheng Liu of CLSA. Please go ahead.

Jisheng Liu -- CLSA -- Analyst

Hey, thank you operator. Thank you, Alex, Megan and Nicky for taking the questions. I have a couple of questions, maybe two quick ones first. First one was on the guidance for 2019, I noticed that you have put a new revenue guidance of 20% to 25% year-on-year growth into 2019 versus 2018. I was just wondering if this is only our organic business?

Alex S. Xu -- Founder, Chairman of the Board of Directors and Chief Executive Officer

Primarily, and that include number of months of the consolidation of Argyle. But I think that we -- that will be very much delayed urban and consolidation, that's probably less than one month or less. So primarily, you can see primarily from organic growth.

Jisheng Liu -- CLSA -- Analyst

Yes. Second -- at the end of second quarter '19, you actually said the revenue of 2019 was expected to grow by 23%, 28% of 2018. So by that time actually Urban was already -- sorry Argyle was already consolidated. So I was just wondering so if that guidance was actually, so 20% to 25% of revenue growth for this quarter, which was announced for 2019 target. So that would be rather considered as a top line growth guide in that essence. So if that were issue, it means that our fourth quarter implied revenue growth will be much slower. So why was that actually?

Alex S. Xu -- Founder, Chairman of the Board of Directors and Chief Executive Officer

Initially, we anticipate that we will have a consolidation of Urban for the entire fourth quarter but that will be delayed for two months or so. So which will have a negative impact on the revenue growth for the M&A. And secondly that we, as I mentioned to you, that we speeded up. We feel that during the transition period, they speed up the existing hotels renovation is very important. So we have a renovation program aggressive program is being implemented and so we will have a higher number of hotels being renovated. So we do not, necessarily want to force the closure of our hotels and we want to give and incentivize our franchisee to renovate during this period of time. So due to these two factors and the reduction of the growth, the revenue from consolidation, from the M&A and also the speed of this renovation and we will see that the guidance will drop 3%.

Jisheng Liu -- CLSA -- Analyst

Got it. That's very clear. Thanks. Second one was because you just mentioned you have been adding development personnels. So may I know how many personnels in development did you actually have by the end of, let's say, June until 2019. And how many do you have like just now. And how many do we plan to add in future actually? Any color would be helpful.

Alex S. Xu -- Founder, Chairman of the Board of Directors and Chief Executive Officer

Sorry, if that -- I'll stick to my memory that I think that in this quarter we -- in the third quarter, we added about -- we -- because we're screening those. We come and our development personnel will come in for three months, for six months of the trial period, because not everyone can be made for full time, after the training can be a full time BD person. So I think the last quarter, we have hired close to 45 personnel. And at the end of the third quarter, we also have squeezed out quite a bit. So at the end of the third quarter, I think we have about 200 plus or minus BD personnel. It is the training and also that it is the screening process that cost a great deal. And at the -- so that's the number. And while this quarter we plan to add another 40 so by the year end, we think we should have 240 to 250. That's our plan.

Jisheng Liu -- CLSA -- Analyst

Great, thanks. And the third question, I actually know that some of your brands, actually two, may have been going through a rebrand exercise or -- Argyle actually in the printers of last quarter name was Argo and this quarter, it has become Argyle Grand Hotel and for GME Hotel, last quarter, it was GME hotel, this quarter it was renamed to GEM Hotel. So if my understanding was right, you are actually doing some rebranding exercises also. So may we get a percentage, what's the rationale behind that because if there is no real economic impact I think franchisees may get pretty confused, because previously, they have one brand and now the brand has actually changed a little bit. So how what's the rationale behind it, if any color could be shared on this? Thanks.

Alex S. Xu -- Founder, Chairman of the Board of Directors and Chief Executive Officer

That's a great question. No, there is no, actually -- there is no change of the brand in any of those logos, Chinese. I think that Argyle always have the Argyle and then we have a brand, they have a lot of other things that depending on the property type. So those -- I think we just used the representatives, once the -- most represents of the hotel brand there. In terms of our Gem hotel, that is [Indecipherable] Hotel, that's always spelled and we said Gemei then people use would lead a couple of -- on the English side, GME and Gem, and I think our guest like for Gem, for gems that's spelled correctly, our English that our English -- that customers and investors. So that's the -- the English side that we just slightly modified, those are our brand, but there is no brand changes to our major customers in China. So apologize for the confusion.

Jisheng Liu -- CLSA -- Analyst

No worries. Thanks. Maybe just a little. The last little element to check with you. Actually, last year during fourth quarter, you actually paid out a dividend. So should we expect any dividend during the next quarter and if there is what amount should we expect for next quarter? Thanks.

Alex S. Xu -- Founder, Chairman of the Board of Directors and Chief Executive Officer

We have announced a plan for a dividend policy, we would -- I think skip for that. For the time being less announced otherwise.

Jisheng Liu -- CLSA -- Analyst

Okay. Thank you very much. That's all my questions. Many thanks.

Operator

[Operator Instructions] I see we have a follow-up from Nate Deng of China Renaissance. Please go ahead.

Nate Deng -- China Renaissance -- Analyst

Thanks, Alex. Maybe one follow-up question about our strategy, because I think previously someone asking about OYO soft brand impact and we are also seeing major China Hotel Group saying they're going to penetrate into lower-tier cities. So my question is how are we projecting this increasing competition in the lower-tier cities, which is our target market. And shall we -- are expecting some kind of increased competition and maybe lower -- maybe price work, something like that to happen. And shall we expect the cost of developing new hotels to increase in the future and how are we going to cope with it? Thank you.

Alex S. Xu -- Founder, Chairman of the Board of Directors and Chief Executive Officer

Thanks, Nate. It's a great question. We clearly see there are more opportunities in the third-tier and fourth-tier cities in China. And the first-tier and second-tier, the brand penetration is much higher. So with going through the third, fourth, fifth tier and the demand for the management resource is much higher. I think that there is a price war right now in terms of the initial brand application fees, the initial fees a lot of people will give you the discount and there is a competition at that end. We are clearly also seeing that impact, so we have adjusted our fees to position ourselves compete effectively. But so far, I think that because our positive performance and because franchisee hotel owner can see our sustained and profitability and performance. So we have the development 50% as we said more than 50% is driven by our existing franchisees and the new openings and the referrals. So we're pretty confident that number will continue and will potentially next year further increase.

And we have a trend in the past, consistently our operating managers to be able to be sent through the third fourth tier cities. We have the largest I think number of area managers in the company. And so we are -- we think we are uniquely positioned to do a better job in the third, fourth and fifth tier city because as we've said the fee revenue, the ADR and that there is a ceiling in that end. And so the operating efficiency and the systems and the support, the logistics are crucial to make the hotel operation profitable and sustainable.

So in that end, we believe we are uniquely positioned and qualified. So we're not really concerned a lot more competition. In the past 10 years, we do see, past 15 years, some brands come and go and it is the solid operator who will continue to deliver the performance to the franchisee will be the one to stay.

Nate Deng -- China Renaissance -- Analyst

Thank you. Thank you, Alex for explanation. Thank you.

Operator

[Operator Instructions] The next question comes from Billy Ng of Bank of America. Please go ahead.

Billy Ng -- Bank of America -- Analyst

Hi Alex. Just have a follow-up on that question. Would you mind to tell us what do you think about the current avialan? Like you do mention the competition become a little bit more intense, but of course, we do believe GreenTree is very well positioned on that, but in terms of like profitability of the franchisees, how do you see your own franchisees profitability compared to a year ago. And also maybe in terms of overall industry, how profitable or not profitable at this stage and as a result in 2020, whether you think there will be bigger opportunities for you guys to get on to how those and profitable operators out there to join the franchise or in general, it will be a very tough environment for everyone so like the incentive to open new hotels are low? And how -- what stage are we in at this point?

Alex S. Xu -- Founder, Chairman of the Board of Directors and Chief Executive Officer

Okay. So, Billy, thank you so much for the questions. For our franchisees, our profitability has been very stable because in order to operate in a profitable cost. It goes through a lot of preparation from design and construction cost, pre-opening cost, operating cost, the sales and marketing cost and also you the ability to have direct sales forces in addition to work with so many online players there. So it is a comprehensive sales and marketing and management skill set the team has to have to deliver a return for our franchisees. So for our existing and -- existing hotels with no need for renovations, our profitability stays the same and our original plans, the investment return period of three to 2.5 years and I think was still in that range for many hotels.

We have hotels older hotels that need to be renovated, and that they will be more impacted by a newly old hotels nearby, so they have a reduced performance. So that is why -- and there return, in other words, their profitability got reduced, but most of them already the capital paid back years ago. So they are in the best position to reinvest some of the dollars to renovate and then stay their profitability will come back, because what we designed in terms of the hotel products and pricing really meet the core demand for the everyday leisure and business travelers, so that is about 108, according to the China's hotel statistics. The average hotel space is about USD177. So we really want to target the mid-market and divested the great demand. So we -- the majority of our franchisees profitability remain the same and they are -- that's why I think you enthused about the upcoming opportunities and that they are developing more hotels. And so we anticipate next year we should have the same or higher speed of growth. And we have gone through that in 2009-2010 and I think our growth really have not been impacted that much.

In terms of the -- growing in the future about economy conditions, we think that because there is a pressure on terms of debt -- in terms of the debt services for many small and medium-sized corporation and even for some -- we've seen some the household debt level increased that make put a dent in terms of household expenditures in or small business travel budget. But I believe the core demand are still there. So as long as that we don't deviate -- overspend in terms of the design and the construction and the price of hotel above four or five-stars RevPAR. I think the sector will be very healthy and at least at the sector we say and the comparing with -- comparing with a lot of different sectors, I believe the hospitality sector is a really astonished industry. And we're really blast to begin that hopefully.

Billy Ng -- Bank of America -- Analyst

Okay. Thank you.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Megan Huang for any closing remarks.

Megan Huang -- Director of IT

Thank you, operator. In closing on behalf of the entire GreenTree management team, we 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 do not hesitate to contact us. This concludes the call.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Rene Vanguestaine -- Investor Relations

Alex S. Xu -- Founder, Chairman of the Board of Directors and Chief Executive Officer

Megan Huang -- Director of IT

Ken Chong -- Jefferies -- Analyst

Nate Deng -- China Renaissance -- Analyst

Colin Yao -- Goldman Sachs -- Analyst

Jisheng Liu -- CLSA -- Analyst

Billy Ng -- Bank of America -- Analyst

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