Choice Hotels International, Inc. (NYSE:CHH) Q4 2022 Earnings Call Transcript

Choice Hotels International, Inc. (NYSE:CHH) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Choice Hotels International’s Fourth Quarter and Full Year 2022 Earnings Call. At this time all lines are in a listen-only mode. I will now turn the conference over to Allie Summers, Investor Relations Senior Director for Choice Hotels.

Allie Summers: Good morning, and thank you for joining us today. Before we begin, we’d like to remind you that during this conference call, certain predictive or forward-looking statements will be used to assist you in understanding the company and its results. Actual results may differ materially from those indicated in forward-looking statements, and you should consult the company’s Forms 10-Q, 10-K and other SEC filings for information about important risk factors affecting the company that you should consider. These forward-looking statements speak as of today’s date, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of our fourth quarter and full year 2022 earnings press release, which is posted on our website at choicehotels.com under the Investor Relations section.

This morning, Pat Pacious, our President and Chief Executive Officer; and Dom Dragisich, our Chief Financial Officer, will speak to our fourth quarter and full year operating results and financial performance. Following Pat and Dom’s remarks, we’ll be glad to take your questions. And with that, I’ll turn the call over to Pat.

Pat Pacious: Thanks, Allie, and good morning, everyone. We appreciate you joining us. 2022 was a landmark year for Choice Hotels. We delivered step function growth while successfully closing the most significant transaction in our company’s history and further accelerated our long-term strategic plan. Our distinct growth strategy drove our full year 2022 adjusted EBITDA 19% higher than the prior year and 28% higher than full year 2019. We expect this momentum to carry into 2023 and beyond as we continue to grow our brand portfolio with hotels that generate higher royalties per unit, and we leveraged the new capabilities we have built to improve the profitability of each franchise. I’m pleased to report that we expect to grow our full year 2023 adjusted EBITDA by approximately 11% at the midpoint of our guidance year-over-year, representing an approximately 42% increase compared to 2019.

Clearly, we have transformed Choice Hotels into a company that is in a stronger competitive position and has significant long-term growth potential. Our selective unit growth strategy is delivering results and improving the attractiveness of our brands. Over the past two years, the new hotels we have added to our portfolio have generated, on average, twice the revenue as hotels leaving it. This is a trend we expect to continue. In 2022, we grew the system size across our 20 brands in the higher revenue segments by approximately 10% year-over-year and saw an outsized increase in royalties driven by this growth. In addition to our traditional strength in the Upper Midscale and Midscale segments, the company has well-established brands with significant growth potential in the two segments with the highest developer and guest demand: Extended Stay and Upscale.

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. We are also delivering for our franchisees. For three straight years, we have outperformed the industry in RevPAR growth due to the significant investments we’ve made in our business, creating a best-in-class franchisee success system. The award-winning pricing optimization and merchandising tools we continued to enhance last year are contributing to our brand outperformance, allowing our owners to effectively capture additional market share, drive top-line revenue and reach their target customers. Existing owners recognize the increasing value of our brands and choose to remain with Choice as seen in our industry-leading voluntary franchisee retention rate.

2022 also marked a record year for franchise renewal and relicensing contracts, and half of the franchise agreements awarded last year were with existing or returning owners. At the same time, we continue to enhance the value proposition that we deliver to our guests. I’m pleased to share that just yesterday, we announced a multiyear agreement with Wells Fargo and Mastercard to launch a new co-branded credit card program this spring. The new card portfolio will add value for our guests to enhance rewards and benefits as well as faster and easier ways to earn even more points beyond hotel stays, all of which will help to further grow our Choice Privileges membership and deepen member engagement and loyalty. We expect this partnership to drive incremental revenue significantly above our existing arrangement and provide an additional tailwind for our platform business segment in 2023 and beyond.

We also recently delivered another exciting benefit to our loyal guests. Due to the expertise of our Radisson Americas portfolio integration team, our loyalty members can now seamlessly exchange points between our two award-winning loyalty programs, Choice Privileges and Radisson Rewards Americas. The acquisition of the Radisson Americas brands in August of last year accelerated our strategy of growing our hotel mix with higher revenue-producing hotels and added an incremental $18 million to our 2022 adjusted EBITDA in just four and a half months, exceeding our previously issued guidance. The ability to achieve these initial results in such a short time is due to the expertise of our in-house integration team. We have a proven track record of successful integrations, demonstrated by our acquisition of the WoodSpring Suites brand and the expansion of our partnerships with companies like Penn National Gaming, with both adding significant value to our business.

Our integration and operations teams have applied their proficiency to the onboarding of Radisson Americas and have identified additional synergy opportunities beyond our initial projections. And thanks to their exceptional efforts, we are well ahead of our timeline to achieve the synergy target. Given this impressive progress, we now project the Radisson Americas business unit to contribute over $60 million of adjusted EBITDA in 2023 and exceed our previously disclosed recurring adjusted EBITDA target for 2024 and beyond. We believe that Radisson Americas’ portfolio, combined with Choice’s scale, network of franchisee relationships, and our best-in-class digital platforms and tools will fuel significant incremental growth over the long-term that will continue to pay off for our hotel owners and shareholders alike.

In 2022, our strategy enabled us to achieve remarkable financial results, invest in a strategic acquisition, accelerate our capital recycling progress and return approximately $435 million to shareholders through our share repurchase program, representing 7% of the average shares outstanding. These exceptional results were possible, thanks to the hard work of our dedicated associates across the company, including the Radisson Americas team, and the great partnership we have with our franchise owners in driving success for the future. Adding to our optimism is the sequential acceleration in quarter-over-quarter RevPAR growth we drove throughout 2022. For comparative purposes throughout our remarks, we’ll provide last year’s RevPAR performance results excluding the impact of the Radisson Americas acquisition.

Our fourth quarter RevPAR growth was exceptional with RevPAR increasing 20.4% from the same quarter of 2019 and marking the strongest quarter of the year. What’s most impressive is that we drove this performance through both rate and occupancy gains. In fact, in the fourth quarter, we outperformed the industry and our respective industry chain scales in occupancy growth across all days of the week. Despite the historically softer fourth quarter for leisure travel, we observed our guests extending their trips into shoulder days of the weekend. In the fourth quarter alone, on Sundays and Thursdays, we drove nearly four percentage points of occupancy growth compared to 2019. The trend of leisure travel demand spreading more evenly throughout the months of the year and into shoulder days of the weekend benefits our brands and allows us to attract and capture an even larger share of an expanding leisure demand segment.

And we expect our momentum to continue into the first quarter. Our January RevPAR, inclusive of Radisson Americas, increased by over 6% year-over-year. At the same time, we continue to take share from the competition, driving RevPAR index gains as compared to 2019. Our strategy and best-in-class business delivery engine have positioned us for stronger profitability in the future with significant runway ahead of us. The results we achieved in 2022 confirm the effectiveness of our thoughtful, deliberate approach and give us high confidence in our ability to continue to drive exceptional results in the coming years. We have surpassed 2019 RevPAR levels for six consecutive quarters because of the strategic decisions and investments we have made to position ourselves to further increase our share of travel demand.

We are confident that the changes we are observing in leisure and business travel behavior that favor our brands will enable us to maximize growth opportunities well into the future. As discussed on our prior calls, we’ve been highlighting consumer and industry trends that are driving a significant uptick in travel demand. And we’ve been making deliberate investments to reap the benefits from them. Specifically, we are capitalizing on long-term fundamentals, such as remote work, retirements, rising wages and the reshoring of American manufacturing. We see these trends as strong tailwinds for our company’s long-term growth. Importantly, Choice’s resilient business model has historically delivered stable returns throughout both expanding and contracting economic cycles.

Looking ahead, our optimism is further reinforced by the strengthening of our business transient and group segments. In 2022, we drove year-over-year increases in our business travel bookings. At the same time, the revenue generated from our business managed accounts more than doubled when compared to 2019. We expect business travel in our key industry verticals to increase, fueled by the onshoring of the U.S. supply chain and significant nationwide investments in infrastructure. Likewise, we anticipate additional tailwinds from business travelers in sectors such as health care, technology and professional services, especially in the context of the Radisson Americas acquisition and the growth in our brand portfolio mix in segments and hotels that generate higher royalties per unit.

Our impressive results demonstrate that the deliberate decisions and strategic investments we have made in our brand portfolio, value proposition, platform capabilities and other franchisee tools are paying off. I will now provide a brief update on our key segments. First, consistent with our strategy of increasing unit growth in higher revenue segments, we continue to strengthen our upscale portfolio of brands with the Radisson Americas acquisition, further cementing this strength. In 2022, our domestic upscale units grew by nearly 30% year-over-year. We are pleased with Choice’s upscale brands, Cambria Hotels and Ascend Hotel Collection, outperforming the segment’s RevPAR growth by nearly 10 percentage points in 2022 compared to 2019. The Cambria brand had one of its best years ever.

The brand grew by 14% year-over-year, reaching 65 units with an additional 65 domestic properties in the pipeline, 19 of which are projects under active construction as of the end of December. At the same time, we awarded nearly 30 domestic contracts in 2022, doubling the number of the brand’s franchise agreements sold year-over-year. 2023 is shaping up to be another great year for Cambria as we expect 10 additional hotels to open across the country. In addition, we expect that the Radisson Americas acquisition will enable us to build on our momentum in the Upscale segment, accelerating the growth of our Cambria and Ascend brands and, at the same time, allowing us to expand the Radisson portfolio. We also further invested in the Extended Stay segment, which continues to be a significant driver of our pipeline and RevPAR growth.

Last year’s strong developer interest for our Extended Stay brands marked a record year for executed contracts. And we expanded our domestic pipeline to nearly 500 hotels, a 34% increase year-over-year. This pipeline now represents half of the total domestic pipeline and will continue to serve as a growth engine for years to come. Our newest Extended Stay brand, Everhome Suites, which opened its first hotel last year, is on the cusp of major growth, gaining impressive traction across the development community with over 40 domestic franchise agreements awarded last year and 60 projects already in the pipeline. Our investments in the WoodSpring Suites brand’s marketing and distribution capabilities enabled us to achieve RevPAR growth of over 33% in the fourth quarter of 2022 compared to the same period of 2019, driven by increases in both occupancy and rate.

Photo by Ricardo Gomez Angel on Unsplash

Last year alone, the WoodSpring Suites brand’s pipeline reached over 310 domestic properties, a 47% increase year-over-year. And we expect the brand’s openings this year to exceed 2022 levels. Overall, we remain very optimistic about our Extended Stay segment growth and now expect the number of our Extended Stay units to increase at an average annual growth rate of more than 15% over the next five years. We also continued to strengthen our core portfolio of brands. Within this category, our Upper Midscale segment grew by 24% year-over-year, reaching more than 2,200 domestic hotels in 2022 alone. The Comfort brand has now registered 12 straight quarters of unit growth year-over-year since its successful refresh, and consumer confidence in our updated product has continued to drive the brand’s RevPAR index gains versus its local competitors.

In addition to our performance, I want to recognize the efforts we are making to achieve our ESG commitments, which like our strategy, are long-term focused. Our fully dedicated franchise development and services team continues to drive diverse ownership of Choice franchised hotels among underrepresented and minority owners. The team awarded a record number of franchise contracts in 2022, bringing the total agreements executed to 345 since the program launched. I’m especially pleased to note that 80% of those agreements awarded to underrepresented and minority owners last year were awarded to women entrepreneurs. To take our sustainability efforts to the next level, we continue to onboard early adopters into our energy collection and measurement program.

We are rolling out this program to help every one of our franchisees reduce their operating costs and protect the environment by tracking utilities usage at the hotel level and identifying opportunities for additional energy, water and waste conservation. In addition, we have recently joined the Sustainable Hospitality Alliance to help drive progress across our industry toward a more sustainable future. Further details regarding our efforts to live up to our long-standing commitments to diversity and sustainability will be outlined in our latest annual ESG report that will be released this spring. In closing, I want to emphasize that Choice Hotels is in a very strong position to further capitalize on outsized growth opportunities. Thanks to our effective strategic investments and our distinct strategy of growing our brand portfolio with hotels that generate higher royalties per unit, we have significantly strengthened our earnings power and competitive position.

We look forward to fully integrating Radisson Americas into the Choice franchise success system and to accelerating the growth of these brands by leveraging Choice’s scale, network of owner and franchise relationships and best-in-class digital platforms. As we begin this New Year, we are confident that we are well positioned to build on the success achieved in 2022 to further capitalize on growth opportunities we see in 2023 and beyond. With that, I’ll hand it over to our CFO. Dom?

Dom Dragisich: Thanks, Pat and good morning, everyone. Today, I’d like to provide additional insights on our fourth quarter and full year results update you on our balance sheet and capital allocation approach and share expectations for what lies ahead. Throughout my remarks today, I would like to note that our 2022 financial results, unit growth, pipeline and franchise agreement figures are inclusive of the Radisson Americas portfolio, while our RevPAR performance and effective royalty rate results do not include impacts from the acquisition. All outlook figures are inclusive of the Radisson Americas portfolio. For full year 2022, a combination of impressive RevPAR performance, unit growth from our higher revenue brands, strong effective royalty rate growth, successful execution of the Radisson Americas integration and robust performance of the platform business drove full year adjusted EBITDA nearly $9 million above the top-end of our previous full year guidance.

In fact, our full year adjusted EBITDA increased 19% compared to the same period of 2021 and grew 28% compared to the same period of 2019, which was our pre-pandemic peak. This growth builds on our record results in 2021 when we became the first hotel company to surpass pre-pandemic performance. Our 2022 adjusted EBITDA figure represents a new record for our company, eclipsing the one set last year. From August 11 through the end of December, the Radisson Americas portfolio contributed $18.3 million in adjusted EBITDA. Even excluding this adjusted EBITDA contribution from Radisson Americas, our adjusted EBITDA for full year 2022 grew 14% year-over-year and 23% versus 2019. For the fourth quarter 2022 compared to the same period of 2021, revenues excluding reimbursable revenue from franchised and managed properties were $186 million, a 33% increase.

Our adjusted EBITDA grew 18% to $112.5 million, and our adjusted earnings per share were $1.26 for the fourth quarter, an increase of 27% versus the same period of 2021. For the fourth quarter 2022, the Radisson Americas portfolio contributed $41 million in revenues, excluding reimbursable revenue from franchised and managed properties and $11.5 million in adjusted EBITDA. I’d like to now turn to our key revenue levers, beginning with RevPAR. Our domestic RevPAR outperformed the overall industry by approximately seven percentage points for the full year and met the top-end of our previous full year guidance, increasing 14.6% versus the same period of 2019, which represents 12.4% growth versus 2021. Our domestic RevPAR increased 20.4% for the fourth quarter, driven by average daily rate growth of 17.4% and an over one percentage point increase in occupancy levels compared to the same quarter of 2019.

Our RevPAR growth in terms of both rate and occupancy represents an acceleration of the gains achieved in the third quarter of 2022 compared to 2019. We expect to drive continued RevPAR growth in 2023 with full year domestic RevPAR inclusive of the Radisson Americas portfolio expected to increase approximately 2% as compared to full year 2022. And given our current momentum and the acceleration of our long-term strategic plan, a 1% increase in RevPAR growth in 2023 is now expected to drive $4.9 million of royalty revenue. Our effective royalty rate also continues to be a significant source of our revenue growth. Our domestic effective royalty rate once again exceeded 5% for both the fourth quarter and full year 2022, increasing four basis points for the full year 2022 compared to the prior year.

This performance further validates our long-term investment strategy on behalf of our franchisees, the continued strengthening of our value proposition to our franchise owners and the attractiveness of our proven brands. For full year 2023, we expect our effective royalty rate, inclusive of the Radisson Americas portfolio to continue to grow on a comparable basis in the mid-single digits year-over-year off of a 4.93% baseline in 2022. In 2023, a one basis point increase in effective royalty rate is expected to drive $1 million of royalty revenue. The third revenue lever I’d like to discuss is unit growth, where our portfolio’s absolute size in the royalty revenue per hotel are key advantages. Our strategic goal has been to accelerate quality room growth in higher revenue segments and markets, which ultimately results in an outsized increase in royalties.

While a mix shift has been a tailwind for the broader portfolio, the revenue maximization strategy is also evident at the individual hotel and brand levels. In fact, in 2022, we increased the royalty revenue per hotel of each brand, with every new hotel added within its brand generating on a comparable basis an average 20% higher royalty revenue than hotels exiting the brand. This, coupled with our focus on segments that generate higher royalties per unit, has resulted in new units entering our portfolio over the past two years, generating on average twice the revenue as those leaving it, a trend that we expect to continue this year. The addition of approximately 60,000 Radisson Americas domestic rooms open or in the development pipeline as of the end of last year marks the next chapter in Choice’s higher revenue per room growth trajectory.

For full year 2022, our domestic system size of higher revenue, upscale, Extended Stay and Midscale segments grew by 9.5% year-over-year. On a comparable basis, this unit growth was in line with our guidance of approximately 1%. Underpinning our long-term strategy is the different earnings potential of our two distinct families of brands. For full year 2023, we expect our domestic system size of higher revenue segments, which includes our 20 premium brands, to grow by approximately 1%. Most importantly, we expect our higher revenue segments to approach our historical growth rate by 2024. In 2023, a 1% increase in unit growth in the higher revenue segments category is expected to drive $4.5 million of royalty revenue, while a 1% unit growth increase in our economy transient portfolio of two brands is forecasted to generate just under $400,000 of royalty revenue.

However, as we continue to execute our strategy of adding higher revenue hotels while terminating underperforming economy transient hotels, we expect to maintain 2023 royalty revenue associated with the economy transient segment at the same level as 2022 royalty revenue. Aided by our strong value proposition and RevPAR performance, developers continue to choose our brands versus the competition as they seek to improve their operations and boost the long-term value of their hotels. I am pleased to report that our domestic pipeline increased 14% year-over-year, reaching nearly 1,030 domestic hotels at year-end. Even excluding the incremental Radisson Americas hotels, our domestic pipeline increased by 9% year-over-year, reaching over 980 domestic hotels at year-end.

In addition, for full year 2022, we awarded 590 new domestic franchise agreements, an 11% increase year-over-year. Our developers are optimistic about the long-term fundamentals of the lodging industry. Specifically, we are very pleased to see the demand for our new construction brands increase by over 30% in 2022 year-over-year. Importantly, we also continue to expand our platform business segment through strategic partnerships that drive incremental revenue to our existing portfolio. As Pat mentioned, we are very excited about the new co-brand credit card agreement, which we expect will deliver over $5 million of incremental adjusted EBITDA in 2023, ramping to over $10 million of incremental adjusted EBITDA in 2024. Furthermore, through our strategic focus in investments, we see additional opportunity in 2024 and beyond.

I’d like to now turn to the strength of our balance sheet, which we believe will be another driver of our growth for years to come. Even after the completion of the Radisson Americas acquisition and recent significant share repurchases, our impressive performance and effective allocation of resources to drive top-line outperformance has cemented our strong liquidity position. We continue to maintain a best-in-class balance sheet with a gross debt-to-EBITDA leverage ratio of 2.5 times, below the low end of our targeted range of three times to four times as of the end of 2022. Last year, we returned over $487 million back to our shareholders. These returns came in the form of approximately $53 million in cash dividends and approximately $435 million in share repurchases.

In the fourth quarter alone, we returned $188 million through share repurchases. I am also pleased to report that we made impressive progress executing on our capital recycling strategy. Following the sale of two of our own Cambria assets earlier in 2022, we sold an additional asset in October, recycling approximately $30 million. Most importantly, we also secured a 30-year franchise agreement with the buyer. The sale of this hotel brings our total recycling of prior investments in the Cambria brand to approximately $170 million during 2022. The strategic sale of these Cambria assets reduced the company’s adjusted EBITDA for 2022 from owned hotels by approximately $5 million compared to the same period of the prior year and is expected to reduce the company’s adjusted EBITDA for 2023 by $7 million year-over-year.

Our strong cash flows and debt capacity position us well to continue to make strategic investments, grow the business and return excess cash to shareholders well into the future. As we enter 2023, we plan to continue to leverage all pillars of our capital allocation strategy. Before opening up for questions, I’d like to turn to our expectations for what lies ahead. We expect our full year 2023 adjusted EBITDA to range between $520 million and $540 million, representing approximately 11% growth at the midpoint compared to full year 2022. This adjusted EBITDA outlook includes over $60 million of expected adjusted EBITDA contribution from the Radisson Americas business unit. Even excluding the contribution from Radisson, we expect to grow adjusted EBITDA on a comparable basis by approximately 7% at the midpoint of our guidance versus full year 2022.

We are confident that this earnings growth trajectory will continue for years to come, and we intend to keep investing in the core growth vectors across the higher revenue segments. Given our ongoing integration of the Radisson Americas portfolio into the Choice family, we also wanted to share today more color on our near-term expectations. For the first quarter of 2023, we expect adjusted EBITDA to range between $100 million and $105 million. We are proud of the accomplishments we have achieved to advance our long-term strategy and are excited about the value creation we expect Radisson Americas to bring to Choice. We look forward to providing you with further updates in May during our next earnings call. In closing, we remain confident that our long-term strategy of growing our brand portfolio with hotels that generate higher royalties per unit, coupled with our resilient business model, will enable us to continue to deliver strong operating results and generate substantial levels of cash flow through multiple growth levers.

Combined with our disciplined capital allocation strategy and strong balance sheet, we believe these strengths will allow us to further capitalize on growth opportunities and drive outsized returns in the years ahead. At this time, Pat and I would be happy to answer any questions. Operator?

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Q&A Session

Operator: Thank you. Your first question comes from Dany Asad with Bank of America. Please go ahead.

Dany Asad: My question is on unit growth. You guys gave a decent amount of color on expectations for the unit growth on the higher-tiered chain scales in the year. So can you just maybe start by helping us bridge to like the broader systems growth, including where your thoughts are on the economy brands in your portfolio?

Pat Pacious: Yes, Dan, it’s a great question and I think it’s really important from the standpoint of understanding the total unit growth story. I think as we described in our remarks, the brand portfolio today is 22 brands with the Radisson acquisition. So when you look at the 20 brands that now represent everything outside of economy, we’re really looking at a unit growth percentage this year of around 1%. And as Dom mentioned in his remarks, that translates to about $4.5 million of earnings growth. On the economy side, our goal there has been to bring in better hotels, which we’ve been doing. Every Econo Lodge we’re adding today is driving about 25% higher than the brand average as far as royalty growth. And that segment is not expected to shrink with regard to our total royalties.

So our unit growth will be flat. Our royalties will be flat on the sort of broader Econo Lodge growth. But as the segment is shrinking, what we’re doing is really refilling the brand with higher quality hotels, which leads to that sort of royalty flat projection that we have. So as you think about our business, we really have these 20 brands in these more higher revenue-intense segments. We have two brands in the economy segment. And that’s really how we’re thinking about unit growth in the long-term. As we look forward into 2024 and beyond, we do expect that more revenue-intense group, those 20 brands, to kind of return to more of our historical norm be 2% to 3% growth as we move forward. And we’re really excited, as I mentioned in the call, about what we’re seeing with upscale, with Cambria’s growth.

We’re seeing it in Extended Stay with the just spectacular growth we’re seeing in the WoodSpring brand and now with our Everhome Suites brand as well. So a lot of really positive momentum in our pipeline that we think is going to fuel that revenue intense growth in the future.

Dany Asad: Understood. Thank you. And my follow-up is for your underwriting of $60 million of EBITDA for Radisson in 2023, can you help us kind of understand what’s the implied unit growth outlook in that brand?

Dom Dragisich: Yes. So, I think broadly speaking, what you’ll see in the short term, Dany, is really just a stabilization of that portfolio. One of the things that we’d talked about was onboard these assets, take a look at the Radisson portfolio much the same way that we’re looking at our existing portfolio with regards to revenue intensity, high quality assets. When you take a look at the Country Inn & Suites brand in particular, obviously, primarily new construction, so you would expect to see that unit growth probably picking up more in the 2025 timeframe. But broadly speaking, a lot of the synergy has been identified at this point in time. We do expect, candidly, to actually exceed our original synergy target, and these are both top-line revenue synergies as well as cost synergies. So that $80 million that we guided to in the last quarter probably feels a little closer to $85 million-plus as we look ahead to 2024.

Dany Asad: Got it. Thank you very much.

Pat Pacious: Thank you.

Operator: Your next question comes from Michael Bellisario with Baird. Please go ahead.

Michael Bellisario: Thanks. Good morning everyone.

Pat Pacious: Good morning, Mike.