A Profitable Choice Hotels Plans for Bigger Extended Stay and Upscale Portfolios

Drive-to and leisure hotels were once again a financial winner for Choice Hotels, which reported Monday a $22.3 million first quarter profit.

Choice Hotels, owner of brands like Comfort and EconoLodge, was the rare hotel company to see a full-year profit in 2020, and company leaders pointed to their portfolio of roadside hotels outside of city centers as the prime factor in the profitability.

Ninety-five percent of Choice’s domestic U.S. hotels are outside urban centers, where hotels were most negatively impacted from the pandemic. More than 4,000 of Choice’s U.S. properties are within a mile of an interstate highway exit.

The company plans to parlay some of the financial strength over the last year into growth within its smaller extended stay and upscale hotel segments, the latter of which had its strongest quarter ever for hotel openings.

“We believe we are now better positioned to increase our share of travel demand in the years to come than we were prior to the onset of the pandemic,” Choice Hotels CEO Patrick Pacious said on an investor call Monday.

The extended-stay hotel sector garnered major investor interest over the last year, most notably with Blackstone and Starwood Capital’s joint $6 billion planned takeover of Extended Stay America. Investors liked the sector as its typical client base of frontline workers across the medical, logistics, and construction industries as well as people using rooms for residential purposes meant occupancy rates never really cratered across these kind of hotels.

Choice Hotels, which bought the WoodSpring Suites extended-stay brand in 2018 for $231 million, also operates the MainStay Suites and Suburban Extended Stay Hotel brands within this market segment. Extended-stay hotels, 454 of them, accounted for 10 percent of Choice’s U.S. portfolio. The company has a 310-hotel domestic extended-stay hotel development pipeline.

Calling the sector a “significant growth driver,” Pacious noted WoodSpring Suites outperformed 2019 performance levels in the first quarter, the first Choice brand to achieve such a financial win.

“The increased developer interest we’re seeing reaffirms that our strategic commitment and continued investment in this highly cycle-resistant segment are driving a competitive advantage,” Pacious said. “Given these results, we remain optimistic about the growth potential of our extended-stay portfolio.”

Midscale brands like Comfort still comprise the bulk of the company’s portfolio as well as more than half the U.S. development pipeline, but company leaders see opportunities on the upscale front. Choice’s upscale portfolio includes its Cambria brand as well as the Ascend Hotel Collection, its soft brand.

Choice’s new partnership with Penn National Gaming added 7,000 hotel rooms to Ascend, a 26 percent increase ford the brand. Cambria Hotels grew by 12 percent over the first quarter. The first three months of the year saw the highest number of hotel openings for Choice’s upscale division in a single quarter.

Labor and Construction Headwinds

Rising construction costs and a labor shortage are just as much of a hot topic at Choice Hotels as they are at the company’s competitors.

“The number one thing we hear from our franchisees is getting the labor they need and into their hotels,” Pacious said.

Some of the cost-savings initiatives deployed earlier in the pandemic like less-frequent housekeeping during a guest stay as well as grab-and-go breakfasts in lieu of a staffed breakfast bar both bring down costs and help with staffing shortages.

Pacious attributed the worker shortage squarely on the extra $300 in federal unemployment benefits that runs through early September — an argument many economists and U.S. Secretary of the Treasury Janet Yellen have disagreed with since Friday’s disappointing jobs number.

Leisure and hospitality, which was a bright spot in the report, wouldn’t have had the strong month it did if unemployment benefits were disincentivizing work, Yellen said at a Friday press conference. Wages are typically lower in this sector, but hospitality had its strongest month of job gains since September.

Pacious also pointed to soaring construction costs potentially curtailing developer interest for new construction hotels. Lumbers costs are up more than 6 percent, according to the U.S. Bureau of Labor Statistics. However, Choice Hotels expects the construction cost escalation to cool off.

“As things move forward, hopefully three to four months from now, those construction costs will come down so that the deals pencil out for the types of returns [developers are] looking for,” Pacious said.

Sustainable Growth

Choice Hotels has posted some of its highest occupancy rates since the beginning of the pandemic over the last two months, with several days surpassing a 70 percent average occupancy rate across the entire portfolio.

“We are optimistic that these demand trends will remain elevated, especially throughout summer and will further strengthen the financial health of our franchisees,” said Dominic Dragisich, chief financial officer at Choice Hotels.

Every hotel company is expecting a massive summer spike in demand, but there is less certainty around what happens in the fall and how much of this growth is sustainable.

There is strong momentum heading into the latter part of the year for group bookings, and more tourism drivers like live entertainment are opening up across more U.S. markets. But there is a giant question mark on what the business travel climate will look like after the summer travel season subsides and children are back in school.

Pacious was optimistic there could be some lingering level of flexibility in people’s work schedules that would enable them to continue leisure travel beyond the summer.

“The question is going to be at what point does the bow wave subside into something that’s more normalized,” he added.