Choice Hotels is seeing weakness in its hotel development pipeline. That may not improve much if it remains distracted by pursuing a merger with Wyndham.
Choice Hotels International said the organic growth of its development pipeline is healthy despite claims it has recently relied on growth by acquisitions instead.
“Through our superior speed-to-market conversion processes and best-in-class franchisee support, we are able to move projects quickly through the pipeline,” said president and CEO Patrick Pacious during an earnings call on Tuesday.
Choice said its legacy brands in the U.S. that were upscale, extended-stay, and midscale expanded in room count by 1.9%. That figure excluded its economy brands and brands from its recent acquisition of Radisson Americas — which together make up roughly half of its portfolio by property count.
Choice Hotels also said it had opened the prototype for its flagship midscale Comfort brand last month, with 136 projects in the pipeline.
Choice Hotels Pipeline Weakness?
Yet some analysts are looking closely at the larger patterns.
“Choice-legacy room count has negative to modest footprint growth,” said Joseph Greff, lead hospitality analyst at J.P. Morgan, in a report before the earnings call. “Its closest comparable, Wyndham, has positive net footprint growth of about 4% year-over-year.”
|Hotel Group||Estimated 2024 Pipeline Growth Year-Over-Year, JP Morgan Estimates|
|Marriott||4% with 5.5% CAGR through 2025|
“Choice has used M&A [mergers and acquisitions] to mask its lack of organic growth through the $675 million acquisition of the rights to use the Radisson brand in the Americas, which has accounted for the entirety of their reported system growth since the transaction closed of August of 2022,” said Wyndham CEO Geoffrey Ballotti on an earnings call.
Choice Hotels had two years of negative organic growth in its hotel pipeline for its legacy (non-Radisson) brands.
Impact on Future Revenue?
Choice’s pipeline slowdown appeared to be a partial drag on revenue per available room.
Its domestic revenue per available room rose 1.4% for the first nine months of 2023. But in the third quarter, its domestic revenue per available room was only $64, down 0.8% from a year earlier.
Choice’s growth in revenue per available room has lagged U.S. hotel group rivals.
A Bet on Revenue-Intensive Hotels
Choice Hotels executives highlighted a few reasons for optimism about its hotel development pipeline.
“We are also executing new hotel openings at an impressive pace,” Pacious said. “Through September, we averaged more than four openings per week.”
The group’s international pipeline, including Radisson’s brands, nearly doubled in the third quarter. Globally, it said its rooms pipeline growth for conversion hotels was up 11%.
Domestically, it predicted nearly 70 additional domestic conversion projects would open by year’s end. These would primarily be hotels that tend to deliver higher revenue per room — typically 20% higher than properties leaving its system.
Yet legacy (non-Radisson) economy brands had revenue per available room of $39.74 — down 5.9%.
Executives implied it wasn’t fair to single out its legacy brands.
“In the Radisson brand itself, the amount of re-financings that are going to occur in the next 18 months for upscale full-service hotels is fairly elevated,” Pacious said. “That’s a real opportunity for brands to come in and reflag, and our development team for the upscale segment is engaged in a lot of those conversations.”
Pacious argued that many hotel owners are seeing their operational costs rise. Choice’s portfolio has demonstrated cost reductions, which will appeal to owners. Plus, his group tends to boost revenues for owners who have converted from elsewhere.
Choice Hotels Continues to Pursue Wyndham
Last week, Wyndham’s Ballotti said his company had no plans to return to the negotiating table.
Pacious said he hoped Wyndham would reconsider. He said objections that Wyndham executives have raised could be addressed if the board and executives returned to talks.
“In the last 3 weeks, we’ve probably spoken to hundreds of franchisees across the spectrum,” Pacious said. “They’re very supportive of the combination. These are sophisticated investors themselves.”
He said his ongoing campaign might take “months.”
If Wyndham continues not to engage, Choice may have to wait until May — when the company has annual shareholder votes. It might then woo Wyndham shareholders to override the company’s board and management and push through a deal.
“Is that something you’re prepared to do sort of timing-wise, and I don’t know if you feel that there would be any sort of uncertainty between now and then that could impact franchisees on either side?” asked Robin Farley, an analyst at UBS, in a conference call.
“We’re aware of what the opportunities are and the options are, and we’re also aware of what the calendar looks like in order to get the transaction completed,” Pacious said.
What about the risk of higher interest rates, given the company’s need for debt to swing the proposed deal?
“We’ve stress-tested [the model] if we saw a recession,” said chief financial officer Scott Oaksmith. “We feel very comfortable that the businesses can handle the debt load and, again, de-lever quickly.”
- In the quarter, Choice Hotels generated a remarkable $92 million in net income off of $219.6 million in revenue (after excluding revenue that it reimbursed franchised and managed properties).
- The company’s operating expenses were 30% higher, year-over-year, in the nine months through September. The hotelier primarily blamed rising operating expenses on inflation, costs related to moving to a new headquarters, and costs for absorbing its recent Radisson acquisition.
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Photo credit: The lobby of the Comfort Inn & Suites in Mountain Grove, a prototype for a remodel for the full Comfort brand. Source: Choice Hotels.