Choice’s Pacious says demand defied virus trends in Q3
 
Choice’s Pacious says demand defied virus trends in Q3
05 NOVEMBER 2020 5:04 PM

Choice Hotels International executives said bookings are up despite rising COVID-19 cases in the U.S., and they are confident RevPAR declines will continue to improve.

ROCKVILLE, Maryland—Choice Hotels International executives expect an upward trend in revenue per available room over the summer to continue in the fourth quarter.

During a conference call to discuss Choice’s third-quarter earnings, President and CEO Pat Pacious and CFO Dominic Dragisich said Choice’s Q3 RevPAR declined 28.8% year over year, and early indications from October data show a 25% decline to start the fourth quarter.

Pacious said Choice hotels have built momentum earning business transient bookings that should contribute to “RevPAR decline improvements” into November and December.

“Traditionally, Q4 is (when) there’s just lower demand out there in general,” he said. “There is more business travel out there in the fourth quarter historically for us, and we are seeing continued year-over-year or month-over-month volume in business travelers that are out there. In our segments it’s primarily construction, retail, trade and transportation segments right now that we’re seeing an increase on the business travel side.”

The recent spike in U.S. COVID-19 cases hasn’t significantly affected Choice’s bookings either, Pacious said.

“We saw a pickup in case counts in the months of July and August, and we did not see a correlation between that and bookings going down; we actually saw bookings increase,” Pacious said. “In specific areas of the country where the cases were rising, we continue to see travelers build travel demand month over month.

“It’s always hard to know what the next two months or the next year is going to entail with regard to the virus. But as we look back at the last eight or nine months, as case spikes have gone in a higher direction, other than that initial shock in In March, we haven’t seen a correlation between that and travel demand.”

Dragisich said Choice’s leisure bookings were also up in Q3 as guests extended weekend trips into the week since parents can work remotely and children can attend school remotely. Those trends continued into October, which gives Choice executives optimism about Q4.

“What we’re seeing in October is much stronger than expected in terms of seasonal trends … (on) the corporate side but also on the leisure side,” Dragisich said. “Especially when you look at the South, it’s had the strongest RevPAR growth among all of our regions in Q3 and into October despite the recent elevation in virus cases.

“We’re not sitting here saying you can expect to see the improvements in RevPAR look like they did from Q2 to Q3. We just expect to see some level of sequential RevPAR improvement from Q3 to Q4, and that’s showing up in the 25% (RevPAR decline) that you see in October.”

If the more traditional travel trends change once the virus is contained, Choice is well-positioned to capitalize, Pacious said.

“The real question is going to be as the virus gets under control, as the country returns to more of a normal travel pattern, will consumers have more flexibility with the offices they work in and with the schools that their children attend. That may allow for travelers to travel at different points of the year and also different days of the week,” he said. “And if that is in fact the case, then our locations are really well-suited to pick up some of that demand.”

Unit growth, conversions
Choice executed 81 domestic franchise agreements during the quarter, a 19% decrease from Q3 2019, according to an earnings release. In the first nine months of 2020, Choice has awarded 232 new domestic franchise agreements in 2020, which is down 38% compared to the same period in 2019. Nearly 70% of the 2020 agreements were for conversion projects.

During the call, Pacious noted the rooms growth of Cambria Hotels (up 14% year over year) and Ascend Hotel Collection (up 42%) in Choice’s upscale segment, as well as 6% rooms growth in the company’s extended-stay portfolio. Choice’s pipeline of hotels awaiting conversion, under construction or approved for development reached 945 hotels with more than 76,000 rooms as of the end of the quarter.

Pacious said he’s more optimistic about Choice’s conversion deals and overall pipeline in the midst of the current downturn than during past recessions.

“If you look at the last downturn, that was a financial crisis, where the banking industry was frozen for a period of time and then it took a real long time for that to recover, which financing is a key driver of new construction,” Pacious said. “The other big change is our portfolio today. We have several additional new-construction brands today compared to 10 years ago, particularly in the extended-stay segment … which is doing very well operationally.”

More hotel developers are inquiring about building or converting extended-stay brands, Pacious added.

Developers “who (previously) just focused on transient hotels (are) showing a lot of interest in those brands right now,” he said. “That’s an area today of strength for ours that we didn’t have 10 years ago. … We think our new-construction pipeline and our pipeline in general will probably be in a better condition during this downturn than the one 10 years ago.”

Q3 earnings
Choice’s net income was $14.5 million in the quarter, down 81% year over year. Adjusted earnings before interest, taxes, depreciation and amortization was $74.9 million, down 34% from Q3 2019.

The company’s systemwide occupancy was 52.1% in the third quarter, down 17.8% compared to Q3 2019. Average daily rate was $75.30, down 13.4%, and RevPAR was $39.25, down 28.8%.

As of press time, Choice’s stock was trading at $93.61, down 9.5% year to date. The NYSE Composite was down 5.1% for the same period.

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