Choice
Hotels CEO Patrick Pacious pointed to green shoots indicating a recovery for economy hotels and discussed what he loves about their pipeline.
NORTH BETHESDA, Maryland — While
Choice Hotels International focused on the strength of its international growth during its
third-quarter earnings report, CEO Patrick Pacious also said he sees plenty of green shoots in its
U.S. economy business that gives the company optimism for the future.
The bifurcation in hotel
performance is a well-documented trend at this point and Choice, which indexes
heavily in the economy segment in the U.S., reported a -3.2% U.S. RevPAR loss
year-over-year in Q3. But Pacious, speaking during the company’s third-quarter
earnings call on Monday, pointed to signs of recovery.
Our economy transient segment occupancy performance has begun to improve year to date and has shown year-over-year growth in each of the last two quarters, excluding the impact of the third quarter 2024 hurricane. This segment was also the first to recover after the last period of demand softening, followed by the midscale segment.
Patrick Pacious
“As we look for signs as to when
the cycle in the U.S. may turn positive for our business, two indicators are
moving in the right direction,” he said. “First, our economy transient
segment occupancy performance has begun to improve year-to-date and has shown
year-over-year growth in each of the last two quarters, excluding the impact of
the third quarter 2024 hurricane. This segment was also the first to recover
after the last period of demand softening, followed by the midscale segment.”
Pacious also pointed to more
positive occupancy numbers for the year with index
across their entire U.S. portfolio up slightly year-to-date, a constructive
early indicator that, in prior cycles, has preceded broader U.S. RevPAR growth.
“As we look ahead, we’re optimistic about the next phase of the U.S. lodging
cycle and its impact on new construction openings in the U.S.,” he said.
Green shoots for
economy
Pacious said the occupancy
trends can be an early indicator and are often something franchisees notice
first.
“This is a cyclical business...
The green shoots you look for are when occupancy stops dropping. That then
gives owners confidence when they set prices,” he said. “That’s an early
indicator that we’ve seen where the cycle starts to turn, and that’s, in fact,
what we’re starting to see in our chain scales, in our segments and our brands.
We’re pretty excited with what we’re actually seeing in the economy segment,
which is the segment that usually leads you out of one of these typical
downturns.”
Another positive Pacious pointed
to was the overall trend for small and medium-sized business travel.
“There’s this question around
this K-shaped recovery, but it’s missing the fact that you have a ton (75%)
of people in this country who work for a small- or medium-sized business,” he
said. “We’re seeing that surge in the SMB business in our hotels. It’s because
of the types of travelers that… stay in our hotels: construction, utilities,
medical staffing, which is traveling nurses and the like. There’s a pretty
significant tailwind that we see from a business traveler’s perspective.”
That trend, coupled with the
company's overall business travel mix trends, is good news for future Choice
business, Pacious said.
What we’re seeing, particularly with what AI is doing to the workforce, is more people who are in that sort of blue and gray travel segment. When you look at the job gains and you look at the small business formation that’s occurring, they’re in the segments that travel in our hotels.
Patrick Pacious
“When you look at our business
travel or mix, we used to be a 70-30 leisure business. We’re now 60-40, and
that small business traveler is a much more resilient traveler because they
have to travel for their jobs,” he said. “What we’re seeing, particularly with
what AI is doing to the workforce, is more people who are in that sort of blue
and gray travel segment. When you look at the job gains and you look at the
small business formation that’s occurring, they’re in the segments that travel
in our hotels.
“When we look at that overall
total available market for small and medium businesses, it’s about $13 billion
of travel on an annual basis. Our ability to capture more and more of that
share is another positive that we’re looking forward to.”
Another demographic that gives
Pacious room for optimism is the Golden Traveler segment, 60 years and older
travelers who have the time and income to travel.
“About 30% of our business today
is those folks who are 60 years old and older,” he said. “They’re sitting on
tremendous wealth in their homes. They’re sitting on very attractive stock
portfolios, and they’ve got discretionary income and the time to travel. We are
seeing travelers on the road, and we expect to see more of them.
“We know that those are the
folks who spend more in our hotels. They stay more often, and they book direct,
which is all a real positive [for] the hotels themselves. So, we feel pretty
good about how the setup is coming for 2026.”
Higher-revenue
brands
Another theme that Pacious has
been discussing in the last few years' worth of quarterly earnings calls is
that most of the company’s pipeline, both internationally and in the U.S., is
in higher-revenue brands.
“Ninety-eight percent of the
rooms in our global pipeline are in higher revenue brands… and these hotels are
expected to be 1.7 times more accretive than our current portfolio, driven by
their RevPAR premium, higher effective royalty rates and larger average room
counts,” he said. “This pipeline strength underscores our ability to
continue to elevate our earnings per unit by adding accretive hotels to our
platform.”
Pacious also discussed how
quickly Choice can add conversion hotels to its system, meaning they are often
never in the pipeline because they become an open hotel for the company in a
short period. That ability can be even more crucial in the current environment,
where there is little new supply growth.
“Our pipeline is important, not
only for its size, but also for the quality of the hotels within it, and the
velocity at which we can convert signings into openings,” he said. “In fact,
the number of hotels that opened over the past year without ever appearing in
our global pipeline accounted for approximately 1% of the systemwide unit
growth.
“As we look into next year, just
given the limited supply growth that’s been going on in the U.S., from a new
construction perspective, I would expect that trend to continue well into 2026.
That’s probably how we would think about the setup for the conversions coming
out of the pipeline, and the net room growth in the U.S.”