During its second-quarter earnings call Choice Hotels President and CEO Pat Pacious remarked that as travel trends normalize, domestic RevPAR for the second half of the year is likely to maintain its pace with the first half of 2024 and exceed 2019 levels by 10 percentage points.
The hotel franchisor reported sequential improvement in domestic RevPAR in the second quarter, up from last year and pre-pandemic levels. However, the pace of acceleration was slower than the industry.
“When we step back and look at the long-term trend of what performance has looked like since 2019, we’re right in line with that long-term historical annual RevPAR growth and that’s really a factor of normalization,” he said. “The day-of-week travel that we’re seeing over the last couple of years with the pandemic has sort of reverted to this normalization. The booking window is closer in, similar to what it looked like in 2019,” Pacious said.
Domestic unit growth stood at 1% YOY across the company’s more revenue-intense upscale extended stay and midscale portfolio. Its domestic pipeline improved 11% YOY.
Total revenues in the second quarter reached $435.2 million, a quarterly record and a 2% lift from the corresponding period in 2023. EBITDA increased 6% to a quarterly record of $161.7 million.
There’s been a reversion of locations where urban was among the last markets to make a rebound. That’s the area where Choice and its portfolio under-indexes, Pacious said.
Portfolio Expansion
The second quarter saw Choice expanding its portfolio of revenue-intense hotels, with domestic franchise agreements climbing 8% YOY. These agreements are expected to drive a higher RevPAR premium in its pipeline. With a global pipeline of 115,000 rooms (representing a 22% YOY rise), Choice set a record for the second quarter and executed 20% more openings across the world YOY.
By increasing its international room count by 1.6%, the company also widened its international footprint.
The revenue-intense properties are more accretive to Choice’s earnings and have resulted in upscaling the portfolio. “Importantly, they are a key driver of future growth as hotels within a brand on average generate royalty revenue over 20% higher than hotels exiting the brand. Our strategic focus on more revenue intense hotels means that the pipeline continues to be a significantly higher value than the current hotel portfolio,” Pacious said.
The company nearly doubled its upscale domestic rooms pipeline YOY and expects to see continued strength in this segment. Choice has also been focusing on its midscale brands in the domestic market and had increased the number of agreements by 27% YOY and opened 30 new hotels in the segment.
Overall, Choice’s domestic midscale rooms pipeline increased 7% quarter-over-quarter to stand at more than 23,000 rooms.
As construction costs moderate, there has been interest in new construction contracts as well, Pacious noted. “If interest rate cuts are announced in the near future, as anticipated, we expect a return to a more robust new construction and transaction environment, which will translate to acceleration in our pipeline.”
Aligning with the rising popularity and preference for extended-stay accommodation options, Choice’s extended-stay brands have been posting strong performances and expanding its portfolios. Its Woodspring Suites brand expanded its unit count by 10% YOY in the second quarter. Choice observed a strong traction in Everhome Suites, its newest, midscale extended-stay offering. With four open hotels, Everhome Suites has 65 domestic projects in its pipeline, which includes more than 20 under construction.
Conversion Projects
Conversion projects have been fueling Choice’s portfolio growth and helping launch new brands. This can be seen by the recent relaunch of Park Inn by Radisson, a conversion brand that seeks to offer premium lodging options at a low affiliation cost, Pacious said. Choice has executed 19 global franchise agreements under the brand, of which five are open in the U.S. and Canada.
By the end of June, Choice’s global rooms pipeline for conversion hotels grew by 5% quarter-over-quarter.
About 36% of Choice’s existing domestic pipeline consists of conversion projects and that has been the key driver at a time when interest rates are elevated, Pacious said.
“Some 80% of our openings year-to-date have been conversions. About 84% of the agreements we sold in Q2 were for conversion. And when you look at the conversion agreements in mid-scale in particular, those agreements are up 31% YTD,” he said.
The last piece that needs to fall into place is hotel financing, which is a function of interest rates coming down, Pacious said. “So, if we do see that in the coming months, we expect to see new construction pipeline starting to move more rapidly than we’ve seen over the last 18 months.”
