Choice Hotels’ Record 2022 Hinged On Moving Upmarket

Choice Hotels International saw revenue spike in the fourth quarter of 2022 thanks to its August acquistion of the Radisson Hotel Group Americas for $675 million and its strengthened pricing power for room rates.

“Our distinct strategy of growing our brand portfolio with hotels that generate higher royalties per unit is driving impressive results,” said President and CEO Patrick Pacious on Wednesday. “Our portfolio mix is getting stronger.”

The Rockville, Maryland-based hotel operator said that in 2022 it generated a company record net income of $332.2 million on revenue of $1.4 billion, another record.

For full year-2022, Choice Hotels —whose nearly 7,500 hotels primarily span 22 brands, such as its flagship upper midscale brand Comfort and roadside midscale brands like Quality Inn — notched a company record for adjusted earnings before interest, taxes, depreciation, and amortization at $478.6 million — a 23 percent jump compared to 2019, minus the non-comparable contribution from Radisson Hotel Group Americas.

A sign of the value of the Radisson contribution is that, if you had included it, Choice’s adjusted earnings for the quarter would be 28 percent above the 2019 level — meaning Radisson’s brands added five percentage points. Radisson Hotel Group Americas contributed $18.3 million in adjusted earnings on $104 million in revenues for the year.

The vast majority of the acquired Radisson hotels are in the Country Inn & Suites brand, and these roughly 450 hotels are helping to move Choice Hotels International’s portfolio mix upmarket.

Not Afraid of Spark

Last month, Hilton Worldwide said it would roll out its first brand in the premium economy segment, Spark by Hilton. But Choice Hotels executives responded to analyst questions on Wednesday by saying they weren’t worried.

“We are winning the better-quality hotels that are out there, be that [economy brand] Econo Lodge, be it Quality Inn or any of our midscale brands,” Pacious said.

Owners may be skeptical of new brands, they implied.

“If you’re asking them [owners] to renovate their hotel and put capital into it, they have to be able to see the rate premium that you can drive,” said Dominic Dragisich, chief financial officer. “And in many of these markets, that rate opportunity is limited by the surrounding product.”

Choice Hotels executives said they believe their reliability for partners in helping owners manage a pandemic, a labor crisis, and inflation while driving growth will enable them to win the hotels with the most desirable properties into their system.

End-of-Year Resilience

Fourth quarter trends show ongoing strength for Choice Hotels, as higher room rates boosted the hotel franchisor.

In the quarter, Choice generated a profit of $55.5 million on revenue of $362 million. Profit was down from $64.1 million a year earlier primarily because of rising operating expenses — including inflation and costs from the transaction and restructuring. The company’s operating expenses were 60 percent higher, year-over-year, at $284.7 million.

Choice Hotels saw its legacy (non-Radisson) brands produce comparable systemwide revenue per available room — a key industry metric — of $49, or 20 percent above the same period in 2019. The gain was thanks to a 17 percent boost in its average daily rate — to $91 — and a modest rise in occupancy levels.

Growing Royalties

The hotel franchisor has enjoyed rising royalties per unit partly thanks to the group adding branded properties that can command higher rates.

“Over the past two years, the new hotels we have added to our portfolio have generated, on average, twice the revenue as hotels leaving it,” Pacious said. The company expects that trend to continue this year.

Choice Hotels last year had a domestic effective royalty rate, including Radisson Americas, of 4.93 percent, which represents a steady multi-year rise from 4.75 percent in 2018 and 4.3 percent in 2015.

The company awarded 590 domestic franchise agreements last year — 87 percent of which were for the company’s upscale, midscale, and extended-stay brands that typically drive higher royalties per unit than the company’s historical average. In 2022, the company’s upper-midscale segment alone grew by 24 percent year-over-year.

“The new capabilities we have built to improve the profitability of each franchisee have resulted in three straight years of RevPAR [revenue per available room] growth that exceeded the industry,” Pacious said.

Executives said one long-term tailwind for Choice Hotels was that it had been enhancing the technological tools used by its franchisees for pricing and selling online.

They also touted a multi-year deal with Wells Fargo and MasterCard to launch a co-branded credit card program this spring, which will help to further grow its loyalty program, Choice Privileges.

Later this spring, the company also expects to more tightly integrate the loyalty programs between Choice and Radisson Americas.

Optimistic Forecast

Choice Hotels predicted that its net income this year would range between $245 million and $265 million. That profitability will be enhanced by expected adjusted earnings before interest, taxes, depreciation, and amortization contribution of more than $60 million from the Radisson Hotel Group Americas business unit.

Radisson is expected to drive more than $80 million of adjusted earnings before interest, taxes, depreciation, and amortization upon full integration in 2024.

The company’s total domestic pipeline rose 14 percent, year-over-year, to 1,029 hotels in December. That represented about 100,000 rooms being in the process of becoming Choice Hotels brands.

Pacious didn’t rule out additional brand acquisitions given the capital his company has on hand, despite the effort of digesting Radisson Americas.

“Our leverage targets remain effectively below where we target,” Pacious said. “So it gives us the capacity to do more if the right opportunity from an M&A [mergers and acquisitions] perspective or the right opportunity for an investment shows up for us this year.”