Leaner, fitter, higher

US-oriented hotel group Choice Hotels has reinstated its dividend after declaring a profitable first quarter. 

The move is a substantial indicator of the growing confidence in a strong recovery. In both the US and China, hotel markets are bouncing back strongly – while other parts of the world are preparing to restart, at varying rates.  

“We once again delivered results that significantly outperformed the industry, our chain scale segments and local competition,” declared Choice CEO Pat Pacious. “And we expanded our adjusted EBITDA margins to 69%.” 

“While uncertainty remains, we are observing positive signs of recovery that give us confidence for 2021 and beyond.” As well as declaring a dividend, the group has also reintroduced the option of share buybacks, to use cash generated.  

At Marriott, CFO Leeny Oberg noted: “It’s encouraging to see that where demand has rebounded swiftly, ADR has come back quickly as well.” In Sanya, China, during March, Marriott saw room rates 40% above 2019 levels, and 79% occupancy. 

Marriott reported March average occupancy at over 45%, up 9% from February. CEO Tony Capuano said business is continuing to pick up, with 48% occupancy in April, albeit with revpar still 50% off 2019 levels.  

Landlord Park Hotels also reported growing confidence, with forward bookings reckoned to be around 83% of 2019 levels. “Overall, I’m very optimistic about our outlook going forward,” said CEO Tom Baltimore.   

For Choice, the resilience of its long stay brands has been a characteristic of the pandemic, and its WoodSpring Suites brand is taking the lead: “For the first quarter as compared to 2019, WoodSpring reported over 3% revpar growth, driven by a more than 4% increase in average daily rate and an average occupancy rate of 74%, a truly remarkable achievement.” 

There is also growing corporate and group demand, said Capuano. “Rates for group room nights booked in the first quarter for 2022 and 2023 are currently 6% and 10%, respectively, above pre-pandemic levels, demonstrating that we are not trading rate for occupancy.” 

At Choice, Pacious echoed the experience: “We’re already ahead of 2019 levels with our sports segment, and that was in Q1. And the forward bookings for June and July for that segment alone are significantly above where we were in 2019.” 

Park, which has a portfolio of group-oriented hotels across the US, is also feeling confident about any changes in working patterns. Baltimore commented: “I think that if we’re going to allow people to work remotely and work in different locations than in some respects that whatever we may have lost, you can make a case that some of that gets picked up as they will travel more coming back to the corporate headquarters, coming back for training activities. And if anything, I think on the group side, I think the need for companies to bring their people together in a safe environment for training, for team building, for continuing to recognise, you’re never going to do away with that need to be together. “ 

For the brand groups, growth continues, with Choice signing 90 new domestic franchise agreements, an over 50% increase over the same period of 2020. And there was a hint that the group’s strong finances could lead to M&A opportunities. CFO Dom Dragisich commented: “Our strong results have led to an even stronger liquidity position for the company. At the end of the first quarter, the company had approximately $823m in cash and available borrowing capacity through its revolving credit facility.” 

“Choice’s primary objective in this area has always been to increase organic growth by strategically investing back into the business. We will continue to monitor the environment for other investment opportunities.” And Pacious added: “We do look for M&A opportunities. We know that’s a challenged environment right now in the hotel sector. It’s just difficult to underwrite assets.” 

At Marriott, Capuano said the group is on target for a net 3-3.5% portfolio growth in 2020. “We still expect gross rooms growth could accelerate to approximately 6% – but the net figure is dragged down by the loss of a portfolio in the US to landlord SVC.  

But he tempered any concentration on the gross figure, noting Marriott will continue to push higher end growth, rather than growth purely for its own sake. “About 40% of the global pipeline is full service and even within that 40%, 25% of those full-service rooms are in the luxury tier. And the fees coming out of a new luxury hotel can easily be 10 times that of a limited-service hotel.” 

Both groups have made much of the fact that the pandemic has forced them to become leaner – and ultimately likely to be more profitable in future. But Capuano said some changes, notably around operations and brand standards, are still evolving.  

“Guests have their own views on what they feel comfortable with as it relates to housekeeping. And so we have made sure that there are choices for them – for example, in a luxury hotel, to continue to have daily housekeeping, while if they are not comfortable with somebody coming in with their stay then they can have that too.” 

“By the end of the year we will have been able to make some decisions as we look forward about how we will manage this as occupancy really gets back closer to being normal. We do believe that there are some things that we can do to improve the productivity of hotels. As we get into ’22 we will have re-established where we are on brand standards.”  

He also suggested there will be greater flexibility on renovations. “We’ve got to make sure that we’re taking into consideration the dramatically lower cash reserves that hotel owners have, and picking our spots and making sure that we’re picking the renovation work that is critical to the customer experience.” 

HA Perspective [by Chris Bown]: Aaah, efficiency savings. The brands, and the owners such as Park, are as one in declaring that the pandemic has allowed them to strip out layers of corporate inefficiency, to become lean, mean business machines.  

Speak to seasoned management companies, and they’ll tell you this is a cyclically overdue procedure. Marketing and acquisition teams are frequently overlapped, in a business where demand is growing ahead of the broader economy – as long as there are signings, management are happy. And, as ever, if you have recruited well, then bright young talent gets a chance to shine as recumbent senior team members are let go. As long as those bright young things didn’t leg it, early in the pandemic.  

But the flip side is dangerous. Keep cutting in the name of efficiency, and you let experience depart, and put management roles in the hands of bright young things, destined to repeat the same mistakes of the past. And leave guests frustrated by a lack of common-sense response to blindingly obvious failures. Just saying.  

Additional comment [by Andrew Sangster]: Asset light brand companies are in a difficult position right now. Shout about how well you are performing and your owner community is not likely to be pleased. But if you fail to communicate your success in coming through the pandemic-induced crisis, then shareholders will probably mark you down. 

And so it is at Choice, where the decision was made to start paying a dividend and start talking about how it now has its highest effective royalty rate, exceeding 5% for the first time. For owners staring at huge financial losses, that is not going to be great to hear. So much for sharing the pain. 

It would be unfair to suggest that brand companies have not helped owners but there does not seem to have been the sharing of pain that landlords, for example, have offered, with 50% reductions on rent being commonplace where hotels have had to shut. 

The past few decades have seen the pendulum swing towards owners, particularly in having more balanced agreements. Covid and resulting lockdowns have highlighted an area where perhaps there is further progress to be made, notably in further aligning brand owner rewards with returns generated for owners. 

This has to be a two-way street: if brand owners do better than budget, they should receive an outsize share. Likewise, if things turn south, brand companies should share more of the downside. 

This has been a long-standing tenet of some management agreements, with owner’s priority return a subject of some contention within any management deal. It is much less common within franchise agreements. 

At Marriott, for example, the senior team was able to say on the investor conference call that franchise fees were down just 26% in Q1 with “non-revpar related franchise fees proving to be particularly steady”. There can’t be many owners that have seen revenues drop just 26% in the first quarter. Further pushback can be expected (although I suspect not much will come of it). 

Separately, another observation from the Marriott call regarding urban hotels. As Mark Twain might have observed, the reports of the death of urban hotels are exaggerated. Marriott’s pipeline comprises 40% full-service hotels and of these 25% are in the luxury tier. 

Marriott CEO Tony Capuano is understandably pleased about this, saying: “The fees coming out of a new luxury hotel can easily be 10 times that of a limited-service hotel.” He noted that while pipeline metrics are important, looking at the composition of the pipeline is just as important. 

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