Choice’s growth focused on ‘revenue-intense’ US brands

NORTH BETHESDA, Maryland — Regarding net unit growth for Choice Hotels International, it’s not necessarily the total numbers in its pipeline but the brands they are heading into.

“Our long-term growth is expected to continue to be strong because 98% of the rooms in our global pipeline are now within our more revenue-intense brands,” Choice President and CEO Pat Pacious said during the company’s fourth-quarter earnings call. “This means that our pipeline is set to generate significantly higher revenue compared to our existing portfolio, driven by a substantial RevPAR premium, a higher average effective royalty rate and a larger room count per hotel.”

As part of its Q4 and year-end 2024 earnings, Choice net global rooms systems growth of 3.3%, including 4.3% growth for domestic upscale, extended-stay and midscale rooms portfolio.

2024 was the year we began to realize the benefits of our larger scale, which enabled us to make additional investment given our significantly enhanced growth profile. We’ve invested in capturing more group business and business transient demand, leveraging our evolution to a more upscale portfolio.

Pat Pacious

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“2024 was the year we began to realize the benefits of our larger scale, which enabled us to make additional investment given our significantly enhanced growth profile,” Pacious said. “We’ve invested in capturing more group business and business transient demand, leveraging our evolution to a more upscale portfolio.”

He said business transient demand is supported by Choice’s strengthened upper midscale portfolio, where revenues were up by 20% year-over-year in the fourth quarter.

“In addition to the positive trends in leisure travel, we are seeing improving strength in our business travel,” Pacious said. “In 2024, business travel represented approximately 40% of our overall mix, reflecting the success of our revenue-intense strategy. In fact, our business transient segment grew 14% year-over-year in the fourth quarter.”

In addition to its traditional strength in the upper midscale and midscale segments, Pacious said Choice is also emphasizing adding brands with significant growth potential in the two segments with the highest developer and guest demand: extended-stay and upscale limited-service.

“These segments are more accretive to our earnings, and they have been and will continue to be a key driver of our earnings algorithm and future growth,” he said. “By successfully executing our strategy, we’ve repositioned the company and established a strong foundation for future growth.”

Choice opened 407 hotels globally, a 21% increase for full-year 2024 year-over-year, which included opening the 515th extended-stay hotel domestically in the fourth quarter. It also entered into a strategic partnership with Westgate Resorts, which added 21 hotels and 14,471 rooms to its domestic portfolio in Q4.

Converting conversion rapidly

Pacious was asked if the 1% projection for net unit growth to grow in 2025 was too conservative and he said the number reflects a trend where conversions can be signed and added into Choice’s system within a single quarter, so they never technically appear in a pipeline.

“We’re effectively in a world now where about 80% of the openings are coming from conversion hotels,” he said. “It’s why in our remarks, we keep referencing the focus we’ve had on moving hotels rapidly through our pipeline. Over the past two years, we’ve seen a 25% improvement for that.”

What does that mean for Choice’s pipeline? “It means that we may have a hotel that enters and opens within three months, so you don’t even see it in the pipeline during a quarter and because we’ve been able to increase the velocity and the pace of that, we’re not really just focused on the aggregate amount in the pipeline,” Pacious said. “We’re focused on how do we get these conversion hotels that are looking to join our system from an application to a cash-flowing hotel in our system more rapidly. We’ve had a lot of success on that front.” 

Choice is focused on adding more hotels in revenue-intense brands into its system, like the Cambria Pigeon Forge in Tennessee.

Other Q4 and FY24 results

• Choice reported its net income increased 16% to $299.7 million for the full year 2024, representing diluted earnings per share (EPS) of $6.20, a 22% increase compared to 2023, both of which exceeded the top end of the company’s full-year 2024 guidance. EBITDA for full-year 2024 also increased 12% to a company record of $604.1 million, exceeding the top end of its 2024 guidance.
• For its full-year guidance for 2025, Choice expects net income between $288 to $300 million and full-year 2025 adjusted EBITDA to be between $625 and $640 million. It expects domestic RevPAR growth to be between 1-2%.
• Choice repurchased 3.1 million shares of common stock for $382.1 million in 2024. The company had 3.8 million shares of common stock remaining under the current share repurchase authorization.
• Platform and procurement services fees increased 5% YOY to $17.7 million In Q4.
• Through the end of 2024, the company had a total liquidity of $699.5 million, including available borrowing capacity and cash and equivalents. Choice’s net debt leverage ratio was 2.9 times. 
• During 2024, the company generated cash flows from operating activities of $319.4 million, an 8% increase YOY.

What the analysts said

Analyst Michael Bellisario of R.W. Baird said Choice’s earnings topped expectations as RevPAR growth was better than forecast.

“The earnings upside drivers were higher other revenues and lower SG&A expense; total gross fees were light of our estimate,” he said. “The incremental focus likely will be on 2025 guidance and the embedded assumptions to get to the company’s ~3.5%-6% adjusted EBITDA growth forecast, which is modestly ahead of expectations. Investment spending remains elevated (a known known, in our opinion), but earnings estimates for 2025-2026 should continue to move higher while most investors remain negatively biased (although less so than 90-180 days ago), which we believe should support [Choice] shares over the near term.” 

Patrick Scholes of Truist Securities said Choice’s Q4 earnings beat was primarily driven by the upside to its “other” revenues line item.

“The ‘other’ revenue line item grew approximately 30% year-over-year and accounted for $4 million of upside to consensus with the rest of the EBITDA beat coming from a combination of various revenue and cost line items,” he said. “This line item includes ’a combination of miscellaneous non-marketing and reservation system fees, which includes quality assurance, non-compliance and franchisee training fees.’”