For Choice Hotels, Recession Brings a Chance at Decisive Gains

At first glance, Silver Spring-based Choice Hotels looks well-positioned to take advantage of the current economy. Its rooms are relatively inexpensive at less than $100 a night. Its 4,700 U.S. hotels under 10 brands are accessible to the middle-class family packed into an automobile. And the summer vacation season is in full swing.

But the company, whose brands include Clarion, Comfort Inn and Econo Lodge, faces the same headwinds the rest of the lodging industry is seeing: a slowdown in new construction and pressures on profit margins.

Choice, which is 51 percent owned by the Bainum family of Montgomery County, has a unique business model. Rather than owning or running hotels, it collects a flat royalty from its franchisees, which averages 4.2 percent of gross room revenue but can vary widely based on negotiations with individual franchisees. Choice gets another 3.8 percent of gross room revenue to fund its worldwide marketing and reservation system.

The company had been seeing healthy growth from two places: new franchises from developers who built hotels and joined the chain, and independent or chain operators who converted to Choice.

But that growth is slowing. The net growth in new chain members, which was more than 5 percent last year, is expected to be 3 percent this year, according to the company.

Choice president and chief executive Stephen P. Joyce, who joined the company in May 2008 after a career at Marriott International, said the company's healthy balance sheet allows it to buy other brands that would fit in its portfolio.

With little debt and predictable revenue, "we have enormous capacity to take advantage of this situation," Joyce said. "Our powder is dry, and we are waiting to look for opportunities in this economy."

The U.S. Travel Association estimates that Americans will take 322 million leisure person-trips, a measure that counts travelers individually, inside the country during June, July and August. That number is down 2.2 percent from 2008. On average, consumers will take two trips, venturing out for seven nights and spending more than $900 on their longest trip, according to U.S. Travel.

"That means middle-class Americans, the family of four," Joyce said. "We are going to get a bunch of our normal travelers and get a bunch of new ones who are looking to spend their money [visiting amusement parks such as] Six Flags."

Felicia R. Hendrix, an analyst with Barclays Capital, said Choice's market position should allow it to gain some short-term advantages during the recession.

"Given the quality of the product and the price point, they are taking advantage of their strong position in that part of the market," Hendrix said. "In this downturn, the economy and budget-chain-scale hotels have been outperforming the luxury and upscale."

However, she downgraded the stocks for the entire lodging sector to negative from neutral for the next 12 months, singling out Choice -- along with Starwood and Marriott -- as more vulnerable than others. She said sluggishness in the number of new hotels at Choice could ultimately slow earnings growth.

"The main concern in this lodging cycle we are in, because it's very hard to access capital to build and convert, is not only the industry pipeline slowing and growth slowing, but Choice's unit growth slowing," Hendrix said.

Shares closed at $25.65 Thursday, which is 27 percent off its 52-week high.