Choice Hotels International (NYSE:CHH) managed to improve its top line in the third quarter despite revenue per room that fell short of management's guidance. The consumer discretionary hospitality enterprise also reported credible progress in the property refresh of its largest brand, Comfort, and sweetened its 2019 forecast alongside earnings. Below, let's unwrap results from the third-quarter report that was released on Tuesday, keeping in mind that all comparative numbers refer to those of the prior-year quarter.

Choice Hotels: The essential numbers

Metric Q3 2019 Q3 2018 Change
Revenue $310.7 million $291.5 million 6.6%
Net income $76.2 million $80.0 million (4.8%)
Diluted EPS $1.36 $1.41 (3.5%)%

Data source: Choice Hotels International. EPS = earnings per share.   

Highlights from the quarter

  • Adjusted EPS of $1.30 slightly exceeded management's guidance range of $1.25 to $1.29.
  • Excluding marketing and reservation system revenue, which has an offsetting line on the expense portion of the income statement, revenue rose 10.4% to $153.7 million. This total included $8.7 million in new "owned hotel" revenue following the company's purchase during the quarter of the remaining equity interest in a joint venture that held four key Cambria hotel properties.
  • Royalty fees, the largest component of Choice's top line (excluding marketing and reservation system revenue), increased by 2.4% to $113.7 million.
  • Choice's royalty rate charged to domestic franchisees increased by 12 basis points against the comparable quarter, to 4.84%.
  • Revenue per unit continued to exhibit weakness, reflecting larger industry conditions. Domestic RevPAR, or revenue per available room, dipped by 0.7%, against management's forecast of 0% to 2% growth.
Close-up of a room service breakfast tray in a modern hotel room.

Image source: Getty Images.

  • During the quarter, both domestic hotels and rooms increased by 1.8% against end totals in Q3 2018, while Choice's international hotel count expanded by 4.1% and its international room count grew by 4.5%.
  • Choice completed the 500th property renovation within its core Comfort brand.
  • The hotelier expanded its room base in its two upscale brands, Cambria and Ascend, by 13% against the end of the third quarter of 2018.
  • New-construction domestic hotels in development increased by 5% to 741 properties against the end of Q3 2018. The company's total domestic development pipeline at quarter-end (which includes hotels approved for conversion or development, in addition to those under construction) stood at 975 hotels, or roughly 82,400 rooms.
  • Choice's total international hotel development pipeline increased to 94 hotels, compared to 82 hotels as of the prior-year quarter's end.

Management's thoughts on upscale development

Choice Hotels completed the 500th hotel renovation of its core Comfort brand during the third quarter. As Choice refreshes its economy and midscale offerings, it's allocating significant resources to developing its upscale franchises. During the hospitality giant's earnings conference call, CEO Pat Pacious updated investors on Choice's upper-tier Cambria and Ascend chains:

In the third quarter, we drove a 20% year-over-year increase in Cambria's room count by expanding the brand in major business hubs nationwide. [For] the full year 2019, the brand is expected to break its record with the opening of a dozen Cambria hotels, which together represent nearly 1,900 upscale rooms. Through today, nine of these hotels have already opened in high-value markets such as Boston, Houston, Dallas, and Milwaukee. I'm also pleased to share that we expect Cambria will welcome the 50th hotel to its system just before Thanksgiving...

Year-to-date we have opened nearly 60 Ascend hotels and surpassed 300 hotels in the brand's global system. This means Ascend remains the industry's largest soft brand [i.e. an affiliate brand of a major hospitality chain that keeps its own unique identity]. Ascend's global development pipeline is now over 100 hotels strong, which means we can expect it to fuel our upscale rooms growth well into the future. 

A tweak to the full-year outlook

Despite flattish RevPAR growth, Choice Hotels increased 2019 earnings guidance with one quarter remaining in the year, due to its expected pace of room openings and new revenue from the four Cambria properties acquired in the third quarter.

The company now expects the year's top line to land between $209 million and $213 million, against last quarter's forecast of $200 million to $206 million.

Diluted 2019 earnings per share are now anticipated at $3.74 to $3.80, versus the prior range of $3.58 to $3.68. Similarly, management has chalked in adjusted EBITDA of $362 million to $365 million, an increase of $2.5 million from the original estimate of $358 million to $363 million, at the midpoint of both ranges.

Finally, looking ahead to the fourth quarter, Choice Hotels expects to net adjusted EPS of $0.82 to $0.86, which will represent a decrease of $0.04 (at the midpoint) from the $0.88 in adjusted EPS it booked in the final quarter of 2018.