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Choice looks to ‘year of investment’

Choice Hotels International forecast a year of investment, as it looked to build new brands and expand globally.

The group said that it was seeing a higher percentage of new construction hotels in its pipeline and expected its upscale portfolio to contribute more to gross revenue.

Pat Pacious, president & CEO, told analysts: “We have holes in our portfolio today. If you think about upscale, extended stay, you think about an upper-upscale brand where we don’t have opportunity, those may be opportunities for us to do something on the acquisition front.”

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The company reported full-year adjusted Ebitda up 7% to $364.9m, at the top end of previous full-year guidance. Domestic systemwide revpar decreased 0.9% and 2.1% for full year and the fourth quarter 2019, respectively.

Dom Dragisich, CFO, said: “We attribute the fourth quarter performance primarily to the regional performance in oil and gas market, which had been impacted by oil price and production challenges, the geographic mix of our current portfolio versus our competitive set and tougher comparable, which in the fourth quarter of 2018, benefited from the lingering hurricane activity in the Southeast US.”

For both the first quarter and full year 2020, the group forecast system-wide domestic revpar to be between flat and a decline of 2%. Adjusted Ebitda was expected to range between $378m and $385m for 2020.

Pacious said: “2020 will be an investment year as we continue our strategy of positioning the company to grow in more revenue intense segments and locations. We are strengthening our existing brand and building new ones to appeal to the customer of tomorrow in the upscale, midscale and extended stay segment. We have also been intentional about the geographic market we are targeting to grow our brands across these three keys segments.”

The CEO said that the group had seen a 3.1% increase in units across the three segments in 2019 and expected the growth rate to increase this year.

The company’s total domestic pipeline increased to over 1,050 hotels, with over 75% of the pipeline represents new construction projects. The international pipeline was up 48% on the year to 83 hotels.

The group’s international hotels portfolio increased by 3.5% on the year, with the domestic portfolio up 1.6%.

Pacious said: “New construction hotels are typically more revenue intense and more likely to pay off for the company in the long term. The anticipated gross room revenue of a hotel in our pipeline is higher than that of the average hotel in our system today. And as a result, we expect these new hotels will generate nearly 15% higher revenues to Choice throughout the life of the franchise agreement.”

The CEO acknowledged that the growth in new construction hotels meant that the group was seeing more of a delay in opening times. He added: “We’re developing hotels in higher revpar market and higher revpar segment and we’re developing in markets where entitlements and the costs of labour to actually get hotels built is actually more expensive, takes a little bit longer.”

The company continued to pursue its refresh of the Comfort brand, with the brand’s pipeline almost doubling to 300 hotels since the relaunch. Next month the company was due to unveil the new Comfort prototype, which Pacious said would maintain “Comfort’s low cost to build advantage over its competition, and delivers flexible design options that meet guests and owner preferences”.

This year saw the group launch Everhome Suite, a new construction midscale extended stay brand. Pacious said: “Everhome Suite is the first brand to enter the midscale extended stay segment in nearly a decade where a significant portion of the inventory is 15 years or older and where the data tell us that demand far exceeds supply for hotel stays of seven plus nights.”

Commenting on the impact of the coronavirus, Pacious said the group, which had seven hotels in the country, expected it to be “less than minimal”.

Insight: Choice has seen its unit growth come off a little as it looks to move into the more spiffy end of the market, with its focus on the US also proving something of a hindrance as construction costs grow. Performance too was looking troubled in the region, a familiar tale this results season.

The group is, however, prepared to look down the back of the sofa for cash to buy more of what it wants and doesn’t have to look very far for a decent war chest. Experience of past failed efforts, as well as successful ones, tells us that Choice isn’t put off by asset-heavy groups, even by those much-maligned leases when it comes to an acquisitions target, so don’t look too shocked should something seem to come out of the left field.

This does not mean that the company will be moving away from its economy roots, which Pacious described as “a necessary piece of who we are”. He said: “We look at our economy brands as an opportunity for owners to get to know us, to start out with us. A lot of our very successful Comfort owners today began with us with Econo Lodge back four decades ago.”

So if you’re watching at OYO, don’t expect a clear run at the US.

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