Choice preps for future by focusing on 3 segments

Cambria Hotel Downtown Phoenix Convention Center
In 2019, Choice Hotels International opened 11 properties under its Cambria flag, including the Cambria Hotel Downtown Phoenix Convention Center. Photo credit: Choice Hotels International

As Choice Hotels International closed out 2019 with largely positive results, President/CEO Pat Pacious has been continuing to chart a path for the future.

“We are strengthening our existing brands and building new ones to appeal to the customer of tomorrow in the upscale, midscale and extended-stay segments,” Pacious said. “We have also been intentional about the geographic markets we are targeting to grow our brand across these three key segments.” 

Stated plainly, he continued, the company’s focus is on the revenue intensity of each hotel. “We drove substantial growth across the higher-value and more revenue-intense upscale, midscale and extended-stay segments with a 3.1 percent increase in units and we expect this growth rate to increase in 2020,” he said.

By the Numbers

In Q4, Choice achieved net income of $42.2 million. For the full year, net income was $222.9 million, up from $216.4 million one year earlier. Full-year adjusted net income, excluding certain items, increased 9 percent over the prior full-year period from $221.5 million to $242 million.

Adjusted earnings before interest, taxes, depreciation and amortization for the full year were $364.9 million, a 7 percent increase from the same period of 2018, achieving the top end of the company's full-year 2019 adjusted EBITDA guidance. Adjusted EBITDA for the fourth quarter was $81 million, a 6 percent increase from Q4 2018.

Pat Pacious
Choice Hotels President/CEO Pat Pacious detailed some of the chain's successes and upcoming strategies for the crowd at last year's brand conference. Photo credit: Choice Hotels

There were, however, some slight downturns: Domestic systemwide revenue per available room decreased 0.9 percent and 2.1 percent for full year and the fourth quarter, respectively, compared to the same periods of the prior year. This, Pacious noted, was at the low end of the previous guidance, and can be attributed to Q4 performance in oil and gas markets, which have been impacted by oil prices and production challenges, he said. 

Three Segments

Choice reported a 3.1 percent aggregate increase in units and a 4.3 percent growth in rooms for its domestic upscale, midscale and extended-stay segments for the year. The company grew the number of domestic rooms in its upscale Cambria Hotels brand and the Ascend Hotel Collection soft brand to more than 29,000 for the year, a 44 percent increase from 2018 and inclusive of 17 properties associated with the company's strategic partnership with Apple Leisure Group’s AMResorts brand.

The company opened a record 11 properties under its Cambria flag in key markets and grew the number of rooms by 28 percent. The brand reached a milestone of 50 open hotels with 27 additional hotels under active construction as of year-end 2019. As of the end of the year, the company had approximately $582 million reflected on its consolidated balance sheet pursuant to the Cambria Hotels financial support activities, which Michael Bellisario of RW Baird noted, is a $27 million net increase compared to outstanding investments at the end of the third quarter.

Related: Choice looks to ‘year of investment’

New domestic franchise agreements for the company's upscale brands totaled 94 for 2019, a 27 percent increase over 2018, 43 of which were awarded in the fourth quarter, a 30 percent increase over the same period of 2018. Additionally, the Ascend Hotel Collection executed 151 global contracts in 2019, the largest number in the brand's history. As the soft brand incorporates existing hotels, Pacious noted, this flag can add unit growth in a matter of days rather than the year or more required by other hard brands. 

For the ever-increasing extended-stay segment, the company surpassed 400 domestic hotels in its portfolio by the end of the year, a 10 percent increase over 2018. The company also increased its extended-stay domestic pipeline by 13 percent to 315 hotels over the same period. The WoodSpring Suites brand grew more than 8 percent in terms of domestic hotels open and 23 percent in the domestic pipeline of hotels awaiting conversion, under construction, or approved for development. 

In January, the company announced Everhome Suites, an new-construction, midscale extended-stay brand. “Everhome Suites is the first brand to enter the midscale extended-stay segment in nearly a decade, where a significant portion of the inventory is 15 years or older and where the data tell us that demand far exceeds supply for hotel stays of seven-plus nights,” Pacious said. Multiple developers, he added, already have committed to build 13 Everhome Suites.

Choice opened an average of more than one Comfort hotel per week in 2019, the highest number of Comfort openings in eight years. Comfort's domestic pipeline reached 290 hotels, approximately 80 percent of which are new-construction. The brand's domestic franchise agreements awarded for the full year increased 20 percent over the prior year and are expected to generate higher revenues over the life of the contracts compared to domestic franchise agreements awarded in 2018.

Pipeline Growth

Choice’s overall pipeline, Pacious said, has a high percentage of new-construction hotels, with more than 75 percent of projects in the works falling into this category. 

In all, the company awarded 307 domestic franchise agreements in Q4, a 7 percent increase compared to the the prior year period. The company's total domestic pipeline of hotels awaiting conversion, under construction or approved for development as of the end of 2019 increased to more than 1,050 hotels and nearly 85,000 rooms, representing the largest domestic pipeline in the company's history. 

Choice's total international pipeline of hotels awaiting conversion, under construction, or approved for development totaled 83 as of the end of the year, a 48 percent increase from the same time in 2018. 

Coronavirus Impact

While COVID-19 has been a primary topic of conversation in many hotel companies' fourth quarter and full year 2019 earnings calls, it barely made a blip in Choice’s outlook for the year, thanks to the business’ relatively small presence in China. “I would call it less than minimal,” said Pacious, noting of Choice’s 7,000 hotels, only seven are in China. All of these properties, he added, currently are closed.

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In terms of inbound travel to the U.S., Choice does not have a “heavy concentration” in the key gateway markets that attract Chinese visitors. “And a lot of our international inbound travel comes from markets other than China,” he added. And while he acknowledged the situation could change over time, the virus is currently having a “very small” impact on Choice’s overall business. 

What’s Ahead

For 2020, Choice expects net income to range between $201 million and $208 million, with adjusted EBITDA ranging between $378 million and $385 million.

Net-domestic-unit growth for 2020 is expected to range between 1.5 percent and 2.5 percent, and domestic RevPAR is expected to be between flat and a decline of 2 percent for Q1r and full-year 2020 versus the same periods of the prior year. This, Bellisario noted, is “largely as expected given the company's greater exposure to the underperforming economy and midscale chain scales domestically.”