Kicking off the company’s first quarterly earnings call since announcing plans to acquire Radisson Hotel Group Americas, Choice Hotels International President and CEO Patrick Pacious called the transaction “the most significant acquisition in our company's history.”
The addition of Radisson’s nine brands will “significantly accelerate” Choice’s long-term, asset-light strategy of growing business in higher revenue travel segments and locations, he said, noting “a number of compelling value drivers” Choice can expect from the deal: “First, the acquisition will add over 67,000 rooms that will be [revenue per available room] accretive to our existing platform due to Radisson Hotels America's strength in the upscale and upper-midscale segments and their hotels locations in higher RevPAR markets.” In 2019, he added, the average RevPAR for this portfolio was 38 percent higher than the average for Choice’s existing system. The 67,000 rooms will increase Choice’s global rooms number by about 12 percent.
Notably, the addition of the Radisson upscale brands in the Americas will increase the size of Choice’s global footprint in the upscale segment to approximately 80,000 upscale rooms.
Pacious also predicted the acquisition would improve the return on investment for franchise owners who the company expects to benefit from the “enhanced business delivery capabilities” of the combined companies, including the loyalty program, proprietary tools and emerging technologies.
Finally, Pacious said the deal is poised to expand Choice’s regional representation in the Upper Midwest and West Coast of the U.S. while growing the company’s presence in Canada, Mexico, the Caribbean and other “key” Americas markets.
“We see the pending Radisson Hotels Americas acquisition expanding Choice’s growth vectors by bringing the company's best-in-class franchising platform to adjacent hotel segments and to a new set of hotel owners while providing opportunities to further strengthen Choice's core upper-midscale presence,” Pacious said. The company’s leadership also expects the deal to further drive the company into the upscale segment, accelerating growth for the Cambria and Ascend Hotel Collection brands while also growing the Radisson portfolio.
“We strongly believe that this transaction will enable us to achieve our dual goals of delivering greater return on investment for franchise owners while growing the newly acquired brands to drive meaningful value creation for our shareholders,” Pacious told investors. The deal is expected to close this month.
Beyond the Deal
The quarter, Pacious said, was “a truly remarkable one for our company.” Domestic RevPAR growth surpassed 2019 levels for 13 consecutive months through the end of June, increasing 13 percent for the second quarter compared to the same period of 2019. The company credits this growth to an increase in average daily rate of 13.7 percent compared to second quarter 2019. The trend continued into Q3 with July RevPAR increasing approximately 14 percent compared to July of 2019.
Net income increased 24 percent to $106.2 million for the quarter, a 24 percent increase over second quarter 2021. Adjusted net income for the quarter increased 17 percent to $79.9 million from Q2 2021.
Adjusted earnings before interest, taxes, depreciation and amortization for second quarter 2022 was $129.6 million, a 16 percent increase from the same period of 2021.
Beyond the Radisson acquisition, Choice sold the Cambria Hotel Southlake DFW North in Texas in June for $24 million and secured a long-term franchise agreement with the buyer. The sale of this hotel increases the recycling of previous investments in Cambria Hotels development projects for the six months ended June 30 to more than $30 million.
In the first quarter of the year, Blackstone Real Estate Partners and Starwood Capital acquired a portfolio of 111 WoodSpring Suites hotels from Brookfield, who purchased the properties when Choice acquired the WoodSpring Suites brand and operating company. Because Blackstone and Starwood also own Extended Stay America, the partners intend to reflag the bulk of these properties in September. “This exit scenario would result in a cash benefit amount of approximately five years of future royalty fees to Choice,” Pacious said. “The majority of these exiting hotels represent the older legacy Value Place hotels and are in markets that are highly attracted to current WoodSpring owners interested in future development. We see this transition as an opportunity to further strengthen the brand by replacing first generation hotels with our highly profitable new construction prototype.”
Segment and Brand Performance
The company's extended-stay portfolio has exceeded 2019 RevPAR levels since April 2021 and achieved domestic RevPAR growth of 21.4 percent in second quarter 2022 compared to the same period of 2019. The WoodSpring Suites brand achieved RevPAR growth of 28.1 percent in second quarter 2022 compared to the same period of 2019, driven by occupancy levels of 82 percent and a 22 percent increase in ADR.
The company's overall midscale portfolio has consistently surpassed 2019 RevPAR levels since June 2021 and achieved domestic RevPAR growth of 10.1 percent in the quarter compared to the same period of 2019.
The company's upscale portfolio achieved domestic RevPAR growth of 10.1 percent for the quarter compared to the same period of 2019.
Development
The company awarded 122 domestic franchise agreements in second quarter 2022, a 10 percent increase compared to the same period of the previous year. Year to date through the end of June, Choice awarded 215 domestic franchise agreements, an 8 percent increase compared to the same period of 2021. Excluding the multiunit transaction for 22 properties as part of the company's alliance with Penn National Gaming in 2021, domestic franchise agreements increased 21 percent in the first half of 2022, compared to the same period of 2021. Applications received for new domestic franchise agreements increased 24 percent year-to-date through June 30 compared to the same period of 2021.
The number of domestic franchise agreements awarded for conversion hotels increased 10 percent in Q2 compared to the same period of 2021.
The company's extended-stay portfolio reached 489 domestic hotels as of June 30, a 6.3 percent increase since June 30, 2021, with the domestic pipeline reaching 362 hotels awaiting conversion, under construction or approved for development and an additional 46 hotels under master development agreements committing to future development.
The number of domestic franchise agreements awarded for the WoodSpring Suites brand doubled in the first half of the year compared to the same period of 2021. The company recently entered into development agreements for 45 new WoodSpring Suites hotels with two developers, bringing the brand’s pipeline to approximately 250 hotels.
The number of domestic franchise agreements awarded for the company's midscale segment increased 6 percent year-to-date through June 30, 2022, compared to the same period of 2021.
For the first half of 2022, the Cambria Hotels brand tripled the number of domestic franchise agreements awarded, compared to the same period of 2021.
The number of domestic hotels and rooms, as of June 30, decreased 1.4 percent and 2.9 percent, respectively, from June 30, 2021. Excluding the impact from the previously announced departure of 17 AMResorts-branded properties and the exit of 41 underperforming assets from the portfolio in fourth quarter 2021, the company's domestic upscale, midscale and extended-stay segments reported a 0.3 percent increase in units compared to June 30, 2021.
The company's total domestic pipeline of hotels awaiting conversion, under construction or approved for development and including master development agreements committing owners to future franchise development, as of June 30, reached 910 hotels, representing nearly 84,000 rooms.
Next Steps
On the call, CFO Dominic Dragisich said that Choice is raising the bottom end of its RevPAR growth range and now expects full-year 2022 domestic RevPAR to increase between 11 percent and 13 percent compared to full-year 2019. (The guidance, he added, does not include any positive impact from the Radisson acquisition.)
Unit growth in what Dragisich called “the more revenue-intense segments” likely will range between 1 percent and 2 percent, not including the impact from the one-time exit of the WoodSpring Suites Hotels or the Radisson deal.