Outgoing CEO of Choice Hotels praises successor as Q2 numbers show steady gains

Choice Hotels Office

A decade is a long time to be doing anything. But that's exactly how long Steve Joyce has been CEO of Choice Hotels International, and his tenth year will be his last at the helm.

Choice's second-quarter 2017 earnings call began with a short speech from Joyce on his decision to step down by Jan. 1, 2018, as well as a few congratulatory words for his successor, Pat Pacious.

"I always believed that great companies change before that change is required," Joyce said. "I have enjoyed every moment as CEO of Choice, and after I step down I will assume a position as vice-chairman of the board."

Joyce stressed throughout the call that Pacious was chosen not to shake things up, but to build upon the decisions the two of them worked together to construct during Pacious' tenure as president and COO. Joyce used the word "continuity" to describe Choice's mentality going into this changing of the guard, and based the decision on promoting Pacious due to the company's board of director's confidence in his ability to achieve Choice's current objectives, as well as the success of prior projects he has spearheaded.

This mentality was highlighted multiple times during the call's question-and-answer portion, where Pacious was asked about future transactions and said Choice has always maintained an "opportunistic" approach to acquisitions, but they had to make sense to both shareholders and hotel owners. Roughly half of Choice's current portfolio of brands were organically started by the company, while the other half were acquired over the years, and Pacious isn't about to change the secret formula that has worked for so long.

"Going forward we're going to continue to expand our great business in the midscale space, capitalize on moment in the upper midscale space and loo at international growth as an opportunity," Pacious said. "There won't be a significant shift in the strategy that Steve has led in the past 10 years, a strategy that I worked with him on. We like it, so does the board, and it goes back to those tenants that our decisions have to be good for shareholders and must help hoteliers better manage their businesses.

Rock Steady

Choice's Cambria brand is breaking into Southern California with a new opening in Los Angeles, though future properties are also in the works for Anaheim, Glendale and Calabasas.

When it comes to the actual numbers, Choice has cause to celebrate. Net income for the Q2 2017 jumped 16 percent to $45 million, while adjusted EBITDA increased by 15 percent to $81.1 million. Total revenues and hotel franchising revenues for the second quarter increased 14 percent and 10 percent, respectively, compared to the same quarter in 2016. 

"Choice Hotels' overall strategy to successfully focus on franchisee profitability has led to our robust development pipeline and continues to deliver strong financial results," Joyce said. "For second quarter of 2017, 176 new domestic franchise agreements were executed, a 20-percent increase when compared to second quarter of 2016. In fact, we have experienced one of the strongest January through June development periods in our company's history, as new franchise agreements increased 30-percent and new construction agreements increased 65-percent, versus the first six months of 2016."

On the development front, Joyce said that the Comfort brand has a deep pipeline, but due to its focus on ground-up development there is an expected 18-36 month lag on seeing a result from investments there. Because of this, Joyce said the company is forecasting a dramatic uptick in revenues from the 56 Comfort in development as they come online by the end of 2018 and throughout 2019.

"Our midscale and upscale brands continue to be core areas of strength and expansion," Pacious said. "The brands in our midscale segment, including Comfort, Quality and Sleep Inn, are experiencing continued growth in both RevPAR and our development pipeline. In addition, our upscale brands—Cambria Hotels and The Ascend Hotel Collection—are aggressively expanding. These results reinforce that we have very effective distribution channels and a high-performing franchisee business model."

2017 vs. 2016

As of the end of June, Choice saw some notable increases compared to the end of the second quarter in 2016. To wit

  • The company’s new, executed franchised hotel development contracts reached 176, a 20-percent increase.
  • Domestic franchised hotels increased 2.6 percent. Domestic and international rooms, meanwhile, increased 2.2 percent and 1.8 percent, respectively.
  • New construction and conversion franchise agreements increased 33 percent and 14 percent, respectively.
  • The company executed 11 Cambria Hotels new construction franchise agreements, a 22-percent increase. The domestic new construction pipeline for the Cambria Hotels brand now totals nearly 70 hotels.
  • Cambria Hotels surpassed 30 open hotels, with three new properties opening during the second quarter alone, including the first Los Angeles property and the second hotel in Chicago.
  • The Comfort brands extended their consecutive months of RevPAR index gains, compared to their focused competition, to 33 months.
  • The new construction and conversion domestic pipelines totaled 523 and 198 hotels, respectively, representing increases of 30 percent and 5 percent.
  • Domestic relicensing and contract renewal transactions totaled 127, a 19-percent increase.
  • The company's total domestic pipeline of hotels awaiting conversion, under construction or approved for development increased 22 percent to 721 hotels.
  • Domestic system-wide RevPAR increased 2 percent for the second quarter.  
  • Occupancy and ADR increased 30 basis points and 1.5 percent, respectively.
  • Effective royalty rate increased 19 basis points for the second quarter of 2017, compared to the second quarter of the prior year.

Looking Ahead

While acknowledging that its estimates for 2017 exclude any potential costs associated with the company's recently announced executive succession plan, Choice’s forecast for the rest of the year is promising:

  • Net income for full-year 2017 is expected to range between $160 million and $163 million.
  • Adjusted EBITDA for full-year 2017 is expected to range between $293 million and $297 million.
  • Adjusted EBITDA from hotel franchising activities for full-year 2017 is expected to range between $299 million and $303 million.
  • Net domestic unit growth for 2017 is expected to range between approximately 2 percent and 3 percent.
  • RevPAR is expected to increase between 1 percent and 2 percent for the third quarter and range between 2 percent and 3 percent for full-year 2017.
  • The effective royalty rate is expected to increase between 17 and 19 basis points for full-year 2017 as compared to full-year 2016.
  • The effective tax rate is expected to be approximately 33 percent for both the third quarter and full-year 2017.