Choice Hotels International raised its adjusted earnings before interest, taxes, depreciation and amortization forecast for the year by $2 million in its second-quarter report despite a decrease in domestic revenue per available room. In a call with investors, President/CEO Patrick Pacious attributed the decision to a “strong second-quarter performance and positive outlook for the remainder of the year.”
The company raised its adjusted EBITDA midpoint of guidance from $358.5 million to $360.5 million. Domestic RevPAR decreased 0.1 percent year over year, in line with its forecast from last quarter, which predicted between a 1 percent decrease and a 1 percent increase. Choice has kept its full-year 2019 RevPAR guidance the same at between 0 and 1 percent while expecting between a 0 percent and 2 percent increase for Q3.
“We are very pleased with the substantial progress we are making in our strategy to strengthen our midscale brands, particularly Comfort Inn, grow our presence in the upscale segment and increase both business travel and midweek revenue delivery to our hotels,” said Pacious.
Focus on Midscale
In the call with investors, Pacious touted the progress Choice has made on the $2.5 billion transformation of its Comfort brand hotels, noting two-thirds of the properties scheduled to complete their renovations this year have already done so. These hotels, he said, have outperformed the segment’s RevPAR by 60 basis points in the second quarter and increased their business travel revenue growth five times faster than non-renovated Comfort hotels.
“This reinvestment in the brand is also having a positive impact on unit growth,” said Pacious. In the first half of the year, he said, Comfort hotel openings increased 10 percent, while new Comfort franchise agreements rose 49 percent YOY. Pacious said the company expects these new agreements to generate more than 20 percent higher revenues throughout the life of their contracts compared to the pipeline of the year-ago period, largely because these hotels will be located in higher RevPAR locations. According to CFO Dominic Dragisich, 82 percent of Comfort’s pipeline is new construction.
Pacious added Choice’s entire midscale brand portfolio is performing well, too, with the company expected to open three midscale hotels per week in 2019. Launched last September, Choice’s newest midscale brand, Clarion Pointe, opened its second location in Q2. Pacious said the company awarded 21 franchise agreements in the second quarter, bringing the brand’s pipeline to 41, of which 16 are expected to open by year's end.
Choice’s upscale Cambria and Ascend brands experienced the highest domestic growth of Choice’s brands with 11.7 percent and 17.6 percent increases in total rooms, respectively. Cambria experienced the largest rise in occupancy of Choice’s brands at 340 basis points, helping offset a 2.2 percent decline in average daily rate for a 2.2 percent increase in RevPAR. According to Pacious, this outpaced the industry RevPAR by 110 basis points and the upscale chain scale by more than 260 basis points.
In Q2, Pacious said Cambria’s pipeline grew to 82 hotels (nearly 11,000 rooms), 25 of which are under construction. The brand, with seven hotels expected to open this summer, is approaching 50 open hotels. “We believe that our investment in Cambria will continue to accelerate the brands development, evolve the company's overall portfolio and drive strong financial performance,” said Dragisich.
Pacious also highlighted the company’s extended-stay growth. YOY, Choice grew this segment 7 percent to more than 380 hotels. Its domestic extended-stay pipeline grew 18 percent to more than 250 hotels. “We believe this growth will continue as there is significant untapped demand from both consumers and developers for extended-stay hotels across the country,” said Pacious. The company’s WoodSpring Suites brand experienced the third highest Y-O-Y rooms growth of Choice’s brands at 7.2 percent. Due to a 2.6 percent increase in ADR and constant occupancy, this brand saw RevPAR rise 2.7 percent. This number was only beat by Suburban’s 2.9 percent RevPAR jump. The economy extended-stay brand grew its total rooms 5.9 percent and its pipeline 38 percent YOY in Q2.
Overall, Choice’s number of domestic franchised hotels and rooms grew 2 percent and 2.1 percent YOY. International franchised hotels and rooms rose even faster at 4.1 percent and 5.4 percent YOY. It awarded 181 domestic franchise agreements in Q2, including 107 in June. Its total domestic pipeline of hotels awaiting conversion, under construction or approved for development rose 4 percent YOY to 988. Its new-construction pipeline, specifically, increased 7 percent to 753 hotels. Internationally, its pipeline rose from 74 to 123 hotels.
“Our focus on maximizing franchisee profitability by delivering incremental business and providing our hotel owners with the resources to better manage their properties sustained demand for our brands and helped drive our effective royalty rate,” said Dragisich. “We remain confident in our value proposition and expect continued growth in our Y-O-Y effective royalty rates, which we anticipate will increase between eight basis points and 12 basis points for full-year 2019.”