US ‘Normalisation’ Keeps Earnings Forecast Alive

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Choice Hotels recently noted that its U.S. hotels are still performing about 10% above 2019 levels in revenue per available room, a trend executives believe could continue into next year.

Sean O’Neill

Choice Hotels reported a weakening in domestic revenue per available room in the second quarter, a trend that other hotel companies have also seen in recent weeks. But Choice said some of the weakness was offset by demand for extended-stay brands in the U.S. and luxury brands abroad.

Choice Hotels lowered its full-year 2024 revenue per available room (RevPAR) growth forecast to a range of -3.5% to -1.5%, down from its previous forecast of 0% to 2%.

Patrick Pacious, Choice’s chairman and CEO, pointed to a “normalization” from the post-pandemic boom. But the company maintained its full-year adjusted EBITDA guidance range of $580 million to $600 million.

During Thursday’s earnings conference call, Choice Hotels executives spoke optimistically about the company’s potential for next year.

“We saw U.S. GDP growth in the last quarter, which generally translates into positive RevPAR (revenue per available room),” Pacious said.

“The really positive news in (last week’s U.S. jobs report) was the increase in the labor force participation rate. When consumers have jobs, they tend to be more confident about traveling. The labor force participation rate is one of the most correlated factors we look at.”

Difference in wealth?

Choice’s second-quarter revenue per available room was lower than the average 2.2% year-over-year growth for all U.S. hotels, according to CBRE Research.

The difference between Choice’s results and the national average illustrates the “wealth gap” in hotel demand. Choice Hotels’ brands in the U.S. are heavily weighted toward economy and premium economy brands, which have seen weaker demand from tighter middle-class consumers.

Still, Choice Hotels continues to see overall strength compared to how it was performing before the pandemic. Its second-quarter revenue per available room was 11% higher than before the pandemic.

“As travel trends normalize from 2019 levels, we expect our domestic RevPAR results in the second half of the year to maintain the pace of the first six months of the year and exceed 2019 levels by about 10 percentage points at the midpoint of our forecast,” Pacious said.

Extended stay

The company’s focus on luxury and extended-stay properties is paying off, with the number of domestic franchise agreements in these segments up 8% this year.

The WoodSpring Suites brand, in particular, saw a 10% increase in units to 246 hotels. “The WoodSpring Suites brand represents more than two-thirds of all rooms under construction in the extended-stay economy segment,” Pacious said.

The hotel franchisor’s newest extended-stay brand, Everhome Suites, has four hotels open and 65 national projects in the pipeline.

International growth

International expansion is also picking up pace, with room numbers up 1.6%. Hotel openings doubled year-on-year in the quarter.

The number of international room bookings at Choice Hotels has more than tripled compared to the previous year.

They are making progress on rolling out over 4,000 rooms in France through a franchise agreement with Xenitude residential hotels, which will double their presence in the country

They recently struck a deal in Japan with a hotel real estate investment trust affiliated with Hoshino Resorts to convert more than 2,200 rooms into the Comfort brand portfolio. The rooms are expected to be operational within two months.

The international portfolio is dominated by brands generating high revenues, with approximately 96% of them falling in the mid- and high-end segments.

“Our international EBITDA has more than doubled over the last two years,” said Pacious.

An eye on mergers and acquisitions

The company also strengthened its liquidity by increasing its revolving credit line by 17% to $1 billion and refinancing other debt on more favorable terms.

The executives did not explicitly provide a reason for the liquidity boost beyond improving their financial position. However, they did mention that their strong balance sheet and liquidity position (which was about $530 million available at the end of June) give them a “dry pot” for potential acquisitions.

They also noted that while there aren’t many large transformational M&A opportunities, they have strengthened their ability to make smaller acquisitions, both on the balance sheet and in a debt-wise manner.

Second Quarter Choice

• Adjusted EBITDA rose 6% to a record $161.7 million.

• Net income rose 3% to $87.1 million.

• The number of hotels worldwide increased by 22% to more than 114,000 rooms.

Accommodation Stock Market Index Performance Year to Date

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