ROCKVILLE, Maryland—With a 0.6% year-over-year decrease in net room count, it might appear that Choice Hotels International’s third quarter performance was less than expected. However, executives pointed out on an earnings call with analysts that they are hard at work improving the quality of assets in the portfolio, including a continued push into the upscale segment.
The factor behind the company’s net rooms change is its ongoing “rejuvenation” of the Comfort Inn and Suites brands, which includes a systematic removal of underperforming hotels that will reach approximately 600 by year’s end, according to Steve Joyce, the company’s president and CEO.
He and CFO David White discussed those efforts as well as similar projects with the Cambria Hotels & Suites brand and Ascend Hotel Collection during an earnings call with analysts, which was webcast.
- Read third-quarter earnings coverage from other hotel companies.
Shares of Choice (NYSE: CHH) were down 0.9% since Friday. The Baird/STR Hotel Stock Index, meanwhile, was up 0.2%.
Comfort rejuvenation
“We’re seeing strong development interest in these brands as we implement the brand strategy to renovate, remove or reposition properties from the system,” Joyce said.
The Comfort Inn and Suites “rejuvenation,” as executives called it, has helped drive a 40% increase in new domestic hotel contracts in total and a 50% increase for the Suites brand in particular, he added.
“We’re also seeing a big upswing in urban and dense suburban markets, which we know will bring up the brand averages significantly,” White said.
The new-build Comfort hotels also are “larger and more revenue-intensive,” Joyce added.
The brands’ revenue-per-available-room index has improved for 11 consecutive months as a result.
At the same time, Choice executives have systematically removed hundreds of underperforming Comfort properties from the system to raise the overall quality of the existing stock. That number will reach 600 by year’s end. Excluding the impact of this strategy, Choice’s domestic system increased by more than 100 hotels, or approximately 3%.
Joyce said exits will slow significantly in 2016, as executives already have combed through most of the Comfort portfolio. While 600 units is sizeable, the CEO originally thought it would be even higher.
“We expected a much larger number of hotels being terminated. And in fact what happened was we had a much higher level of owners who stepped up and put significant resources and investments into their products to maintain the Comfort flag, which is good because otherwise we would have had more terminations than we had,” he said. “But we've been through the system and we are getting at the tail end of the termination process and then expect everything else to continue to grow on top of each other over the next couple of years.”
While such improvements vary, White said the total cost of investment ranges between $200,000 and $400,000 on average.
Cambria and Ascend
Executives at Choice noted significant momentum in the upscale segment during the quarter.
“This quarter the momentum continued with a wave of new openings and signings for our Cambria Hotels & Suites brand and our Ascend Hotel Collection,” Joyce said.
Launched in 2005 originally as Cambria Suites, the brand had difficulty gaining traction, particularly amid the global recession. Executives announced a retooling in May 2014 to broaden its appeal to millennials and business travelers. (They also renamed it Cambria Hotels & Suites at that time.)
As of 30 September, 24 Cambria hotels comprising 2,917 rooms were open.
Executives have signed 16 new Cambria franchise agreements this year, including nine in the third quarter.
Of particular focus is establishing the brand in higher-profile urban markets, Joyce said.
“Just a few days ago, we opened a brand-new Cambria Hotels & Suites at Times Square (in New York City). This is our second Cambria to open in Manhattan following the successful opening of the Cambria at Chelsea earlier this year,” he said.
Also opening during the quarter was a Cambria in Rockville, Maryland, across the street from Choice’s corporate headquarters.
Among the contracts signed during the quarter are projects in Chicago and Orlando, Florida.
Choice’s soft brand, the Ascend Hotel Collection, is seeing growth as well.
“The Ascend Hotel Collection also continues to be a strong driver for Choice in the upscale space,” Joyce said.
The soft brand counted 112 hotels with 9,407 rooms as of 30 September, according to the company’s earnings release. Executed franchise contracts are up nearly 50%, and the pipeline has increased 70% year over year, the CEO added.
“We're excited about the momentum we are seeing with our upscale brands, and I think it will continue long into the future,” Joyce said.