Choice Hotels Looks to Extended-Stay, Midscale to Weather the Storm

ROCKVILLE, MD—During its first quarter earnings call, Choice Hotels International Inc. reported that 97% of domestic hotels remain open and its brands have experienced a RevPAR index gain compared to the competition in Q1 and April.

Patrick Pacious, president/CEO, Choice Hotels, said, “While the current situation has no true precedent, Choice is uniquely positioned to outperform its peers as it has in past economic downturns… Our hotels outperformed the competition in the first quarter on several fronts. Systemwide occupancy rates were higher than the overall industry, especially for our extended-stay brands. This contributed to a domestic systemwide RevPAR growth rate that outperformed the overall industry by 430 basis points. Additionally, our brands’ RevPAR outperformed the primary chain scale segments in which we compete as reported by STR. These trends have continued throughout the worst weeks of the pandemic into the second quarter. For the past eight weeks, our brands have consistently achieved RevPAR share gains versus the competition, and occupancy rates have been climbing since early April and even this past week, occupancy continued to grow over the previous week.”

Like most hospitality companies, Choice Hotels adopted a number of mitigation measures to support franchisees and guests while preserving financial flexibility. However, Pacious noted that its portfolio makeup will enable the company to recover relatively quickly.

“We attribute [Choice’s] outperformance to our long-term strategy of growing the right brands in the right segments in the right locations,” he said. “Our midscale brands represent two-thirds of our total domestic portfolio, a segment that outperformed in the first quarter of 2020 and continues to do so through early May. Our 410 extended-stay hotels maintained an occupancy level of 60% in the month of April and our WoodSpring brand was even higher at 64%. And, almost 90% of our domestic hotels are in suburban, small town and interstate locations, areas that, according to STR, retained higher industrywide consumer demand than hotels in urban or resort destinations.”

For instance, the WoodSpring Suites brand and the overall extended-stay portfolio experienced occupancy levels in March at 72% and 69%, respectively. These trends have continued in April and May: WoodSpring Suites’ brand RevPAR decreased only 2.9% in first quarter 2020 over the prior year comparable period, while its occupancy levels have remained above 60% since mid-March.

Pacious pointed to other factors that have helped Choice during the pandemic as well.

“Since our hotels mostly serve domestic travelers, our portfolio has been insulated from the precipitous drop in international travel caused by the pandemic,” Pacious said. “[And], we benefited from the loyalty of those who know us best: business customer segments like transportation, logistics, construction and government travelers, who have been staying with our brands for years.”

He also pointed to the combination of the resilient franchise owner base and the brand company’s level of support of its franchisees. “Our typical franchisee is an owner/operator with two hotels financed with low overall debt levels, which provides them with financial flexibility in down cycles,” he said. “To adapt to a softer demand environment, our franchisees can flex payroll costs, reduce operating expenses and postpone capital expenditures. These limited-service hotels are less labor intensive and, in general, operate at higher margins as compared to full-service hotels.”

The company’s portfolio continued to expand, despite the pandemic.

“While we expect new franchise agreements to be lower than last year, we do see development opportunity on the horizon,” Pacious said. “During the Great Recession, we continued to grow at a faster pace than the overall industry supply… In Q1, our pipeline grew 2% year over year to 1,000 domestic hotels, nearly one-quarter of which are conversions, representing a 5% year-over-year increase. Despite the COVID-19 pandemic and travel restrictions weighing on the industry, we awarded nearly 60 new agreements in the first quarter, three-quarters of which were for conversion hotels. Further, approximately half of the contracts in the first quarter were awarded in the last two weeks of March.”

Highlights of first quarter 2020 results include the following:

    • Net income was $55.5 million for first quarter 2020, representing diluted earnings per share (EPS) of $0.99.
    • First quarter adjusted net income, excluding certain items, decreased 9% to $42.8 million from first quarter 2019.
    • Adjusted EPS were $0.76, a 10% decrease from first quarter 2019.
    • Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the first quarter were $69.2 million, an 8% decrease from first quarter 2019.
    • The company recognized a $30.6 million non-cash tax benefit in first quarter 2020 related to a restructuring of the company’s foreign operations.
    • Total revenues were flat at $218.2 million for first quarter 2020, compared to the total revenues reported for the same period of 2019.
    • Total revenues excluding marketing and reservation system fees were relatively flat at $107.8 million for first quarter 2020 over the prior year comparable period.

As a precautionary measure to further enhance liquidity, Choice Hotels obtained a 364-day $250 million term loan in April with the possibility of a one year-extension subject to lender consent. Consequently, the company now has more than $725 million in cash and available borrowing capacity through its revolving credit facility.

The company currently expects the impact of COVID-19 on business performance will be more significant for the second quarter, given that the majority of its hotels are located in areas the pandemic only began to affect in March. Based on experts’ projections, economic activity is expected to begin to stabilize in Q3, with a recovery likely to be underway in Q4, the company reports.

“Our expectation is the near-term recovery will be sporadic and regional,” Pacious said. “There are, however, several reasons to believe our franchisees will be well positioned to capture demand as conditions improve. First, leisure travel, which comprises about two-thirds of our room nights, is expected to lead the recovery and rebound faster than business travel. Second, our brands are at the right price point and locations for the type of traveler who has been on the road these past eight weeks and who we expect will lead the return to travel: the resourceful American, our core customer. As they did in previous down cycles, we expect these guests will replace lavish trips with lower-cost getaways, presenting an opportunity for our portfolio when folks get back on the road. We expect Americans will choose to drive when their ability and appetite to travel return. We believe heightened concern about the safety of air travel, low gas prices and our strong presence in drive-to locations will allow us to capture an outsized share of pent-up travel demand as stay-at-home orders are lifted.”