Choice Hotels' solid Q3 contrasts with broader industry

Soft third quarters have been plaguing some hotel companies, but Choice Hotels International bucked the trend.

The Rockville, Md.-based hotel franchisor reported that its domestic revenue per available room increased 4.5 percent, and CEO Steve Joyce during an earnings call said that mark “exceeded industry results by 120 basis points (1.2 percent) and by 220 basis points (2.2 percent) in relation to the STR chain scales we compete in.”

In comparison, Hilton Worldwide reported global RevPAR growth of 1.3 percent in the third quarter over the same time period last year, 1.7 percent in the Americas.

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Choice’s net income for the quarter totaled $47.6 million, an increase of 15 percent from the same period last year. Revenues totaled $267.6 million, an increase of 11 percent over the same time last year.

Franchising revenues for the quarter totaled $113.1 million, an increase of 7 percent from the same period last year.

Solid Footing

Joyce said Choice’s strong third quarter was fueled by three main things: the Comfort brands’ rejuvenation program (162 new-build Comfort franchise agreements in last two years), the launch of Choice Smart Rates revenue management tool (launched in May, and with a total of 4,000 Choice hotels so far using it, it’s a pricing optimization system that offers daily rate recommendations, using what Joyce said is “artificial intelligence”) and Choice Privileges member rates, which can’t be found anywhere else on the Internet.

Joyce also underscored the company’s success with driving direct business. “We had more business ever through our channels,” he said. July, according to Joyce, set milestones. “Direct online channels had 17 days in the third quarter with over $6 million in bookings compared to nine in the third quarter 2015,” Joyce said, adding that it had its highest day ever in July, taking in $8.2 million in one day.

On the development front, Choice signed 161 new franchise agreements in Q3, a 25-percent increase over the year prior. “This was driven by growth in both new construction and conversions, and we expect the full year to exceed 2015,” Joyce said.

The company’s domestic pipeline of hotels awaiting conversion, under construction or approved for development as of September 30, 2016 increased 20 percent from the same time last year. The domestic new construction pipeline for the company’s Comfort brand as of September 30, 2016 totaled 180 hotels, a 30-percent increase from the same time last year.

 

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External Forces

While Joyce lauded the Comfort brand, one analyst on the call challenged Joyce with the idea that Hilton’s Tru brand could be a share shifter in the midscale space. Joyce gave Hilton and Tru credit, but was not about to wave the white flag.

“They did a great job on Tru, so numbers out of the gate are pretty impressive,” he said. “But whenever you launch a new brand like that, you get a lot of signings, but not necessarily a lot of hotels."

Part of Comfort’s rejuvenation project was removing underperforming product from the system, the pace of which is now declining, Joyce said.

On the lending front, Joyce said that what he is hearing is not cause for any alarm as the hotel industry heads toward the end of 2016. Banks, especially regional banks where developers have strong relationships, are still lending for projects, albeit at a more measured pace.

“The general view is lenders have lowered levels somewhat but are still lending,” Joyce said. However, he added, loan-to-value has come down somewhat, from low to mid 70s, to low to mid 60s.

“Most of our franchisees don’t leverage that much anyway. They like to have equity in it, and not have worry as much about downturns,” Joyce said.

It’s not all aces for Choice. Just like other hotel companies, it has had its obstacles. Consider the oil and gas markets, where Choice has high exposure. There is still softness there, but Joyce said that rates are not falling precipitously. “Business has leveled off, but the worst is through.”

Joyce said during the good times of the oil business, companies were renting out entire hotels for year for their crews. “We won’t see that happening again,” he said.

Joyce added there, too, is softness in corporate business. “Business travel is moderate growth wise,” he said. “The bulk of increases are on the leisure side.”

When asked about the sharing economy’s impact on business, Joyce was quick to note that, with their vacation Rentals by Choice, they were part of it. Above all, he was not scared by the prospects of Airbnb. “We can’t detect Airbnb impact yet,” he said. “They focus on major markets where there is demand—urban and resort. We aren’t heavily populated there. So we’ve detected no impact in results. Our inventory is differently placed.”

For a time now, Choice has not his the fact that it has been looking to round out its portfolio of brands with something in the full-service, upper-upscale space. He was asked about it again and reiterated much what he has mentioned before.

“An appropriate upper-upscale brand is something we should be looking at,” he said. “It’s more a purchase option than a development option.”

Joyce said he has looked at several opportunities and even mentioned “looking at Europe for some things.”

He ended the call, however, with this declaration: “I think the full-service, 300-room, suburban, 10,000-square-foot hotel is a dinosaur."

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