Company Reports

We applaud narrow-moat Choice Hotels' decision to halt the pursuit of a merger with narrow-moat Wyndham Hotels & Resorts. We've believed for months that the deal would face regulatory and shareholder hurdles, potentially hindering development for the companies. The market seemed to share our sentiment, sending Choice shares up around 5% during March 11 trading, leaving them slightly overvalued relative to our unchanged $120 fair value estimate. We see a more attractive opportunity for investors to own Wyndham, whose shares were flat on the news, keeping them undervalued relative to our $88 fair value estimate, which is near the valuation Choice had been offering for the hotelier.

While the coronavirus had a material impact on Choice's 2020 demand, the company's U.S. leisure-based portfolio (which represents around 70% of nights) saw a full return to 2019 revenue per available room levels in 2021. We expect the narrow-moat company to gradually expand room share in the hotel industry in the next decade, with its keys increasing 2% on average annually, above the 1%-2% supply lift we estimate for the U.S. industry during that time. This growth is supported by a rejuvenated Comfort brand (27% of 2023 total domestic rooms), newer Cambria, Ascend, and Everhome concepts (7% combined), its extended-stay brand WoodSpring (6%), the acquisition of the Radisson brand in 2022, and a solid loyalty program with 64 million members as of Dec. 31, 2023, up from 44 million at the end of 2019. Overall, Choice holds around 2% global hotel revenue share, ranking it sixth in the industry.

Although Choice’s 2023 results and 2024 outlook were near our expectations, we plan to lower our $125 fair value estimate by a low-single-digit percentage, largely due to reducing our average annual revenue per available room, or revPAR, growth forecast to 4% from 5% for 2025-29. This revision is in line with our narrow-moat Wyndham forecast over this time. We continue to see both Choice and Wyndham’s off-interstate portfolios benefiting from U.S. infrastructure spending over the next several years.

While the coronavirus had a material impact on Choice's 2020 demand, the company's U.S. leisure-based portfolio (which represents around 70% of nights) saw a full return to 2019 revenue per available room levels in 2021. We expect the narrow-moat company to gradually expand room share in the hotel industry in the next decade, with its keys increasing 2% on average annually, above the 1%-2% supply lift we estimate for the U.S. industry during that time. This growth is supported by a rejuvenated Comfort brand (27% of 2022 total domestic rooms), newer Cambria, Ascend, and Everhome concepts (8% combined), the acquisition of the Radisson brand in 2022, and a solid loyalty program with over 60 million members as of Sept. 30, 2023, up from 44 million at the end of 2019. Overall, Choice holds around 2% global hotel revenue share, ranking it sixth in the industry.

While the coronavirus had a material impact on Choice's 2020 demand, the company's U.S. leisure-based portfolio (which represents around 70% of nights) saw a full return to 2019 revenue per available room levels in 2021. We expect the narrow-moat company to gradually expand room share in the hotel industry in the next decade, supported by rejuvenated Comfort brands (27% of 2022 total domestic rooms), newer Cambria, Ascend, and Everhome concepts (8% combined), the acquisition of the Radisson brand in 2022, and a solid loyalty program with over 60 million members in 2022, up from 44 million at the end of 2019. The company has a high-single-digit share of existing U.S. hotel rooms with an expanding pipeline. We see its room growth averaging 2% over the next decade, above the 1%-2% supply lift we estimate for the U.S. industry during that time.

We plan to lower our $130 fair value estimate on narrow-moat Choice Hotels by a low-single-digit percentage to account for slower revenue growth in 2023. Timing of a resolution or progress of Choice’s unsolicited bid for narrow-moat Wyndham remains uncertain, which we think could present some overhang to shares of both hoteliers. It appears that Choice is ready to engage, while Wyndham wants confirmation on its concerns, including breakup fees, leverage, and equity mix.

After further digesting narrow-moat Choice’s hostile bid for narrow-moat Wyndham Hotels, we see additional factors that need to be considered, which ultimately could hinder the existing offer from gaining Federal Trade Commission and/or shareholder approval. While we still think a $90 per-share valuation for Wyndham is reasonable on the surface, the attractiveness becomes more diluted by some key details. To begin with, around 40%-45% of the hostile bid is Wyndham shareholders receiving Choice shares, and if the price of the latter falls, so would the $90 offer price. The performance of Choice shares can be influenced by the development prospects of both companies. In this vein, there could be resistance from some third-party owners within one of these companies’ networks to want to be part of a combined business, despite the long-term scale advantages we think can come from a larger loyalty, distribution, reservation, and marketing program. Additionally, if regulators focus on the roughly 50% brand share the combined company would have in the economy and midscale segments, which is a distinct possibility, it could face an extended review period. During this time the overhang of the uncertainty of the deal could hit the development growth and share price performance of either company. Last, the more than $4 billion in debt Choice stands to raise under the existing hostile bid will take time to pay down and could hit its near-term capital needs, influencing its development growth and share price.

We think narrow-moat Choice’s hostile bid for narrow-moat Wyndham would, if completed, make a combined entity more competitive than each of them is on a stand-alone basis as scale entices both third-party owners and travelers to join operator ecosystems in the hotel industry. To this point, a combined company would double its revenue share to around 4%, according to Euromonitor, matching number-three player narrow-moat InterContinental, or IC, while still trailing narrow-moat companies Hilton and Marriott. Further, it would expand Choice’s room base to over 1.4 million from more than 600,000, making it second only to Marriott’s 1.6 million. It would also combine Wyndham’s more than 100 million loyalty members with Choice’s 60 million, getting it closer to industry leader Marriott’s 186 million. As a result, a merged entity would be able to offer owners increased procurement, distribution, loyalty, and reservation advantages, while travelers would have more hotel choice.

While the coronavirus had a material impact on Choice's 2020 demand, the hotelier's U.S. leisure-based portfolio (which represents around 70% of nights) saw a full return to 2019 revenue per available room levels in 2021. We expect the narrow-moat company to gradually expand room share in the hotel industry in the next decade, supported by rejuvenated Comfort brands (27% of 2022 total domestic rooms), newer Cambria, Ascend, and Everhome concepts (8% combined), the acquisition of the Radisson brand in 2022, and a solid loyalty program with over 60 million members in 2022, up from 44 million at the end of 2019. The company has a high-single-digit share of existing U.S. hotel rooms with an expanding pipeline. We see its room growth averaging 2% over the next decade, above the 1%-2% supply lift we estimate for the U.S. industry during that time.

We don't expect much change to our Choice $130 fair value estimate, outside of time value, as demand growth moderates after a strong recovery to date. Having already recovered to 2019's level in 2021, Choice's U.S. second-quarter revenue per available room (including its Radisson acquisition), or revPAR, moderated to just 0.5% growth, compared with a 6% lift last quarter. We estimate revPAR was down a point or two from last quarter's 119% of 2019's level. Still, Choice maintained its 2023 revPAR growth target of 2%, which we think is achievable. This growth sits below the low-double-digit lift we expect for narrow-moat peers Hilton and Marriott, which have more exposure to travel broadening out to group, business, and international from leisure travel, which led the recovery. Beyond this year, we see a mid-single-digit revPAR average annual increase in 2024-27 for Choice, as the firm benefits from remote work flexibility and a U.S. onshoring and infrastructure rebuild, boosting its interstate and extended-stay portfolio.

In a second-quarter earnings profit warning on July 11, Choice reaffirmed its 2023 adjusted EBITDA target of $525 million-$540 million, offering yet another data point that travel demand remains resilient, driven by the human-ingrained desire for trips and remote work flexibility, in our view. But shares moved 3%-4% higher due to the hotelier guiding 2024 adjusted EBITDA growth for more than 10%. This 2024 target implies over $586 million in adjusted EBITDA (using the midpoint of 2023 guidance), well above the FactSet consensus estimate of $548 million and near our Wall Street high $579 million forecast, which we will review after the company reports second-quarter results in a few weeks. While details behind drivers of the 2024 prognosis were sparse, the company did note year-to-date hotel opening growth of 39%, through June 30, indicate that the hotelier's brand intangible asset, the source of its narrow moat, is intact. We see its net room growth averaging 2%-3% over the next decade, above the 1.8% supply lift we estimate for the U.S. industry during that time. Also, Radisson synergies—the acquisition of which closed August of 2022—are tracking ahead of 2023's more-than-$60-million target, with $20 million additional synergies still to be had. We continue to view this acquisition as strategically sound, as it has increased the hotelier's mix of higher revenue producing upscale and midscale units, expanded its loyalty membership base by more than 10 million to over 60 million, and enhanced procurement and distribution scale advantages. Further, the price of about $10,000 per key struck us as attractive. We reiterate our Standard capital allocation rating.

While the coronavirus had a material impact on Choice's 2020 demand, the hotelier's U.S. leisure-based portfolio (which represents around 70% of nights) saw a full return to 2019 revenue per available room levels in 2021. We expect the narrow-moat company to gradually expand room share in the hotel industry in the next decade, supported by rejuvenated Comfort brands (27% of 2022 total domestic rooms), newer Cambria, Ascend, and Everhome concepts (8% combined), the acquisition of the Radisson brand in 2022, and a solid loyalty program with over 60 million members in 2022, up from 44 million at the end of 2019. The company has a high-single-digit share of existing U.S. hotel rooms with an expanding pipeline. We see its room growth averaging 2% over the next decade, above the 1%-2% supply lift we estimate for the U.S. industry during that time.

While the coronavirus had a material impact on Choice's 2020 demand, the hotelier's U.S. leisure-based portfolio (which represents around 70% of nights) saw a full return to 2019 revenue per available room levels in 2021. We expect the narrow-moat company to gradually expand room share in the hotel industry in the next decade, supported by rejuvenated Comfort brands (27% of 2022 total domestic rooms), newer Cambria, Ascend, and Everhome concepts (8% combined), the acquisition of the Radisson brand in 2022, and a solid loyalty program with over 60 million members in 2022, up from 44 million at the end of 2019. The company has a high-single-digit share of existing U.S. hotel rooms with an expanding pipeline. We see its room growth averaging 2% over the next decade, above the 1%-2% supply lift we estimate for the U.S. industry during that time.

We don’t plan to materially change our Choice $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.

While the coronavirus had a material impact on Choice's 2020 demand, the hotelier's U.S. leisure-based portfolio (which represents around 70% of nights) saw a full return to 2019 revenue per available room levels in 2021. We expect the narrow-moat company to gradually expand room share in the hotel industry in the next decade, supported by rejuvenated Comfort brands (27% of 2022 total domestic rooms), newer Cambria, Ascend, and Everhome concepts (8% combined), the acquisition of the Radisson brand in 2022, and a solid loyalty program with over 60 million members in 2022, up from 44 million at the end of 2019. The company has a high-single-digit share of existing U.S. hotel rooms with an expanding pipeline. We see its room growth averaging 2% over the next decade, above the 1%-2% supply lift we estimate for the U.S. industry during that time.

We don’t anticipate a material change to Choice’s $122 fair value estimate, as stronger Radisson synergies are offset by slightly lower revenue per available room, or revPAR, and unit growth in 2023. Choice’s fourth-quarter revPAR came in at 120% of 2019’s level, directly in line with our forecast and up from 115% in the prior quarter. Aided by a strong domestic leisure mix, Choice’s revPAR recovery continued to outpace the 108% and 105% marks of Hilton and Marriott, respectively. That said, Choice’s 2023 revPAR growth guidance of 2% tracked below our 5% estimate (which we plan to lower to around 3%) and the 4%-8% and 6%-11% targets of Hilton and Marriott, respectively, as the higher group and business mix of these peers starts to see a stronger recovery.

While the coronavirus had a material impact on Choice's 2020 demand, the hotelier's U.S. leisure-based portfolio (which represents around 70% of nights) saw a full return to 2019 revenue per available room levels in 2021. We expect the narrow-moat company to gradually expand room share in the hotel industry in the next decade, supported by rejuvenated Comfort brands (28% of 2021 total domestic rooms), newer Cambria, Ascend, and Everhome concepts (8% combined), the acquisition of the Radisson brand in 2022, and a solid loyalty program with over 60 million members in 2022, up from 44 million at the end of 2019. The company has a high-single-digit share of existing U.S. hotel rooms with an expanding pipeline. We see its room growth averaging 2% over the next decade, above the 1.8% supply lift we estimate for the U.S. industry during that time.

Our narrow-moat Choice $119 valuation may increase by a low-single-digit percentage to account for stronger-than-expected near-term demand and time value, leaving shares trading near our fair value estimate. We see the 8% pullback in shares as an overreaction to higher expenses, some of which appear to be one time in nature.

Despite enduring travel demand into the fall of 2022 and our view that it can continue into 2023, investor concerns around future trips and credit availability have grounded share price performance across the industry. As a result, we see meaningful opportunities to book investment stays in Sabre, Accor, Booking Holdings, and Norwegian, which trade at 64%, 42%, 44%, and 54% discounts to our $15, EUR 37.50, $2,900, and $28 fair value estimates, respectively.

We plan to increase our $116 valuation on narrow-moat Choice by a mid-single digit percentage, as we see the Radisson acquisition (scheduled to close later this month) being accretive to revenue per available room, or revPAR, growth. We see shares as appropriately valued.