4 Takeaways From Choice Hotels’ First Quarter 2017 Earnings

Rockville, Maryland-based Choice Hotels reported solid first quarter earnings for 2017, and its chief executives also delivered some interesting insights into the state of the hospitality industry, as well as the company’s future growth plans given increasing competition not only from their peers but from the likes of Airbnb, too.

Profits in the first quarter totaled $28.7 million, with earnings per share at 51 cents, beating Wall Street expectations, and demonstrating a 38-percent increase over the same period last year. Domestic revenue per available room (RevPAR) was up 3.8 percent, exceeding total industry results by 40 basis points compared to the same chain scale categories researched by STR. Occupancy increased by 100 basis points. Average daily rates also grew by 1.9 percent.

Choice Hotels, which primarily acts as a franchise operator of hotels, collected domestic royalty fees of $64.5 million in the first quarter, up 6.6 percent from the same period last year. The number of new approved franchised hotel development contracts Choice signed was 106 in the first quarter, up 51 percent.

During an investors call, CEO Stephen P. Joyce, along with other executives, also spoke about the company’s future strategies and growth plans. Here are some key takeaways from their conversation:

Direct Bookings Are Growing

Following a relaunch of Choice’s loyalty program, Choice Privileges, and a discounted member rate for bookings, last year, Choice is seeing a boost in direct bookings.

“In the first quarter, revenue from our proprietary channels was 64.9 percent, up 530 basis points compared to the same year last year,” said Joyce. “This was driven almost exclusively by direct reservations on our digital platforms and Choice Privilege member revenue growth. A new version of our Choice Hotels mobile app was also introduced in the first quarter. As the majority of mobile app users are Choice Privilege members, we wanted to ensure that these loyal guests have a state-of-the-art app, that meets their evolving needs.”

He noted that user adoption and engagement with the company’s app has resulted in an increase of more than 60 percent year-over-year growth, and reservations from the app are also up 52 percent.

“In addition, we have already hit record reservation thresholds for the year on our proprietary channels,” Joyce added. “On March 6, our central reservation system achieved a $19 million day. Last year, this milestone was not achieved until June. Furthermore, choicehotels.com achieved six days with more than $7 million in revenue in the first quarter, a first for us. These stats are indicators that our tools are working for Choice, our franchisees, and guests, which further supports our optimism.”

12 Years After Launching, Cambria Is Finally Starting to Grow

Choice launched Cambria Suites in January 2005 but in the years since, that brand, in particular, has struggled to find its footing. Now called Cambria hotel & suites, it had only 28 properties as of March 31. Joyce, however, said he “wouldn’t be surprised if you saw construction in the 24- to 30-unit range.”

“Basically, we are very much on track with our original plan for Cambria, which was a three-year program,” he said. “The only difference is, we are doing it with larger hotels with bigger revenues. And so, the unit count actually is a little behind what we expected, but the revenues are actually a little ahead because of the size.”

Joyce said that developers are attracted to the Cambria brand because of “open urban markets” and “they see a brand on the make. Two, they can develop in the territories that they want to develop in. And three, we are providing incentive capital.”

Choice Isn’t Worried About Competition From Marriott or Hilton

During the investor call, Joyce said, “I don’t view the Marriott-Starwood deal as an impediment; I view it as an advantage. I think that’s going to drive more deals for us, not fewer.”

When asked about competition from Hilton’s Tru by Hilton limited-service brand, which is expected to open its first property this year, Joyce said, “No, I think it’s too early to tell, where Tru is going to end up, where it’s actually going to be introduced in the market, where the costs per key is going to come out, and ultimately, how it’s going to perform, sort of — where everybody is sort of waiting to see. And developers we talk to, don’t have answers yet. So, it’s still something that I think needs to be defined in the marketplace.”

He also said that because a large portion of Chioice’s hotels are in secondary and tertiary markets, even in the urban markets where Choice is looking to expand more with its upscale Ascend and Cambria brands.

“We don’t find it [the slowing cycle in major urban markets] slowing us down in the upscale space, because we are wide open there, and the great thing about our system is, we don’t have many rooms in primary, urban dense suburban locations, but we have enormous demand for them,” he noted. “So we are doing these upscale hotels, we know we are going to fill them.”

Airbnb Isn’t a Threat Either

When asked if Airbnb is impacting Choice’s business, COO Pat Pacious said, “We don’t see much impact at all. As Steve [Joyce] just mentioned, those sort of dense urban markets and destination locations where Airbnb has a lot of supply I guess — if you want to call it that — that’s not where our inventory is. … I think it’s interesting to look at Airbnb, I mean, they had 3 million listings, but only 1 million of those are actually comparable to a hotel, and most of them are in those sort of major markets and destination markets. They are also not where our customer really plays, from a price-point perspective, nor from a length-of-stay perspective. So, we don’t really see an impact from what’s happening with Airbnb.”

Pacious added, “I will say that we are pleased to see that the regulators are starting to treat them more like hotel companies. So, when you think about fire and safety, those types of issues that hotel are required to adhere to, that municipalities are waking up to that fact that, everybody needs to play by the same rules. S,o we are encouraged by that development.”

Joyce noted that he sees Airbnb as “an opportunity” which is why the company launched vacation rentals. “So we think they’ve got to play by the same rules as the rest of the industry. But they are here to stay. We just don’t see the impact from it, and — for all the reasons that Pat mentioned. But we think, the models are worth pursuing and we are pursuing it.”