Choice beats Street, plays long game with Wyndham

NORTH BETHESDA, Maryland – As Choice Hotels International reported a 4Q23 earnings beat, the bigger conversation was about the state of its bid for Wyndham Hotels & Resorts with Choice President and CEO Patrick Pacious using the word “frustration” over the fact that the two sides can’t get back to the negotiating table.

Among the earnings highlights were record total revenues growing 10% to $1.5 billion for full-year 2023 compared to the same period of 2022. Net income was $258.5 million for full-year 2023, representing diluted earnings per share (EPS) of $5.07. Adjusted EBITDA for full-year 2023 reached a company record of $540.5 million, a 13% increase compared to 2022, and exceeded the top end of the company's full-year 2023 guidance.

Pacious attributed the company’s strong performance to adding hotels that generate higher royalties per unit and the rapid integration of Radisson Hotels Americas.

The company posted 4Q24 adjusted earnings per share of $1.44, surpassing analyst expectations by $0.10. However, revenue for the quarter was $358.4 million, falling short of the consensus estimate of $369.44 million.

At the same time, EPS guidance for the full year 2024 ranged between $6.30 and $6.60, below the analyst consensus of $6.75.

Frustrated with Wyndham

During his prepared comments and during the ensuing Q&A session, Pacious expressed continued confidence in completing the acquisition of Wyndham given its “well-positioned, low-leverage balance sheet and continued progress on the regulatory front.”

We’re six weeks into the second request on the regulatory front, and that’s going to be the long pole in the tent.

Patrick Pacious

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The only thing he could point to on the regulatory front was the fact that the second phase was progressing. “We’re six weeks into the second request on the regulatory front, and that’s going to be the long pole in the tent,” Pacious said. “When we look at it from a second request to a final outcome, we’ve been told to expect anything from six to nine months. So, as we’re six weeks into that six-to-nine-month timeframe, that’s getting closer.”

Pacious added that Choice is working with the FTC, who he said is at the peak of its second request efforts and making progress. “We don’t see any surprises, and as we’ve said before, we remain confident our ability to complete this process.”

He said the FTC is learning that the hotel industry is a very competitive marketplace made up of independent hotels OTA and “a lot of large, well-capitalized competitors.”

Pacious also said the FTC is looking at pricing. “As we said before, Wyndham and Choice do not set price – our franchisees do, and that is a very healthy factor with regard to regulatory issues.”

“One of the compelling reasons for putting our two companies together is to drive down the costs of running a hotel, and ultimately, reliance on expensive, third-party distributors,” Pacious continued. “So, the FTC is learning about some of the specifics of the industry, how pricing works for the consumer… They’re looking at a lot of what our competition is doing and how the competitive landscape is evolving.”

Pacious reiterated that a combination of a Choice and Wyndham asset-light businesses is expected to generate significant cash flow available to rapidly reduced leverage while still investing for growth. “Both sets of shareholders would have the opportunity to participate in more than $2 billion of incremental value creation expected from the $150 million in annual run rate synergies that we believe a combined company would unlock,” he added.

However, he called Wyndham’s board “deeply entrenched and unwilling to take the actions that are in the best interest of their shareholders.”

As a result, Choice recently nominated a slate of independent directors for election at Wyndham’s 2024 annual meeting. If elected, Pacious said these nominees will act in the best interests of Wyndham’s shareholders, “which we believe is to move with urgency to maximize the value that can be created through a combined company.”

He added that the deal can continue to change with a board that’s willing to negotiate and create greater value in this transaction.

The feedback we’ve heard from them is around one word, they’re frustrated and frustrated that Wyndham’s board is not engaging in a conversation that would help answer those questions.

Patrick Pacious

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Speak directly with Wyndham’s shareholders, Pacious said Choice has learned what they liked about the offer, and where they might like to see additional improvements. “The feedback we’ve heard from them is around one word, they’re frustrated and frustrated that Wyndham’s board is not engaging in a conversation that would help answer those questions.”

Digging into results, pipeline

Looking at full-year and 4Q23 results, domestic RevPAR increased 10 basis points and decreased 390 basis points for the 12-month and three-month periods ended December 31, 2023, respectively, compared to the same periods of 2022. Domestic RevPAR increased 12.7% and 13.1% for the 12-month and three-month periods ended December 31, 2023, respectively, compared to the same periods of 2019.

The growth of the company’s domestic upscale, extended-stay, and midscale brands accelerated from September 30, 2023, and exceeded the unit growth guidance for the full-year 2023. The Choice legacy portfolio increased by 1.8% for hotels and 2.4% for rooms since December 31, 2022.

Global pipeline as of December 31, 2023, increased 6% to over 105,000 rooms from September 30, 2023. The global pipeline for conversion rooms increased by 16% from September 30, 2023, and 34% from December 31, 2022.

"Choice's outlook is moving in the right direction, but there is more wood to chop to improve the investment community's perception of growth, particularly within the Radisson portfolio and on a relative basis versus peers," wrote R.W. Baird analyst Michael Bellisario. "In 2023, system-wide growth was 0.8% and revenue-intense growth was 1.6% (both in rooms). We model 1.0% and 2.0% in 2024E, respectively."

The company’s hotel mix of the domestic upscale, extended-stay, and midscale portfolio increased by 8 percentage points since December 31, 2017, and represented 82% of the company's total domestic portfolio as of December 31, 2023.

Choice Hotels domestic upscale, extended-stay, and midscale portfolio increased by 1.4% for hotels and 1.6% for rooms since December 31, 2022. Domestic upscale and extended-stay rooms portfolio grew by 6.3% and 14.9%, respectively, since December 31, 2022, driven by an increase in the number of Cambria Hotels, Ascend Hotel Collection, WoodSpring Suites, MainStay Suites, and Suburban Studios units. The company’s total domestic system size increased to over 6,300 hotels and nearly 497,000 rooms as of December 31, 2023.

Choice opened an average of eight hotels per week in the fourth quarter 2023, contributing to a total of 263 hotel openings for full-year 2023, a 13% increase compared to the same period of 2022.

Of the total domestic franchise agreements awarded in full-year 2023, 83% were for the company’s upscale, extended-stay, and midscale brands, and 72% were for conversion hotels. Of the domestic franchise agreements awarded for conversion hotels in 2023, 135 opened in the same year.

Domestic rooms pipeline as of December 31, 2023, increased by 3% since September 30, 2023, highlighted by a 6% increase for conversion hotels.

The international portfolio, as of December 31, 2023, expanded by 2.6% in the number of units and by 2% in the number of rooms from December 31, 2022. Specifically, the company extended its master franchise agreement with Strawberry (formerly Nordic Choice Hotels), secured a distribution partnership with a leading Spanish hotel chain, Sercotel, signed an agreement with Zenitude Hotel-Residences that is expected to double the company's unit footprint in France, and acquired the franchise rights for City Edge Apartment Hotels in Australia. As of December 31, 2023, the international units pipeline increased by 33% from September 30, 2023, and the company more than doubled the number of international hotels in the pipeline since December 31, 2022.