These three initiatives driving Choice Hotels' growth

The Cambria Westfield will have 153 guest suites and 3,800 square feet of meeting space.

As his company’s earnings call began, Choice Hotels CEO Steve Joyce said that “three specific key initiatives” had led to the company’s solid numbers in 2016. These included consolidated efforts to improve franchise profitability, a focus on performance in the upscale sector and a strong development momentum both in the U.S. and internationally. 

Choice’s RevPAR results are “outperforming the industry,” Joyce said, crediting the results to new initiatives including the SmartRates proprietary pricing optimization system and new customer acquisition strategies (including a re-launch of the Choice Privileges loyalty program. “Domestic system-wide RevPAR increased 3.9 percent and exceeded total industry results by 70 basis points,” he said.

Development Momentum

Choice approved 267 new franchised hotels for development in the fourth quarter of the year alone, bringing the number of new franchise agreements signed in 2016 to 645 hotels. New construction franchise agreements increased by 23 percent in the fourth quarter of 2016 from the same period in 2015.

“We are particularly pleased with the increase in a number of new franchise agreements for our Sleep Inn brand, which increased 50 percent from 34 agreements in 2015 to 51 in the current year,” Choice controller Steve Oaksmith said.

The company’s upscale Cambria brand pushed into major gateways with groundbreakings and openings in Philadelphia, two projects in Chicago, Nashville and New York's Times Square. The brand had 66 hotels in its domestic new-construction pipeline by the end of the year, a 53-percent increase from December 31, 2015. The company executed 28 new franchise agreements for Cambria in 2016, 12 in the fourth quarter alone, for a 50-percent increase in the brand’s pipeline.

“As a result, we expect to see an increase in the number of Cambria hotels opening over the next several years,” Oaksmith said. “In fact, we've already open two new Cambrias in January and expect to open eight to 10 more in 2017 in key travel markets.” 

The company advanced approximately $104 million in support of Cambria's development in 2016. Choice also recycled approximately $28 million of investments in support of Cambria development projects resulting in net advances of $76 million for the current year. At the end of the year, the company had approximately $204 million reflected in its consolidated balance sheet pursuant to these financial support activities. “With respect to lending and joint venture investments, the company generally expects to recycle these loans and investments within a five-year period,” the earnings statement declared.

But investing in Cambria seems likely to pay off: The Cambria hotels that have opened over the last two years generated RevPAR of $128 for 2016, and the entire portfolio reported RevPAR of over $100 for the full-year, Oaksmith said. “The higher RevPAR commanded by this brand—as well as the higher average room counts compared to the Company's other brands—should provide a positive catalyst for overall growth over the next several years.”

Domestically Choice’s domestic unit growth was highlighted by Cambria and the Ascend Collection, which grew by 12 percent in the aggregate, the Quality brand which increased by approximately 5 percent, and the Rodeway brand which increased by 10 percent. “We are also pleased with our expansion into upscale segments and our focus on major urban markets,” Oaksmith said. “The number of rooms under our Cambria and Ascend brands grew by 13 percent and 11 percent respectively since the end of 2015, and the royalty generated in these brands increased 32 percent and 8 percent respectively. 

Overall, 2016 ended with new franchise agreements in nearly 650 hotels, representing approximately 50,000 guest rooms. The company's domestic pipeline of hotels awaiting conversion, under construction or approved for development as of the end of 2016 increased 19 percent from December 31, 2015. 

Approximately a third of Choice’s franchise agreements are for new-construction hotels, which were up 16 percent in 2016 compared to 2015. Joyce credited the growth to “driving the right strategies” for the Comfort Inn, Comfort Suites and Sleep Inn brands as well as a dual concept property with Sleep Inn and MainStay Suites. “With Comfort, our transformation strategy has resulted in renewed development and guest satisfaction,” he said, noting that the company executed more than 120 agreements for Comfort hotels last year. Two-thirds of these were for new-construction hotels. 

Internationally, Choice secured agreements in seven new markets last year—United Arab Emirates, Saudi Arabia, Austria, Belgium, Finland, Greece and Hungary. “This is through both master franchise agreements and direct franchising,” Joyce said. “This growth will continue in 2017, as we put additional focus on our European international division.” 

Loyalty Has its Privileges

The Choice Privileges loyalty program got 4.6 million new members in 2016—more than any other year in the program’s history—to reach 30 million members. This could be credited to a new program that lets members access special room rates when they’re logged in to Choice’s website or app. “In addition to the positive impact this has to fill rooms, it has also increased the contributions generated by our proprietary reservation systems up 240 basis points from last year to over 50 percent,” Joyce said.  

Looking Ahead

In 2016, Choice improved the pricing of its franchise agreements. “We expect that to carry forward into 2017,” Oaksmith said. “Our domestic effective royalty rates expanded by a 13 basis points in the fourth quarter to 4.49 percent and increased 11 basis points for the full year.” 

Current RevPAR and U.S. microeconomic trends point to continued RevPAR growth in 2017. “We expect our full-year 2017 RevPAR to increase between 3 percent and 4 percent,” he said.