‘Occupancy climbing’ at ‘insulated’ Choice

Choice

Choice Hotels International said that it was seeing occupancy climbing, led by extended-stay hotels, which were seeing 60% occupancy in April.

Patrick Pacious, president & CEO, said that there was “white space” in its portfolio for an “upscale extended-stay brand” as it looked to expand.

Pacious told analysts that the company had been “insulated from the precipitous drop in international travel caused by the pandemic” by its domestic focus. Pacious added that, with 90% of hotels qualifying as small businesses, he did not expect to see foreclosures in the group as a result of the pandemic.”

Pacious said: “On average, our franchisee owns fewer than two hotels. It's primarily financed with equity, which provides them financial flexibility in down cycles. Even during the Great Recession, we saw very few foreclosures in the portfolio.”

Commenting on the support Choice had given its owners, Pacious said: “We reduced several fixed programme fees, extended brand programme deadlines and adopted more flexible brand standards to lower owners' costs. To date, 10% of hotels have been enrolled in our tailored fee deferral programme (which included franchise fees and marketing fees). We looked at this in more of a strategic nature; 60% of the portfolio is performing above 25% occupancy. So not everybody needed relief.”

The CEO said that average occupancy across its portfolio had been above 30% since the week of 12 April, indicating that many owners had been able to operate without additional assistance.

Pacious said that franchisees had not been chasing rate to the bottom, adding that, since the beginning of March, revpar falls had been driven two thirds by by an occupancy decline and one third rate.

For the first quarter, domestic revpar for the first quarter declined 15%. Domestic system-wide revpar fell by 60% year-on-year in April, but the company said that it had seen consistent daily occupancy improvement in the last two weeks of the month.

Adjusted Ebitda for the period was $69.2m, down 8% on the year.  Pacious said that he expected the impact of COVID-19 on performance to be “more significant” for the second quarter versus the first quarter 2020.

He said: “Despite the uncertainty, we remain optimistic that we will see some degree of sequential improvement in the back half of the year, spurred by the government stimulus and the anticipated pent-up travel demand.”

CFO Dom Dragisich said that mid-scale brands represented two third of the company’s total domestic portfolio, “a segment that outperformed in the first quarter of 2020 and continues to do so through early May. Almost 90% of our domestic hotels are in suburban, small town and interstate locations, areas that, according to STR, retained higher industry-wide consumer demand than hotels in urban or resort destinations”.

Looking ahead, 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 location for the type of traveller who's 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.”

Choice grew its pipeline by 2% year-over-year to 1,000 domestic hotels, nearly 25% of which were conversions, representing a 5% year-on increase. The group awarded nearly 60 new agreements in the first quarter, nearly 75% of which were for conversion hotels.

 

Insight: Here in the land of hotel investment, the move towards hotels being a mainstream asset class has meant more interest from the institutions and more involvement from huge organisations taking on screeds of hotels. Size is not synonymous with sobriety and, as we saw last week with Colony Capital, the wheels can come off.

Choice is a gaggle of small businesses. When you’re a small business and it’s your money, you’re going to keep a closer eye on it and, as Choice has noted, having a franchise business, which attracts entrepreneurs, has worked out for them. It has also, thus far, worked out for the franchisees. Having a mid-market hotel in an unglamorous location may well be proving more resilient that the McDonald’s you may have considered at the franchise fair.

You’re unlikely to be inviting your friends around to carouse in the oak-panelled bar, but you can break even at 30% occupancy, get a Coke out of your fridge and laugh at the HNWs with their trophy assets.

And, when the brand owner next goes shopping, it’s likely to pick up an extended-stay flag to tempt its gaggle of owners with. It’s not glamorous, but it’s certainly attracting new hotels.