Choice Hotels puts focus on the upscale segment in 2018

The Cambria Hotel & Suites LAX. Choice's Cambria and Ascend Collection hotels are currently expanding its base in the upscale sector. Photo credit: Choice Hotels International.

Choice Hotels International aimed high for Q4 2017, and according to its latest earnings report it nailed its projections—but it’s not enough. There is much to celebrate, from record occupancy levels to generous tax reform, and times are good, which is why Choice, like many hotel companies, is diversifying its business by planning ahead for when the cycle takes a turn for the worst.

“This was a transformative year for Choice Hotels, proof that our strategy is working,” Pat Pacious, president and CEO of Choice Hotels International, said during the company’s fourth-quarter earnings call. “Last year we increased our pipeline of new hotel franchises, we increased the percentage of Choice proprietary revenue to our hotels, and this allowed us to increase the pricing of our franchise agreements. We also invested in our future by acquiring a growing brand, WoodSpring Suites… and reinvesting in our technology infrastructure.”

Choice’s Q4 results were positive, in line with many others throughout the industry, and was characterized by new mergers and technology innovations. The company reported an income of $46.7 million before taxes, a 7-percent increase from the same period in 2016, while total revenues from the three months ending Dec. 31, 2017, increased 14 percent year-over-year.

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The company’s domestic system-wide revenue per available room increased 2.2 percent for the quarter and 2.5 percent for the full year compared to the same period last year. Meanwhile, Choice’s number of domestic franchise hotels increased 2.6 percent from Dec. 31 2016 to Dec. 31, 2017. During this period, Choice added 346 new domestic hotels to its system—or as Pacious said, nearly one hotel a day.

Choice excluded the impact of tax reform legislation from its performance guidance this quarter, though this and other items resulted in an initial net loss of $6.4 million Excluding these items, however, the company’s adjusted net income would have resulted in a total of $35.9 million, up from $31.8 million year-over-year. However, Choice’s annual effective tax rate is expected to be lowered to 23 percent, representing a $25-million reduction in cash tax payments going forward.

The EDGE

A perennial lover of technology, Choice Hotels took some time in last quarter to launch its new global reservations system, choiceEDGE, something Pacious referred to as “the industry’s most advanced technology, bar none.” The system is designed to assist Choice’s future expansion efforts as it brings more hotels into its system, and Pacious is more than proud of it.

“ChoiceEDGE is the first new global reservations system from a hotel company in over 30 years,” Pacious said. “We take pride in that we currently have the newest and most technically-advanced platform in the lodging industry.”

Choice purchased WoodSpring Hotels in mid December, 2017. Photo credit: WoodSpring Hotels

Choice didn’t go through the trouble of developing a new GRS from the ground up for no reason at all. Pacious is planning big things, beginning with Choice’s acquisition of WoodSpring Suites last year. The acquisition added 239 hotels to Choice’s system in the first quarter of 2018, and is the cherry on top of a year of strong unit growth for Choice. Overall, the company is expected at increase its portfolio between 7 and 9 percent in 2018, including WoodSpring’s portfolio.

During the question-and-answer portion of the call, Pacious said Choice is targeting the upscale segment for growth, which will then naturally lead it to opportunities in upper upscale and upscale extended stay.

“These are the current gaps in our portfolio,” Pacious said. “We are seeing a lot of progress with regards to Cambria and the Ascend Collection on that front.”

To this end, the Cambria and Ascend Hotel Collection’s portfolio of domestic franchised rooms increased 28 percent in 2017, reaching more than 17,900 rooms in total.

Little Pieces

Choice is also investing more in revenue management systems across its entire portfolio, with a focus on the Comfort brand. By increasing its adoption of revenue management tools, Choice is expecting to record RevPAR growth between 1 and 3 percent in 2018.

“The things that could exceed or come in at the top of our [RevPAR guidance] come down to the tools we are putting in place,” Pacious said. “With Comfort we see it takes about six months for [these hotels] to see benefits… so as more of these hotels come online, we see more potential on that side.”

When asked about the impact of natural disasters in 2017, something keenly felt by other hotel companies, Pacious said a lack of hotels near affected markets in Texas protected Choice from suffering any losses, while also distancing it from the benefits of rebuilding efforts.

Other positives from the call included a statement from Pacious that its technology partner, SkyTouch Technologies, is poised to break even in 2018. The company is currently only representing a roughly $2-million drag on Choice’s earnings. Looking forward, the company expects to investigate future mergers and acquisitions similar to its deal with WoodSpring Suites, but Pacious said the opportunity would have to fit in with Choice’s existing strategy. A strategy that Pacious may be wise not to fiddle with.

“In summary, our 2017 results prove that our strategy is working,” Pacious said.

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