Loyalty buildup, midscale development fuel Choice Hotels' Q1

The Cambria Hotel in Los Angeles is a short distance from Manhattan Beach, several malls and also less than 20 miles from downtown LA's tourist attractions.
Choice Hotels opened its Cambria brand near LAX earlier this week.

One in 10 hotels in the U.S. are a Choice Hotels brand. So said Steve Joyce, Choice Hotels International's CEO, during his company's first-quarter earnings call. In total, Choice has 6,500 hotels globally, and the company is focused on growing that number even higher.

Net income for quarter was $28.7 million and domestic system-wide RevPAR increased 3.8 percent. Joyce pointed out that Choice's RevPAR increase bested the industry average of 3.4 percent for the quarter.

Loyalty programs effectiveness continues to be a hot topic for the industry. Joyce said that Choice Privileges currently has some 30 million members and that a total of 4.6 million signed up in 2016. Choice Privileges added 1.1 million members in Q1 2017.

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According to Joyce, the loyalty program is driving customer engagement. In Q1, Choice saw a 500 bps jump in direct reservations and usage of direct platforms. "Our proprietary platforms and tools are working," Joyce said.

Development

New and approved franchised hotel development contracts totaled 106 in the first quarter, an increase of 51 percent from the same period last year. New construction and conversion franchise agreements increased 153 percent and 24 percent, respectively, in the first quarter of 2017, compared to the first quarter of the prior year.

Leading the way is Choice's Comfort and Sleep Inn brand, which represent nearly 70 percent of the company's new construction franchise agreements. 

The domestic new construction pipeline for the company's Sleep Inn brand as of March 31, 2017, totaled 114 hotels, a 50-percent increase from the same time last year.

Cambria is continuing to grow in the U.S., fueled by key money Choice has provided to kickstart the brand. Earlier this week, the first Cambria opened in California at LAX. Soon to follow are openings in Chicago, downtown Los Angeles and San Francisco.

"We are creating incentives to do those hotels. It's working well," Joyce said, adding that 14 could open this year. "Construction is increasing and the developer community is taking note. We are buying dirt and putting deals together."

Joyce said that the brand is now attracting institutional investors and pension funds.

Choice invested $43 million of its own capital in the first quarter with a recycling plan in place. "In a typical roundtrip capital that we are putting in, call it five years. It's a two-year construction period, three years to stabilization, that's when a refi event occurs, and that's when our money comes out typically," Joyce said."You're seeing a lot of the investments we made earlier, starting to recycle. We have got some loans coming due and other things that are going to occur. But we are going to continue to recycle; we are going to put that capital back out in new deals."

When asked if Marriott's acquisition of Starwood could impede the company development progress, Joyce was dismissive. "I don’t see Marwood as a detriment but an advantage that will drive more deals for us."

Sleep Inn added a new prototype last year, and Pat Pacious, Choice's president and COO, heralded optimism for brand. "We introduced a new prototype last year, and eight months later, we actually have the first of our hotels that have used that prototype open," he said. "So we are feeling very good about where the development side is on Sleep. It's the lowest cost to build in the segment and has the highest ADR. So when you put that combination together, developers are very attracted to it."

Joyce said Choice is set up for future success, especially because it doesn't have much urban exposure, where supply is getting overheated. While Ascend Hotel Collection and Cambria are mostly urban plays, the Comfort brand is in secondary and tertiary markets for the most part. "We don’t have many rooms in urban dense locations, but we have demand for it. Secondary and tertiary markets are where action is and where we are."

Choice is also insulated from Airbnb, said Steve Oaksmith, Choice's controller. "Airbnb is an urban play, and not where we are and not impacting us," he said. "I think it's interesting to look at Airbnb—they have 3 million listings, but only 1 million of those are actually comparable to a hotel, and most of them are in those, sort of, major markets and destination markets. They are also not where our customer really plays from a price-point perspective, nor from a length of stay perspective. So we don't really see an impact from what's happening with Airbnb."

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