Choice Hotels Earnings: Deal With Wyndham Remains Uncertain, but Pipeline Development Continues

We plan to lower our $130 fair value estimate on narrow-moat Choice Hotels CHH 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.

There are positive and negative factors for investors to weigh regarding a Wyndham takeover. On one hand, we think a combined company would yield procurement, distribution, marketing, and loyalty scale benefits that could aid long-term unit and revenue growth. Also, we think the $150 million in synergies Choice has outlined are achievable. On the other hand, we calculate that the deal would lift Choice’s debt/EBITDA ratio to above 6 times and take a few years to return to within the company’s 3-4 times target. Further, a deal could involve an elongated regulatory process, potentially impacting near-term unit development.

Turning to third-quarter results, revenue per available room, or revPAR, was down 1%, aided by a 3% lift in upscale, but weighed by tough comparisons and 6% drop in economy. Choice lowered its 2023 revPAR growth guidance to 1% from 2%, although it noted it has not seen any change in travel demand. We plan to reduce our revPAR forecast for the year to 1% from 2%, implying a slight revPAR decline in the fourth quarter. We expect to maintain our 2% growth estimate for 2024 revPAR, as we continue to monitor a still-uncertain economic environment.

Development growth remains solid, with the pipeline up 6%. The company also commented that its conversions with franchisees are positive regarding the Wyndham potential opportunity. We plan to maintain our flat unit growth forecast for 2023, followed by 1.5% in 2024, as we continue to monitor developments with Wyndham.