Choice Hotels International reported its results for the three months ended March 31, 2020, highlighting how the company has responded to the COVID-19 pandemic and how it has affected its operations.
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“We believe that our resilient, asset-light, franchise-focused business model, strong balance sheet and proven portfolio of well-segmented brands—along with our expertise in the extended-stay and midscale segment—position us to navigate the broad impacts of the pandemic,” said Patrick Pacious, president/CEO. “In addition, our expectation is that our heavier mix of leisure travel and portfolio distribution in domestic drive-to markets will benefit us during the reopening of the economy as we expect overall industry demand will rebound first in these segments. We believe that our long-term focus, disciplined capital allocation strategy and the targeted actions we have undertaken will help us and our franchisees weather the storm and allow us to capitalize on opportunities as these unprecedented circumstances subside."
Balance Sheet and Liquidity
The company continues to benefit from its primarily franchise-only business model, which historically has provided a relatively stable earnings stream, low capital expenditure requirements and significant free cash flow. As a precautionary measure to further enhance liquidity, on April 16, Choice Hotels obtained a 364-day $250 million term loan with the possibility of a one-year extension subject to lender consent. Consequently, the company now has over $725 million in cash and available borrowing capacity through its revolving credit facility. The term loan will bear interest at London interbank-offered rate plus a range of +200 to +275 basis points, based on the company's credit rating, with a 1 percent floor on the LIBOR rate. The loan contains a similar covenant package to the company's existing revolving credit facility.
Performance Trends
Domestic systemwide revenue per available room decreased 15 percent for first quarter 2020 compared to the same period of the previous year, exceeding overall industry performance by 430 basis points. In the first quarter, Choice Hotels' brands outperformed the respective chain scales in which they primarily compete: upper-midscale, midscale and economy.
Through February 2020, domestic systemwide RevPAR trended at the high end of the company's previous provided guidance. However, in March 2020, domestic systemwide RevPAR decreased 37 percent over the previous year comparable period, with occupancy levels falling below 50 percent. Daily occupancy levels softened over the last 10 days of the month and ranged between 26 percent and 33 percent.
In April, domestic systemwide RevPAR declined 60 percent over the previous year comparable period, with the last week of the month trending +280 basis points in higher occupancy versus the previous week and nearly one-third of the domestic portfolio achieving occupancy levels at or above 40 percent. These trends of occupancy gains have continued into May and represent outperformance versus the company's competitive chain scales.
The company's expertise in the extended-stay segment positions Choice Hotels well in the current environment to attract and retain long-term occasion guests, with the WoodSpring Suites brand and the overall extended-stay portfolio experiencing occupancy levels in March at 72 percent and 69 percent, respectively. These trends have continued in April and May. WoodSpring Suites' brand RevPAR decreased only 2.9 percent in first quarter 2020 over the previous year comparable period, while its occupancy levels have remained above 60 percent since mid-March, attesting to the brand's resiliency.
Nearly 90 percent of the company's domestic hotels are in suburban, small-town and interstate locations, which have consistently reported higher occupancy levels industrywide, driven by relatively stronger consumer demand for these destinations compared to urban or resort locations.
As of May 6, 97 percent of the company's more than 5,920 domestic hotels continue to operate. In addition, fewer than 20 percent of the company's more than 1,210 international hotels were temporarily closed as of May 6. The company experienced a higher number of reopenings domestically in the past two weeks and internationally since mid-April 2020.
Additional details for the company's first-quarter 2020 results are as follows:
Revenues
- Total revenues were flat at $218.2 million for first-quarter 2020 compared to the total revenues reported for the same period of 2019.
- Total revenues excluding marketing and reservation system fees were relatively flat at $107.8 million for first quarter 2020 over the previous year comparable period.
- First-quarter 2020 domestic royalties were $66.3 million, a 12.2 percent decrease from the same period of 2019.
- The company's effective domestic royalty rate for first quarter 2020 increased 10 basis points to 4.94 percent over the previous year first quarter.
- Procurement services revenue increased 15 percent in first quarter 2020 to $13.8 million, compared to the same period of the previous year.
Development
- The company's extended-stay portfolio continued to expand, reaching 410 domestic hotels, a 9.6 percent increase since March 31, 2019, and the domestic extended-stay pipeline reached nearly 300 hotels awaiting conversion, under construction or approved for development. Specifically, the WoodSpring Suites brand achieved more than 8 percent growth in the number of open domestic hotels and a 20 percent increase in its domestic pipeline.
- The number of domestic hotels and rooms, as of March 31, 2020, increased 1.2 percent and 2.7 percent, respectively, from March 31, 2019. The upscale room portfolio expanded 42 percent since March 31, 2019, including a 25 percent increase for the Cambria Hotels brand and a 48 percent increase for the Ascend Hotel Collection, which includes 17 properties associated with the company's strategic partnership with AMResorts, an Apple Leisure Group brand.
- The number of international hotels and rooms as of March 31, 2020, increased 6.3 percent and 15.2 percent, respectively, from the comparable period of 2019.
- The company's total domestic pipeline of hotels awaiting conversion, under construction or approved for development, as of March 31, 2020, reached 1,000 hotels and over 80,000 rooms, with the Comfort brand's domestic unit pipeline representing over a quarter of the total domestic pipeline.
- The company awarded 58 domestic franchise agreements in first quarter 2020, a 27 percent decrease compared to the same period of the previous year. Nearly 60 percent of the domestic franchise agreements awarded in the first quarter were executed in the month of March, of which approximately 90 percent were awarded in the second half of the month alone.
Cost-Management Program
The company's management and the board of directors have taken steps to adjust the company's cost structure and increase its financial flexibility, including:
- Reduced the compensation of the board of directors, chief executive officer and other executive officers for the remainder of 2020.
- Implemented a hiring freeze, except for certain critical positions, and suspended 401(k) matching for the remainder of 2020.
- Since the beginning of the first quarter, reduced its global workforce by more than 20 percent through a combination of layoffs and furloughs.
- Eliminated, reduced or deferred nonessential expenditures, discretionary capital expenditures and investments.
- Temporarily suspended activity under the company's share repurchase plan.
- Suspended future, undeclared dividends in the approximate aggregate amount of $25 million for at least the remainder of 2020.
The company estimates that its cost-cutting measures, including those listed above, will reduce 2020 selling, general and administrative costs by approximately 25 percent. While the company has implemented targeted cost and efficiency measures to adapt to the new environment, it believes that opportunities to further increase financial flexibility still remain under various scenarios.
COVID-19 Response – Franchisee, Guest and Community Support
The company has launched a number of broad-ranging initiatives to support its franchisees during this challenging time. The measures to date include, but are not limited to, the following:
- Implemented fee-deferral and other programs to support franchisees through the crisis.
- Advocated with the federal government to secure and expand franchisees' access to capital resulting in more than 6,800 application submissions for government relief Small Business Administration programs and other Coronavirus Aid, Relief and Economic Security Act benefits.
- Established a proactive, ongoing multichannel franchisee outreach and education program being utilized by thousands of hotel owners to learn how to access newly available capital and reduce their operating costs.
- Drove business to its franchised hotels from a wide variety of industries, government and emergency-management agencies, translating to an increase in occupancy.
In addition, Choice Hotels and its franchisees have taken a number of steps to support guests, local communities and those affected by COVID-19, including:
- Revised Choice Hotels' guest cancellation policy and deferred the expiration of loyalty points to provide travelers greater flexibility during these challenging times.
- Launched the "Commitment to Clean" initiative to provide hotels with the latest resources and training to achieve superior levels of cleanliness and address health and safety concerns associated with the COVID-19 pandemic, leveraging the company's long-standing relationship with Ecolab, an industry expert and global leader in water, hygiene and infection-prevention technologies and services; guidance from the Centers for Disease Control and Prevention, the World Health Organization and the U.S. Travel Association; Choice's membership in the American Hotel & Lodging Association Safe Stay Advisory Council; and insights from the company's franchisee advisory councils, which represent its hotel owners across the country.
- Offered members of the company's Choice Privileges loyalty program the option to donate points towards Serta's initiative to help address nationwide hospital bed shortages caused by the pandemic, the American Red Cross' COVID-19 relief efforts, the International Franchise Association's "Franchising Gives Back" program and Operation Homefront's drive to provide hotel rooms for service members and their families who have been displaced from their current housing due to COVID-19. In addition, Choice Hotels is matching loyalty point donations to various degrees and making its own contributions.
- Offered discounted hotel rates to essential workers and volunteers serving communities across the country during the COVID-19 crisis.
Dividends and Stock Repurchases
The company will continue to follow a prudent and disciplined capital allocation strategy and ensure the level of investment activity is aligned with the current environment.
Dividends: During the three months ended March 31, 2020, the company paid cash dividends totaling $12.8 million. In first quarter 2020, the company declared a cash dividend on its common stock of $0.225 per share, which was paid on April 16, 2020. The company suspended the payout of future dividends for at least the remainder of 2020, as previously disclosed. As a result, total dividends paid during 2020 will be approximately $25 million.
Stock repurchases: During the three months ended March 31, 2020, the company repurchased approximately 700,000 shares of common stock for approximately $54.1 million under its stock repurchase program, as well as through repurchases from employees in connection with tax withholding and option exercises relating to awards under the company's equity incentive plans. As of March 31, 2020, the company had 3.4 million shares remaining under the current share repurchase authorization. The company has temporarily suspended share repurchases under the stock repurchase program as previously disclosed, but may continue to repurchase stock from employees in conjunction with tax withholding and option exercises under the company's equity incentive plans.
Outlook
On March 17, 2020, the company announced that it withdrew its previously issued outlook for 2020 and will not be providing formal guidance at this time. The ultimate and precise impact of COVID-19 on second quarter and full year 2020 is unknown at this time, as it will depend on the duration of social distancing and shelter-in-place mandates, the confidence level of consumers to travel and the pace and level of the broader macroeconomic recovery.
The company currently expects the impact of COVID-19 on business performance will be more significant for the quarter ended June 30, 2020, than the quarter ended March 31, 2020, as the adverse effects on the domestic market, where the majority of Choice Hotels' franchised hotels are located, only began to be observed in March. Based on experts' projections, economic activity is expected to begin to stabilize in third quarter 2020, and a recovery, spurred by the government stimulus and anticipated pent-up travel demand, likely will be underway by fourth quarter 2020. The company is optimistic that it will experience some degree of sequential improvement in the back half of 2020.