SILVER SPRING, Maryland—As the transactions market continues gaining traction, executives at Choice Hotels International find themselves in a good position to reap the benefits.
The hotel franchisor typically sees an uptick in conversions whenever hotels start changing hands, and President and CEO Steve Joyce expects a healthy increase in new contract growth for the remainder of 2012, he said Friday during the company’s first-quarter earnings call.
Steve Joyce, President and CEO at Choice Hotels International
Conversions for Choice have been slower than expected during the past few years because hotel transactions were concentrated in the luxury and upper-tier sectors. But that’s set to change as deal activity begins to trickle down into the mid and lower tiers, which house the majority of Choice’s 11 brands.
“We think we’re going to see more transactions, and that typically benefits us from a conversions standpoint,” Joyce said.
Choice executed 64 new domestic hotel franchise contracts during the first quarter compared to 56 new domestic hotel franchise contracts during the same period of the prior year—a 14% increase.
Approximately 15% of those conversions were from one Choice brand to another Choice brand, which is similar to the percentage seen in previous years, said David White, senior VP, CFO and treasurer.
Additionally, the company has 471 hotels comprising 38,210 rooms awaiting conversion or approval for development as of 31 March.
Joyce expects conversion activity for 2012 to be up “significantly” compared to 2011.
Net domestic unit growth is expected to remain flat, however—which Joyce attributed to the company’s desire to “clean up” the Comfort Inn and Comfort Suites brands.
Approximately 2,700 net rooms among the Comfort brands left the system year to date, White said. Choice previously announced its desire to remove 10% of the existing Comfort stock during the next few years, he said.
Financing and new construction
Choice’s franchisees and prospective franchisees are making little headway on the new-build front, Joyce said, although conditions are improving.
“It’s improving for our strongest franchisees. The lending is beginning to loosen slightly,” he said.
Whereas before banks offered 50% loan to value, now that number is increasing to more than 60%, Joyce said, citing conversations he’s had with franchisees. Underwriting gets even better for franchisees with a proven track record of success and a pre-existing relationship with a bank, he added.
However, there’s been few projects to get off the ground thus far, “but improvement is important nonetheless,” Joyce said.
He also reported a notable uptick in interest from developers and potential franchisees.
Choice’s earnings for the quarter were on par with other major hotel chains that reported performance increases this week.
Domestic system-wide revenue per available room increased 8.6% for the three months ending 31 March 2012 compared to the same period of 2011. Occupancy and average daily rate increased 250 basis points and 2.5%, respectively.
The company expects RevPAR to increase approximately 7% for second quarter of 2012 and increase between approximately 5% and 7% for full-year 2012.