Wyndham Worldwide and Choice Hotels International both reported that the weak global economic environment was hitting their pipelines.
Both groups have increased sales activity in an attempt to maintain their expansion plans, as well as using their own cash to help developers. Choice has also launched an incentive programme and Wyndham sought to strengthen its position through the acquisition of the Tryp brand from Sol Melia and agreeing a deal to licence the Planet Hollywood brand.
Steve Holmes, Wyndham CEO, told an earnings call: "Gross room openings excluding the Tryp acquisition are up close to 20% for the year, but are being offset by terminations, which are up 28% year to date, reflecting financial difficulties for our franchisees consistent with our earlier signals on bad debt. These terminations could push us to the lower end of our room guidance despite our strong room openings.
"The franchise sales team did a great job of replenishing the pipeline despite the strong opening, resulting in a pipeline of close to 108,000 rooms, flat sequentially."
Year to date, contract signings were up 7% compared with last year and the group executed 254 conversion deals compared with 206 during the first nine months of 2009, a 23% increase.
At Choice, the number of domestic hotels under construction, awaiting conversion or approved for development fell 27% on the year for the quarter, to 545 hotels, with the worldwide pipeline dropping 26% to 638 hotels .
Stephen Joyce, president and CEO, said: "While the hotel transaction environment and lack of access to financing continues to impact our franchise sales results, our recently launched incentive programme for the Quality, Clarion, and Econo Lodge brands has been well-received by developers. With our roster of strong, well-known brands and proven ability to deliver reservations to our franchisees' hotels, we are well-positioned for growth as the hotel development environment improves." The company expects net domestic unit growth of approximately 1% in 2010.
Both companies were reassured that improved trading fundamentals would drive interest in their brands.
At Wyndham the domestic economy segment was up 6% with Days Inn, Super 8, Microtel and our other economy brands seeing positive revpar comparisons for the first time since 2007. Internationally, the group said it was seeing "pockets of dramatic improvement". Compared with the third quarter of last year, revpar increased 11% and 22% respectively in the UK and Germany and in China revpar was up 23%.
Holmes said: We're encouraged to see a rebound in lodging revpar, particularly in the US economy segment, which comprised two-thirds of our hotel portfolio. This contributed to overall revpar growth of approximately 7% led by broad-based occupancy gains. Importantly, we're starting to see average daily rates stabilisation."
Choice saw systemwide revpar grow by 7.4% in the quarter, rising for the first time in two years. Average room rate was flat on year while occupancy rates rose 4.2 percentage points to 61.1%. The company expects revpar to rise 7% to 8% for the fourth quarter and 2% for the full year. In a note Citigroup echoed the group's forecast and maintained its ‘Buy' rating, writing: "The unit pipeline continues to contract and high-margin initial and re-licensing fees remain depressed, but should begin to rebound as transactions accelerate (conversion opportunities)."
Choice raised $250m in a secondary offering last quarter to repay debt, as part of ongoing efforts to strengthen its balance sheet. It has also been pursuing a share buyback programme.
The company said that it had seen an increase in the money deployed through its strategies of offering financing, investment and guarantee support to franchisees as well as acquiring real estate to help franchise development for certain brands in top markets.
It added: "Over the next several years, we expect to continue to opportunistically deploy capital pursuant to these programmes to promote growth of our emerging brands. The amount and timing of the investment in these programmes will be dependent on market and other conditions. Our current expectation is that our annual investment in these programmes will range between $20m to $40m."
Wyndham is also investing its own cash into the business, with Holmes commenting: "Over time disciplined deployment of cash through share repurchases, additional investment in our core businesses and acquisitions of fee-for-service businesses could even double our growth rate. We will continue to pursue these growth initiatives."
The group said that it expected to generate approximately $600m in free cash flow this year and intended to use a large portion of that cash to support dividends and share buybacks. In the third quarter it committed $120m to repurchase 4.8 million shares and reduced future dilution by repurchasing approximately 40% of its convertible bonds in the open market and retiring the call options and warrants tied to those bonds.
HA Perspective: With new-build financing hard to find, the franchise-driven businesses of Wyndham and Choice have suffered, forcing them to put their hands in their own pockets on behalf of franchisees and for other growth initiatives.
This somewhat diminishes the benefit of the asset light model in that cyclicality remains. But realistically, just as banishing boom and bust was a fantasy, so too is expecting the franchise business to be immune from the business cycle.
There is little doubt that the troughs in franchising are far shallower, however. The challenge now that the recovery appears to be on the way is ensuring the peaks are not equally as muted.
Simply buying and launching new brands is not likely to provide a sustainable boost to growth. Reinvigorating the established brands is more critical. It is not yet clear that either Choice or Wyndham have done enough to tidy up the weaker properties in their franchise portfolios.