Like a strong, nimble, and swift wrestler, the hotel industry must seize opportunities and strike with courage and conviction, Choice Hotels President and CEO Steve Joyce said during a keynote speech at the Hunter Hotel Conference last month. He encouraged attendees to continue to raise rates and push technology boundaries, and touched on issues ranging from tax reform to Cuba. Most important, he told hoteliers to enjoy what they do, particularly in the light of the industry’s current robust performance. “If you’re not having fun now, you ought to get out of the business,” he said. During a conference break, Joyce sat down with Lodging to share Choice’s outlook for 2015 and how the company intends to drive growth.
What’s your take on the year ahead? We’re pretty bullish. January and February were strong, though the weather was an issue. Job growth should continue to push our numbers up, since our folks are going back to work in areas like health services, software, and IT. Paying a lot less for gas is giving people confidence, helping them feel good about their jobs, and putting some excess money in their pockets. We’re looking at another strong year.
Things really started picking up last May, and then it was double digits for most of our brands through the end of the fourth, and that’s carried into this year. So we will see where we end up. On top of that, development is really starting to come on. In 2014, new construction was up 78 percent, and we opened 566 hotels worldwide. We are pushing hard because we have a good run left—probably through 2018 when we look at our core segments, unless something happens. I don’t think RevPAR is going to run close to double digits through 2018, but even if you look at all the forecasts, those guys have it in the 5s, which would be great.
This recovery has been so slow and so steady that it’s looking more like the 1989 recovery, which was a long-time recovery. Even today, with everything going on, supply is still less than the historical average. That will change by the time we get to 2017 and 2018, and that’s when you start thinking that this run isn’t going to last forever.
Do you have a growth target for Cambria before this run dies down? We’re hoping to do 30 to 40 deals this year. We are in the mid-20s now. The magic number, because we are doing urban product, is somewhere north of 75, maybe 100 deals. Because Choice is so dominant in the moderate tier, we generate so much demand for urban markets, and we have very little product there. I don’t want to say Cambria is immune to a downturn, because financing is obviously going to be an important part of it. But the difference is that we have an incredible level of unmet demand in urban markets; that’s why Cambrias in urban markets are doing so well. If we can get into that 75 to 100 territory by ‘18, we are going to be somebody to be reckoned with because it’s the best mousetrap out there.
That’s pretty aggressive for a new-build project targeting urban markets. It is aggressive, but we are using the balance sheet in a big way. There are a lot of people interested in part because they like the brand and part because we are being very aggressive with incentives.
In the last couple of years, you’ve also been investing some capital into the Comfort and Sleep brands. What’s the status of the property improvements? We have made a lot of progress. We are going to get Comfort done in two to three years, and Sleep will be 75 percent done this year. That’s no longer an option—it’s a requirement. We are going to end up putting at least $40 million in incentive capital out for renovations. And by the end of this year, we will have terminated 600 hotels. In addition to that, we have got heavy developer incentives in place to get new builds, and that’s working.
Quite frankly, it was probably overdue. Those brands didn’t look that different when they were launched. Comfort is an old brand, and I remember when Sleep came out as Mixed Sleep, which was in the late ‘80s. We got Gensler to do the designs, so they are not typical moderate, upper moderate tier designs. The customers’ reaction to them has been very positive.
It’s fun seeing Comfort run premiums like it should. And the customers are noticing. We can see it in the scores, and we can also see it in the performance of the brand. The nice thing is, there is a significant ROI to the franchisee. We are building mid-week business, and we are changing the way that we market and sell those brands.
When it comes to international growth, where are you focused? Europe. We were out at the International Hotel Investment Forum [in Berlin in March], and it was the best set of meetings I’ve had since I was out there. It was a robust environment for everybody. We had put resources there. We got additional development types, and we got treasury types to put capital in deals. We were saying, “Look, we will co-invest in gateway cities to do Clarions. We are willing to co-invest for multiunit deals.” That’s gotten a lot of attention, so we think we are getting to the point where the growth rate for Europe ought to accelerate at a pretty significant fashion. That’s our primary target, because it’s arguably the biggest hotel environment in the world. Secondly, a lot of it is conversion. That plays to our strength. We have got a technology platform that allows low-cost conversion, and we are willing to bring capital for urban and multi-unit deals.
What are Choice’s biggest growth vehicles in Europe? The three brands that we’re pushing the most are Quality, Clarion, and Comfort. I would say the fastest growing are Comfort and Quality, but we have added several Clarions, and we have also added several Clarion collections. The other one that is going to start to showing up is Ascend. We already have one in Ireland, and it’s beginning to generate a fair amount of interest.
Would Choice ever consider getting into the management side of the business? We have an asset-light business model. We own nothing. We don’t manage anything. We don’t participate in anyone’s bottom line, other than some of the joint ventures with Cambria, which is all short-term. So we are the model that everyone is striving for, which is why we have the margins we do. If we ever went into management, it would be if we buy something or if we merge with something that has a significant management component.
I managed for 26 years; I’m not afraid of it. It used to be a great business. You used to get your incentive fee with no stand outside. That went out in the mid-’90s, and now you buy into those contracts at prices that look like you are buying real estate. It’s a tough business. It’s easier for a smaller company to make some money at it. Once you start getting a size, it’s a tough model.
For us, if we had the right opportunity, we would welcome management, but we don’t need it. It surely is not affecting our growth. We are very comfortable without the management component.
