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On an earnings call with analysts Tuesday, executives with Choice Hotels International said domestic RevPAR for the first quarter and full-year 2020 is expected to be flat to down 2% due weakness in oil and gas markets, the softening economy and other headwinds.

Primary Category: Earnings Recaps

Secondary Categories: Americas, Brands, News

ROCKVILLE, Maryland—Choice Hotels International is expecting revenue per available room to be flat to down 2% for the first quarter and full-year 2020 in part due to weaker performance in U.S. oil and gas markets and a softening economy, according to Choice President and CEO Pat Pacious.

“We look at the few areas where we are over-penetrated from an inventory perspective. There’s oil and gas markets and the Southeast in particular; those are expected not to perform as well as what you might see in the mountain states or on the West Coast,” he said on a call to discuss fourth-quarter and full-year earnings with analysts. “If you look at what our pipeline is, we do have great opportunity in our pipeline to open hotels in those markets where we’re currently under-penetrated.”

Dominic Dragisich, CFO at Choice, said January 2020 “came in close to negative.” February is trending to be better, he said, and could bring a few tailwinds.

One tailwind is the strength of the consumer, he said.

“You could see some improvement over the first quarter,” Dragisich said. “However, still our best guess right now is that -2% to flat (RevPAR).”

Net unit growth
According to the company’s earnings release, net domestic unit growth is expected to be 1.5% to 2.5% for full-year 2020.

Choice’s Comfort brand will return to net unit growth this year after going through a transformation period associated with its Move to Modern prototype, Pacious said. He added that Choice will likely unveil a new Comfort prototype next month.

The company also is focused on developing hotels in higher RevPAR markets and higher RevPAR segments, which also factored into the full-year net unit growth, he said.

“As a result, we’re doing a lot more new-construction hotels, and we’re developing in markets where entitlements and the cost of labor to actually get hotels built is probably more expensive … and takes a little longer,” Pacious said. “We’re seeing more of a delay in the amount of time it’s taking the hotels, once they start construction, to actually open, but that’s reflective of the fact that we’re pushing more into the upscale segment. We’re doing a lot more of our Comforts … in markets where higher RevPAR usually translates to more time to get through the entitlement and actually get the project open.”

Extended-stay segment
Choice launched its new midscale extended-stay brand Everhome Suites at the Americas Lodging Investment Summit in January.

In 2019, 20% of the rooms sold were for stays longer of seven nights, but purpose-built extended-stay hotels represent only 9% of Choice’s inventory, Pacious said. That means consumers are staying longer in transient hotels when they would rather be in an extended-stay hotel, which was motivation behind Choice’s new brand, he said.

The company’s experience in the midscale and extended-stay segments was also a factor in the launch of Everhome Suites, Pacious said.

“We have eight decades of experience in the midscale segment, and we have a fantastic operating model on the extended-stay side of the house, so bringing the two together for a brand launch like Everhome was the right thing to do,” he said.

The cost to build an Everhome is $85,000 per key, Dragisich added.

Choice’s WoodSpring Suites extended-stay brand “continues to improve in both performance and growth,” Pacious said.

“In 2019, we increased unit count for the brand by 8.4%,” he said. “We also awarded 66 additional domestic WoodSpring franchise agreements last year.”

Not too worried over coronavirus
While Choice’s seven hotels in China are temporarily closed due to the coronavirus (COVID-19) outbreak, Pacious said the impact on business is “less than minimal.”

The seven hotels in China only contribute 0.02% of revenue, and Pacious said he doesn’t expect the outbreak to have a big impact on inbound international travel to the U.S. because the company gets inbound visitors to the U.S. from places other than China.

Fourth-quarter and full-year 2019 earnings
For the fourth quarter, Choice reported net income of $42.2 million, according to the company’s earnings release. Net income was $222.9 million for the full year.

Domestic systemwide RevPAR decreased 0.9% for full-year 2019 and 2.1% for Q4 2019.

As of press time, Choice’s stock was trading at $105.65 per share, up 2.2% year to date. The Baird/STR Hotel Stock Index was down 3.4% for the same period.

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Headline: Choice forecasts weak Q1 due to oil markets, economy

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