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Conversion business a slow go for Choice
February 22 2012

So far in 2012, Choice Hotels International’s conversion pipeline is relatively flat. However, executives said conversions should pick up throughout the year.

Highlights
  • A main selling point for Choice Hotels International is the company’s ability to drive business through its proprietary central reservations system.
  • Choice strengthened its franchise sales team since numbers were down in the fourth quarter of last year.
  • Growing the new construction side of the business will take much more time.
By Jason Q. Freed
Contributing Editor, Tech Impact Report

REPORT FROM THE U.S.—While fees from franchisees boosted Choice Hotels International’s revenue for the fourth quarter of 2011, the company still struggles to grow its portfolio, executives said during the company’s fourth-quarter earnings call Tuesday.

Choice opened 128 hotels during the fourth quarter of 2011, which was “fewer than we were targeting,” according to Choice’s Steve Joyce, president and CEO. The company executed 332 new domestic hotel franchise contracts in 2011 compared to 357 in 2010.

Choice’s “growth profile remains subdued,” according to a research note from Robert W. Baird Senior Research Analyst David Loeb.

“The company's current pipeline accounts for approximately 9% of total rooms, well below the 17% to 35% rate for peers,” Loeb said. “With up to 10% of Comfort-branded hotels expected to be pruned from the system over a multiyear period, limited exposure to high-growth markets, and continued declining franchise contract executions, we believe Choice continues to lack the upside of peers.”

So far in 2012, Choice’s conversion pipeline is relatively flat year over year. However, Joyce and senior VP and CFO David White said conversions should pick up as 2012 plays out.

 

Steve Joyce, president and CEO, Choice Hotels International

“Conversions are 90% of our business,” Joyce said. “We’ve been relatively flat at this point, but it should move in the right direction from here.”

 

A main selling point for Choice in converting properties into the system is the company’s ability to drive business through its proprietary central reservations system, Joyce said.

“Our CRS channels provide highest (average daily rate) at the lowest cost,” he said. “We delivered more than US$1 billion in gross revenue to franchisees last year. Delivery through these channels grew by 12% in 2011.”

Joyce said Choice strengthened its franchise sales team since numbers were down during the fourth quarter of last year, and recent feedback from developers is “very encouraging.”

Growing the new construction side of the business, however, will take much more time.

“We still see some volatility in that over the next year,” Joyce said. “We haven’t forecasted any material progress in new construction financing. It seems like (we’re) moving a little in the right direction, but we’re not counting on it.”

RevPAR strong
Choice reported Tuesday domestic system-wide revenue per available room increased 6.2% for the full year 2011 compared to the same period of 2010. During the fourth quarter alone, domestic system-wide RevPAR increased 7.8%.

Despite “more challenging comps,” Joyce said Choice hasn’t seen a slowdown in RevPAR gains even in the first part of 2012.

“From December to January to today, the acceleration of RevPAR rate growth continues to be in the high single-digits for the quarter,” he said. “We’re well positioned to improve on those results in 2012.”

However, Choice’s guidance further into 2012 predicts a slowdown in RevPAR growth, which Joyce attributed to a lack of clarity.

“We’re sort of in between some of the experts. Where the forecasters were putting our segment was (3% to 5% growth), we’ve moved that up to (4% to 6%),” he said. “We will have to see (where) the slowdown in (gross-domestic-product) growth and unemployment will take us.

“The encouraging thing overall is that despite of all the noise and news, the business has remained not only fairly robust but has increased.”

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