Choice Hotels Earnings: Traveler and Third-Party Owner Demand Continues; Shares Fairly Valued

We don’t plan to materially change our Choice CHH $127 per share fair value estimate as traveler and third-party owner demand for the hotelier’s brand (source of its narrow moat) is tracking near our forecast. First-quarter revenue per available room, or revPAR, was up 6% year over year, representing 119% of 2019′s level, near the 120% reported in the fourth quarter. Choice reiterated its 2023 revPAR growth guidance of 2%, near our 3% forecast. Beyond this year, we see a mid-single-digit revPAR average annual increase in 2024-27, as the company benefits from remote work flexibility and a U.S. onshoring and infrastructure rebuild, which could add 50 million to 100 million in incremental industry demand the next several years, benefiting its interstate and extended-stay portfolio.

Choice shares were down around 3% after the conclusion of its earnings call, which we think was due to misguided concern on its domestic room pipeline being down 11% from last quarter. Instead, investors should note the volatility of quarter-to-quarter room comparisons that can take place in the first quarter, as many third-party conversion owners (conversions were 80% of openings) strive to open before the end of the calendar year. Therefore, it is more important to home in on the 11% year-over-year lift the domestic room pipeline saw in the quarter. Further, management reiterated its 1% net unit growth guidance (in line with our forecast), with expectations for that to accelerate in 2024. Also, Choice’s royalty rate increased 6 basis points year over year in the quarter, highlighting that the brand is resonating with owners.

Choice’s EBITDA is tracking near our forecast, as well. In fact, first-quarter EBITDA was over $106 million, which was ahead of guidance calling for $100 million to $105 million. Off the back of the performance, the company raised the low end of its 2023 EBITDA target $5 million to a range of $525 million to $540 million, compared with our $525 million estimate.