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| Choice launched a Mainstay Suites and Sleep Inn dual-brand hotel in May as a response to requests from developers tapping into oil demand. |
SILVER SPRING, Maryland—Hotel finance lending requirements are easing substantially and Choice Hotels International is in a prime position to take advantage, executives said Friday on the company’s second-quarter earnings call.
The number of U.S. franchise contracts signed with Choice in the second quarter was up 54% compared to the second quarter of 2011, with “meaningful gains” in both new construction and conversion hotel franchises.
“We’re seeing both strong (revenue per available room) and global system growth,” said Steve Joyce, president and CEO of the company. “We are very excited about accelerating momentum in the franchise development world.”
During the quarter, Choice executed 106 new franchise sales contracts in the U.S., an acceleration over the first quarter, and executives said they are optimistic the development environment will continue to improve. Conversion franchise sales were up 40% from 61 in the second quarter of 2011 to 85 in the second quarter of 2012. New-construction sales were up 163%, from eight deals in second-quarter 2011 to 21 deals in second-quarter 2012.
“We have had two straight quarters now … where the development results have been accelerating, culminating with the second quarter being particularly strong,” Joyce said. “We are feeling really good about the development environment.”
Conversions represented approximately 75% of franchise sales growth and were driven primarily by the Quality Inn brand, which increased from 11 deals in second quarter 2011 to 36 in second quarter 2012.
The positive signs in the new-construction landscape provide light to an area that has been dark since the economic collapse in 2008. Much of the new-construction growth has been driven by energy markets, including Pennsylvania, Texas, and North and South Dakota, where oil supplies have created a unique marketplace.
The company executed 12 new deals so far during 2012 for new development of a Sleep Inn prototype, which Joyce said is a “very efficient building that offers low development costs as well as low operating costs.”
Choice outlined plans in 2011 to commit $30 million in capital annually to new-construction deals. So far in 2012 the company has been fairly limited in this regard because, Joyce said, growth has come in mostly the core mid-tier brands. Joyce said Choice has $17 million committed as of now but whether or not those deals go through is still up in the air.
Preliminary talks with developers about 2013 have led the company to be more optimistic about deploying capital next year, Joyce said.
Financing landscape
Choice franchisees are reporting that banks are more willing to provide capital today than in the recent past, Joyce said.
For buyers looking at existing hotels, leverage levels are coming up and tenant requirements are starting to ease somewhat.
“The ones that we’ve got that have really strong relationships with their banks are the ones that we’re seeing actually looking at the new construction activity as well,” Joyce said. “It’s not like the lending environment is completely back, but it has steadily improved.”
For Choice, conversion opportunities arise when the transaction environment heats up. And it looks like the transaction market is finally coming around, Joyce said.
“When people are selling hotels, that’s typically when we get a shot at the conversion opportunity,” he said. “We’ve been waiting for this for three-and-a-half years, and it looks like we are finally getting into a more normal look at the upswing in the cycle, where development will begin to come back. Where we’ll see a lot of conversion opportunities first, but then new construction will follow.
“Barring something unforeseen, it looks like that momentum is building.”
Another encouraging sign for Choice is that the development pipeline continues to grow even as new hotels open.
For instance, at the end of 2011, Choice had 131 conversion contracts in its pipeline. Today, the company’s pipeline is 10% larger even as a number of those 131 hotels have opened and come online.
“We’ve been able to start to replenish our conversion pipeline at a faster rate than the openings coming out of it, which is very encouraging to us,” Joyce said. “As we look forward in the second half of the year, I think we are feeling pretty good about how our brands are positioned to continue to do well on the development front.”
