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Choice Hotels on Thursday offered the first in-depth details of plans for its $675 million acquisition of Radisson Hotel Group Americas. The endgame? Boost those franchise royalties. .

Choice Hotels International on Thursday talked at length for the first time about its expectations for its $675 million acquisition of Radisson Hotel Group Americas — a deal that’s set to close this month. The hotel franchising giant said the transaction, which adds 80,000 rooms, would help the group grow its mix of higher-revenue, higher-margin brands.

“It’ll give us more presence on the West Coast and upper Midwest,” said Patrick Pacious, president and CEO of Choice, whose brands have had their deepest network in the U.S. southeast, Texas, and the U.S. southwest. “We’ll have more units and more growth opportunity in Canada as well as the Caribbean and the rest of Latin America.”

Justifying the Radisson deal, Choice executives were bullish that hotel owners who already have brands in the upscale segment will now sign up more frequently with Choice’s Cambria and Ascend Hotel Collection brands because Choice can now offer a broader array of brands in the upscale segment.

“It’s a nice network effect of additional corporate accounts that are in the Radisson Americas business from a business travel perspective,” Pacious said. “The loyalty program members that we’ll be adding, which is 10 million members that will be added to our 53 million — those skew business travelers, those skew higher income. It will be a nice accelerant for Cambria and Ascend.”

Executives said the new brands were mostly complementary rather than competitive, though it focused its comments on Cambria. They noted that Cambria is a limited service hotel, while Radisson is a full-service hotel — meaning the latter brand has more meeting space and food and beverage options. So the customer groups tend to differ. The deal includes 130 Radisson hotels and nine Radisson Individuals.

“If you’re an owner of a Country Inn & Suites, this deal probably means more occupancy and better rates,” said Sid Narang, the managing principal at Crescent Capital Ventures. “But if you own a Radisson Blu or Radisson Red, will Choice drive higher rates?”

Executives sidestepped comments about the fact the deal mainly includes 453 Country Inn properties. There’s a lot of overlap between Country Inn’s audience and the audience of most of Choice’s core brands. The absorption of these brands may not be trouble-free.

Radisson Hotel Group Americas covers North, Central, and South America,while Brussels-headquartered Radisson Hotel Group operates in the rest of the world.

Choice and Radisson have created what they call “a brand council” to trade best practices to make sure that Radisson’s brands keep consistent standards of amenities, pricing, and marketing propositions worldwide. Allowances will be made to tailor the size of rooms and the local relevance of offerings by market.

Strong Quarter for Hotels

The deal comes at a time of continued strength in Choice’s business as operator of brands that include Comfort, Quality Inn, and Clarion. In the second quarter, the Rockville, Maryland-based company generated $106 million in net income — a measure of profit — off of $368 million in revenue.

The company’s profitability in the quarter was driven by charging rates averaging $95 a night — which were relatively high to its historic pattern — despite only keeping its U.S. hotels 61 percent full on average.

Choice reported that its U.S. revenue per available room — a key industry metric — was $59.

It said that its loyalty program and direct marketing efforts had successfully persuaded many travelers to book directly rather than through online travel agencies, with more revenue coming through its channels than third parties in the quarter compared with pre-pandemic levels and last year’s levels.

Choice Has Cash to Spend

As of June’s end, the company’s total cash and revolving credit on tap was $1.2 billion.

The nice thing about our balance sheet is it gives us the flexibility, if we want to push beyond where the Radisson core is, if we want to do upper upscale, we can use our balance sheet in a way that helps us grow brands,” Pacious said.

Choice executives were a bit vague about how they would use their capital. But they mentioned they could incentivize growth in some of the brands, perhaps with attractive offers for owners and investors, and it could help fund brand launches into adjacent categories, as it has recently done by rolling out a Cambria Hotel prototype designed for secondary and leisure markets.

Might Choice use its dry powder to make another significant acquisition within the next year or year-and-a-half? Perhaps.

“Choice will still have some white space such as upscale extended stay, where they don’t have a presence,” wrote Robin Farley and her team at UBS Research in a recent research report. “International remains a mostly untapped opportunity for the company, too.”

Choice charged franchises a royalty of typically 5 percent of room revenue in the quarter. So growing top-line revenue and adding hotels to its network have similar weight for the company when it comes to boosting profitability.

By acquiring properties suitable for midscale and upscale brands and in markets with higher-income travelers, Choice could drive outsized jumps in royalties. Retaining existing franchise agreements also helps reduce costs related to churn. The second quarter marked Choice’s highest quarter for franchise renewal and relicensing contracts in the past half-dozen years.

Battling Blackstone and Starwood

Blackstone Real Estate Partners and Starwood Capital see an opportunity to compete in the U.S. extended stay market, but Choice executives put on a brave face about their ability to parry the moves.

The financial titans recently acquired Extended Stay Americas for $6 billion and recently bought a portfolio of 111 WoodSpring Suites hotels from Brookfield for $1.5 billion. They plan to reflag most of these properties to Extended Stay America next month. While Choice will get about five years of future royalty fees as a cash payout for the terminated contract, it will lose properties that are in markets that the savvy Blackstone and Starwood see as desirable.

Choice’s response will be to try to compete in these markets by offering investors and developers new construction prototypes — including for its newest extended stay brand, Everhome Suites — as a contrast to some of the existing older structures, executives said.

New builds often can command higher rates, executives noted. For its core extended stay and upscale segments, in the last year-and-a-half, Choice’s system is producing twice the revenue for every unit brought in compared to every unit leaving the system through sales and de-branding.

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Tags: choice, choice hotels, earnings, hotel earnings, hotels, mergers and acquisitions, radisson

Photo credit: The interior of the Cambria Hotel Louisville Downtown-Whiskey Row. Source: Choice Hotels.

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