Comfort Inn 2005 Annual Report Download - page 16

as of December 31, 2005 from 94,220 as of December 31, 2004, a 3.7% increase. The total number of
international hotels on-line also increased from 1,143 to 1,162, an increase of 1.7% for the year ended
December 31, 2005. As of December 31, 2005, the Company had 603 franchised hotels with 46,464 rooms under
construction, awaiting conversion or approved for development in its domestic system as compared to 460 hotels
and 35,652 rooms at December 31, 2004. The Company had an additional 84 franchised hotels with 7,611 rooms
under development in its international system as of December 31, 2005 compared to 109 hotels and 9,515 rooms
at December 31, 2004.
Net domestic franchise additions during 2005 were 214 compared to 198 for the same period a year ago.
Excluding the acquisition of Suburban, net franchise additions totaled 149. Net domestic franchise additions,
excluding Suburban, declined as a result of franchise terminations increasing from 144 in 2004 to 190 in 2005.
During 2005, the Company executed a strategy to replace franchised hotels that did not meet our brand standards
or were underperforming in their market. This strategy resulted in a slightly lower annual growth rate in our
domestic franchised rooms than historically achieved. Existing competition is getting stronger and more focused
on franchising new and existing brands. As the competition gets stronger and more focused on limited service
franchising, the Company will continue to focus on improving its system hotels. A strong RevPAR market is
expected to continue in 2006 and many competitors are focused on improving brand consistency and quality
through higher quality amenities and more aggressive brand compliance efforts. The number of domestic hotels
under development provides a strong platform for continued system growth.
Domestic initial fee revenue, included in the initial franchise and relicensing fees caption above, generated
from executed franchise agreements increased 13.5% to $15.1 million for the year ended December 31, 2005
from $13.3 million for the year ended December 31, 2004. The increase reflects domestic franchise agreements
executed in 2005 of 639 new contracts representing 52,862 rooms compared to 552 agreements representing
47,227 rooms executed in 2004, increases of 16% and 12%, respectively. During 2005, 237 of the executed
agreements were for new construction hotel franchises, representing 18,096 rooms, compared to 182 contracts,
representing 12,799 rooms for the same period a year ago, increases of approximately 30% and 41%,
respectively.
Relicensing fees increased 51.5% to $10.3 million for the year ended December 31, 2005 from $6.8 million
for the year ended December 31, 2004. Relicensing fees are charged to the new property owner of a franchised
property whenever an ownership change occurs and the property remains in the franchise system.
Despite rising interest rates and construction costs, we are optimistic about the prospects for a continuing
rise in the supply of midscale hotels to meet demand. In addition, some of our competitors are terminating
franchising agreements on mature properties. These factors should provide a healthy supply of new construction
and conversion hotel opportunities in 2006.
Franchise Expenses: The cost to operate the franchising business is reflected in selling, general and
administrative expenses. Selling, general and administrative expenses were $78.3 million for the year ended
December 31, 2005, an increase of $8.8 million from the year ended December 31, 2004 total of $69.5 million.
As a percentage of revenues, excluding marketing and reservation fees and hotel operations, total SG&A
expenses were 34.0% for the year ended December 31, 2005 compared to 34.1% for 2004. Expenses increased
primarily due to higher compensation costs including variable franchise sales and key management incentive
compensation and increased travel and entertainment expenses related to the expansion of the franchise sales
force.
Marketing and Reservations: The Company’s franchise agreements require the payment of franchise fees,
which include marketing and reservation fees. The fees, which are based on a percentage of the franchisees’
gross room revenues, are used exclusively by the Company for expenses associated with providing franchise
services such as central reservation systems, national marketing and media advertising. The Company is
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