Choice to Wyndham: Get back to the table

ROCKVILLE, Maryland – Choice Hotels International reported 3Q23 earnings that included no specific update on its intent to acquire Wyndham Hotels & Resorts but did urge the Wyndham board to reengage in discussions toward reaching a deal.

During the earnings call, Choice President and CEO Patrick Pacious recited all of the reasons why the combined company would offer compelling value for all parties, and then some.

Seeing if there’s additional value to be unlocked – there can’t be additional value unlocked if we don’t reengage.

Patrick Pacious

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“We are interested in combining with Wyndham because we respect their business, and we see it as highly complementary to what we have built. Together, we believe we can accelerate and build upon what each company could do on its own. With an asset light fee for service model, we are confident that the combined company will generate stronger free cash flow and profitability and have the financial strength to accelerate growth… We also see a clear path to completion and we're ready to move expeditiously to negotiate terms, including ways to provide market standard protections for Wyndham shareholders.”

Later in the call, Pacious said that every issue that’s been identified can be solved by coming back to the table and negotiating, including negotiating terms. “We’re very committed to this transaction. We’ve been evaluating this over the last 10 months and there’s a lot of value to be created here. The strategic rationale is just simply too compelling not to see it all the way through,” he said. “Seeing if there’s additional value to be unlocked – there can’t be additional value unlocked if we don’t reengage.”

Pacious added that Choice is willing to offer transaction terms that provide the appropriate level of risk mitigation and certainly for Wyndham’s their shareholders. “We’re well aware of what our options are to see this all the way through, and we’re confident we'll get the transaction completed.”

Addressing potential FTC issues, he reiterated that Choice does not see it as an obstacle and that it was still too early in the process to further address.

Proof in the Radisson integration

During the earnings conference call, Pacious also cited multiple synergies generated through the integration of Radission Hotel Americas to reinforce the company’s case to acquire Wyndham. He said Choice achieved $84 million of annual recurring synergies through the Radisson integration, exceeding prior target by 5%.

Choice Hotels President and CEO Patrick Pacious

“The successful integration process is tracking well ahead of schedule towards completion,” Pacious said. “Importantly, what our integration teams have accomplished with Radisson Americas further validates our capabilities to replicate this great success with the Wyndham combination.”

Pacious added that Choice expects to help further drive Radisson Americas hotels top line performance and reduce their operating costs to bring their profitability to the next level, as they leverage the power of Choice’s system and tools. “In the third quarter, the Radisson upscale brand RevPAR grew over 6% year over year, outperforming the upscale segment by three percentage points and achieving RevPAR index share gain versus competitors,” he added. “Future growth is now enhanced by the addition of the Radisson Americas brands to our best in class is a delivery engine and we believe we can provide similar benefits to Wyndham franchisees.”

While big franchisee groups like AAHOA stated its initial disapproval of a Choice acquisition of Wyndham, Pacious also talked about their extensive conversations with Choice franchisees, many of whom are also Wyndham operators. “In the last three weeks, we’ve probably spoken to hundreds of franchisees across the spectrum. They’re very supportive of the combination,” Pacious said. “These are sophisticated investors, and they immediately grasp how a combination like this is going improve their profitability. They see more direct bookings; they see a larger rewards programs and they understand how that can drive down their costs and improve their profitability.”

They see this combination not as a promise that these benefits are coming their way, it’s a reality because we’re achieving those cost benefit reductions right now through the Radisson acquisition.

Patrick Pacious

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Again, he referred to the Radisson integration for proof of Choice’s claim. “They see this combination not as a promise that these benefits are coming their way, it’s a reality because we’re achieving those cost benefit reductions right now through the Radisson acquisition,” Pacious said. “Cost reductions we’re able to drive are going across not just the Radisson brands, but all of the Choice legacy brands.”

Third quarter highlights

Third quarter earnings revealed softer-than-expected RevPAR growth with Choice stating domestic RevPAR decreased 80 basis points and increased 140 basis points for the three and nine-month periods ended September 30, 2023, respectively, compared to the same periods of 2022.

Adjusted EBITDA fell short of Street forecasts but grew to $155.9 million, a third quarter record and a 12% increase compared to the same period of 2022.

The company’s third quarter ADR increased 1.3% compared to the same period of 2022 while occupancy reached 62%.

Choice increased its global pipeline <99,000 rooms (6% sequentially), including a 27% increase in conversions. Growth was driven by a large international signing of a portfolio in Mexico and the Caribbean. The domestic pipeline, however, declined about 1,000 rooms versus 2Q23, which is the third consecutive quarterly contraction.

The company executed an average of more than four hotel openings per week, for a total of 159 hotel openings year-to-date through September 30, 2023, a 24% increase compared to the same period of 2022. For the first nine months of 2023, the company grew hotel openings across all segments, increasing openings in the upscale segment by 50%, the extended stay segment by 38%, the midscale segment by 14%, and the economy segment by 27% compared to the same period of 2022.

Domestic upscale and extended-stay portfolio grew by 11% and 13%, respectively, since September 30, 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 was over 6,200 hotels and 490,000 rooms as of September 30, 2023.

Pacious also briefly alluded to an opportunity to add an upscale extended-stay brand through development or acquisition, citing the company’s experience in the upscale arena with Cambria and now Radisson.

Other 3Q23 highlights:

• Total revenues were $425.6 million, a third quarter record and a 3% increase compared to the same period of 2022. Excluding reimbursable revenue from franchised and managed properties, total revenues increased 9% year over year to $219.6 million.
• Net income was $92.0 million, representing diluted earnings per share (EPS) of $1.81. As a result of one-time items, including Radisson Hotels Americas integration costs, gains from the sale of the Cambria Hotel Nashville owned asset and extraordinary franchisee termination fees in third quarter 2022, and the timing of net reimbursable expenses, net income and diluted EPS were 11% and 2% lower, respectively, for third quarter 2023 compared to the same period of 2022.
• Adjusted net income, excluding certain items, increased 6% to $92.4 million compared to the same period of 2022, and adjusted diluted EPS increased 17% to $1.82 compared to the same period of 2022.
• Royalty, licensing, and management fees increased 3% to $148.5 million compared to the same period of 2022. Excluding the one-time exit of the 110 Woodspring Suites hotels in third quarter 2022, royalty, licensing, and management fees for third quarter increased 6% compared to the same period of 2022.

Choice also raised full-year 2023 financial guidance, which represents a 12.3% increase in its adjusted EBITDA for the full year and reported it has returned $550 million to shareholders over the last 12 months.