• Choice bolstered by Q4 amid pipeline concerns

The 6% increase in full-year revenue at Choice Hotels International caused president and CEO Steve Joyce, to forecast that 2011 would be an "even better year" for the industry and the company, as the recovery took hold.

However, with its focus on the lower end of the market, observers do not expect that the group will see the rebound in rates that operators with a greater spread of brands at the higher end are predicted to enjoy this year.

Joyce was confident that "with a mix of well-segmented brands for both consumers and developers, powerful global distribution capabilities and a rapidly growing global loyalty programme" the group was "poised to take advantage of a better operating environment".

The basis for this confidence was the company's fourth-quarter performance, which saw gains in domestic revpar and a year-on-year increase in new domestic hotel franchise agreements, coming after a period when the group had deployed its own capital to support franchisees as development finance slowed.

For the full year, the company advanced $21.7m in offering financing, investment and guarantee support to franchisees as well as acquiring and reselling real estate to help develop certain brands (predominantly Cambria) in strategic markets.

Joyce commented that "recent market conditions have resulted in an increase in opportunities to incentivise development under these programmes".

Joyce said that over the next "several years", he expected to continue "to opportunistically deploy capital to promote growth of our emerging brands". He added: "Our current expectation is that our annual investment in these programmes will range between $20m to $40m."

The group has been hit hard by the lack of development finance, and for the full year its domestic pipeline fell by 29% on the year, with the worldwide pipeline down by 26%.

However, the company executed 161 new domestic hotel franchise contracts for the fourth quarter, an increase of 44% over the prior year period. The increase in franchise sales was primarily driven by its conversion brands: Quality, Clarion and Econo Lodge, a trend the group could expect to see increase as the ‘pretend and extend' period comes to an end and banks put pressure on owners.

In a call to analysts, Joyce said that the company had also benefited from the recent Holiday Inn revamp, commenting that "somewhere between 15% to maybe 20% of our activity, particularly in the fourth quarter, was related to Holiday Inn conversions, as they moved through their exercise of refresh".

For the fourth quarter, revenue increased 10% to $155m, driven by revpar growth of 9.7%, which was led primarily by occupancy rates increasing 420 basis points and average daily rates increasing 0.6%. Ebitda for the quarter increased 4.5% to $41.5m.

For the full year, revpar was up 2.8% and the group reiterated that it expected revpar to increase by approximately 5% for first quarter of 2011 and 4% for the full year, with net domestic unit growth of approximately 1% in 2011.

Choice has been pursuing a share buyback programme, which saw it spend a total of $8.7m during the year on 0.3 million shares, with authorisation to purchase a further 3.6 million shares.

Despite ongoing efforts to strengthen the group's balance sheet, concerns remain that, with rates not likely to see large increases this year, its reliance on growth through expansion of its estate will limit future results. Credit Suisse was sufficiently concerned over what it described as the limited growth in pipeline to downgrade the group to Underperform from Neutral.

Joyce told analysts that, while "extension activity" was "beginning to slow and therefore there will be more terminations of hotels", at the same time the investment market was "moving slower than we had anticipated", indicating another quiet year ahead.


HA Perspective: How much of a long-term business plan it is to pick-up the off casts of rivals is questionable. Perhaps the former Holiday Inns were simply unsuitable to make the transition to the new look version and Choice is making a canny move to build its system.

The fear is that it is more about a lack of capital for the owners that prevented the upgrade and this raises the question of what these under invested hotels are going to do to the profile of Choice's brands.

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