Choice CEO on Wyndham merger: ‘Strategic rationale still makes sense’

NORTH BETHESDA, Maryland — In the first earnings call since Choice Hotel International’s failed hostile takeover of Wyndham Hotels & Resorts, it almost took an hour for the first question about the M&A to come up — namely, whether Choice CEO Patrick Pacious would be willing to try to do the merger again down the road.

His answer, which pointed back to what Choice said in March when it failed to get enough support from Wyndham shareholders, wasn’t no. But he also said the answer would have to come from somewhere else.

“The strategic rationale still makes sense,” Pacious said. “So, that’s really a question for the Wyndham shareholders to answer.”

Pacious said he wasn’t worried about regulatory concerns that came up at the time. “This is more back to [the fact that] we really got no price discovery,” he said. “We had laid out a $90 [per share] offer. We felt that was a full premium for the value that could be created. You don’t see a lot of opportunities to create over $2 billion in value creation for shareholders on both sides. So, it’s really a question that should be answered by the Wyndham shareholders in the future.”

You don’t see a lot of opportunities to create over $2 billion in value creation for shareholders on both sides. So it’s really a question that should be answered by the Wyndham shareholders in the future.

Patrick Pacious

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Pacious and CFO Scott Oaksmith spoke during Choice’s first-quarter earnings call on Wednesday. Choice’s report was mixed: its RevPAR and fees were weaker than expected, but its adjusted EBITDA was higher. Plus, it had a record global rooms pipeline.

Pacious said the record pipeline is important because the new hotels entering Choice’s system are worth more than the ones leaving. “What’s in that pipeline is worth double what’s in our existing system,” Pacious said. “We’ve talked about a 30% RevPAR premium, 40% more rooms and a higher effective royalty rate. It translates to what’s coming in is worth double what’s leaving.”

Pacious said he especially sees growth opportunities in the “premium value” space. Choice announced last week that it was relaunching a conversion brand in the space: Park Inn by Radisson.

“If you look at that segment, there are about 20,000 existing properties that are independent in the sector unbranded, which are ripe for conversion,” he said. “The total available market there is significant.”

He also mentioned the enthusiasm for the brand relaunch the company saw last week at its annual convention in Las Vegas. “[There are] a lot of owners who are looking for that opportunity and looking for a fresh brand connected to a robust delivery platform that we offer,” he said. “We’re pretty excited about where that can go.”

Pacious said net unit growth is key and scale is key. So, M&A, whether it be something large like Choice’s acquisition of Radisson Hotels America or more of a smaller, tuck-in acquisitions like WoodSpring Suites, is always something the company is thinking about.

“Finding the right acquisitions be transformational… We don’t have anything we’re pursuing today,” he said. “But it is something that when you look out in the near term, there’ll be more domestic opportunities, but also more international opportunities that come available.”

First-quarter earnings

EBITDA in the first quarter of 2024 grew to a record $124.3 million, a 17% increase compared to the same period in 2023, while the company’s global pipeline increased by 10% to a record of more than 115,000 rooms. The domestic hotel pipeline (up 11% in Q1) and an overall 36% increase in conversions led Choice in the quarter, with U.S. conversion also increasing by 59%.

Domestic RevPAR decreased by 5.9% in the first quarter, which also helped drive royalty, licensing, and management fees down to $105.5 million in Q1, lower than the $107.5 million in Q1 2023. Total revenues were $331.9 million for the quarter, a 0.3% decrease compared to 2023.

Choice’s domestic portfolio stood at 6,200 hotels and 494,000 rooms through 1Q24, with upscale, extended-stay and midscale leading growth (up 1.2% in hotels and 0.9% in rooms). The company’s extended-stay portfolio is up 17.4% from last year. Choice’s international portfolio grew 1.3% by hotels and 2.3% by rooms over the same period.

We are feeling pretty good about the trend… and we expect to see RevPAR improvement from here forward,” he said. “So, we would be in the camp where April was better, and we’re not seeing a shift backward.

Patrick Pacious

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In March, Choice’s board approved an increase in the number of shares authorized under its share repurchase program by 5 million shares. The company says it has repurchased 1.5 million shares of common stock for $196.6 million year-to-date through April 30.

Answering the analysts

Analyst Michael Bellisario from R.W. Baird said Choice earnings beat forecasts with “non-core” items. “Other revenues and adjusted SG&A were positive offsets, but the main driver of the significant headline earnings beat was much higher-than-forecasted reservation profit/reimbursable income (a non-core item, in our view),” he said. “Overall, a mixed to negative update given weaker core fundamentals.”

Bellisario said stock buybacks stepped up materially in April, “presumably when Choice sold its [Wyndham] shares.”  

Analysts at Truist Securities said Choice’s earnings beat expectations due to “other” revenues, up 54% year-over-year. “RevPAR was soft (especially midscale and upper midscale relative to U.S. STR results for these chain scales) with fees light of expectations... We are initially unsure of what drove this beat but note that last year, the company called out ‘termination fees’ as a source of growth for this item, so it is possible the upside was again from such fees.”

CFO Oaksmith was asked about the strength of Choice’s “other revenue” line (up 55% for Q1 year-over-year) and its implications for the rest of the year. He said various revenue streams are part of that category, including one large termination award during the quarter. Oaksmith said, “We would expect that line item to be up in the mid-single digits for the year.”

When asked about operating cash flow and key money available for the various conversion brands Choice (20 of the company’s 22 brands can be conversions), Oaksmith said Choice expects to continue to increase its totals over 2023 levels. He said in terms of key money, last year Choice spent about $98 million for the full year and expects to be generally in line (and maybe slightly higher) for the rest of this year, primarily because the company expects more openings in 2024 (openings were up 20% in the first quarter year-over-year). 

Regarding RevPAR declines in the first quarter, Pacious said the company expected the Q1 numbers to be softer, and Choice is already seeing more positive trends for April and beyond. 

“We are feeling pretty good about the trend… and we expect to see RevPAR improvement from here forward,” he said. “So, we would be in the camp where April was better, and we’re not seeing a shift backward.”