Choice Hotels Sees Promise of Tax Cuts For Travel, Just Not Yet

The new corporate tax rate that took effect this year might be having a positive economic impact for a number of U.S. corporations, but that much-hoped-for trickle-down effect may not necessarily be registering with the U.S. hotel industry just yet.

“We believe the promise of tax reform has yet to be fully realized across the industry,” Choice Hotels CEO Patrick Pacious said Wednesday during the company’s second-quarter earnings conference call. “As that occurs, we expect an ongoing positive impact on leisure travel in 2019 and beyond.”

Pacious, however, still expressed some optimism, noting that the low 3.9 percent unemployment rate in July, an uptick in consumer spending and confidence, as well as steady interest rates bode well for “continuing and strengthening economic growth.”

Things Are Looking Up for Choice

A good economic outlook aside, Choice Hotels said the future looks bright for the company overall because of one primary reason: Its franchisee hotel owners are happy.

Pacious said that franchisees are signing 20-year contracts with the company on average, and that Choice Hotels has a voluntary franchisee retention rate of 99 percent.

“We look at that as a very key driver of the health of our brand and the attractiveness of our brands to our franchisee base,” he said

Pacious noted that half of new franchise agreements signed through June 30 are with existing or returning owners.

For Choice Hotels, which operates on a 100 percent franchise model for its more than 6,800 hotels worldwide, keeping those owners happy is key to the company’s growth and success. And as Marriott’s second-quarter earnings call on Tuesday demonstrated, the importance of hotel owners’ happiness is not to be underestimated.

Net unit growth, or the number of hotel rooms entering and/or leaving the Choice Hotels portfolio in the United States is expected to be between 7 and 8 percent for the full year, the company reported. The company’s domestic pipeline of executed franchise agreements as of June 30 was at 950 hotels, representing a 32 percent jump from last year.

And, like its peers Marriott and Wyndham, Choice Hotels is also committed to improving the quality of its brands by removing hotels that don’t meet certain standards.

Investing in its brands is also a major priority for Choice Hotels, and those brands include the upscale Cambria and Ascend Collection brands, as well as Comfort Inn. That brand, which has 1,071 properties worldwide, is in the midst of a “$2.5 billion transformation to renovate common spaces and update guest rooms.”

And, unlike economy extended stay specialist Extended Stay America, Choice Hotels reported strong demand for its extended stay brands. The revenue per available room  metrics for Choice’s WoodSpring and MainStay extended stay brands were up 11.3 percent and 12.9 percent, respectively, for the first half of this year, compared to the same period in 2017.

The Second Quarter by the Numbers

The company reported net income of $79.8 million for the second quarter, which exceeded Wall Street expectations. However, Choice’s total revenue of $295.4 million, 13 percent higher than the same period last year, fell short of analyst expectations of $309.5 million.

Domestic per-room revenue was up 2.7 percent in the second quarter, while average daily rates grew 2.4 percent and occupancy rates climbed 20 basis points compared to the same period in 2017.

Choice Hotels raised its outlook for the rest of the year, estimating net income for the full year to be within $206 million to $210 million.

Shares of Choice remained fairly steady on Wednesday, holding at about $78 per share.