Choice Hotels International Reports 2019 First Quarter Results

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first quarter were $72.4 million, an increase of 8% from the same period of 2018.

Choice Hotels International, Inc. (NYSE: CHH) today reported its results for the three months ended March 31, 2019. Highlights include:

  • Net income was $30.1 million for the first quarter 2019, representing diluted earnings per share (EPS) of $0.54.
  • Adjusted net income, excluding certain items described in Exhibit 6, increased 23% to $47.2 million from the 2018 first quarter.
  • Adjusted EPS were $0.84, a 25% increase from the 2018 first quarter.
  • Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first quarter were $72.4 million, an increase of 8% from the same period of 2018.
  • The company exceeded the top end of its first quarter 2019 adjusted EPS guidance by $0.08 per share and raised its full year adjusted EPS guidance to a range of $4.06 to $4.18.
  • The company repurchased 0.4 million shares of common stock for an aggregate cost of $32 million for the three months ended March 31, 2019.
  • Effective income tax rate for the first quarter was 17.5% compared to 17.6% for the same period of 2018 and guidance of 22%.

Additionally, during the first quarter of 2019, the company:

  • Achieved 12% growth in the number of domestic rooms in its upscale brands, Cambria and Ascend, as of March 31, 2019, from March 31, 2018.
  • Further strengthened its midscale presence by awarding six domestic franchise agreements for the newly launched Clarion Pointe brand, bringing the number of Clarion Pointe hotels expected to open to 27 hotels. The company also achieved 7% and 5% net domestic unit growth in the Clarion and Quality brands, respectively.
  • Opened the 250th WoodSpring Suites hotel in Portland, Oregon, the first WoodSpring hotel in the state of Oregon.
  • Continued the $2.5 billion transformation of its flagship Comfort brand, which now has nearly 50% of the system certified as meeting the elevated brand standards in guest rooms and common areas.

“Choice Hotel’s proven business model continues to deliver strong financial performance to our franchisees and shareholders,” said Patrick Pacious, president and chief executive officer, Choice Hotels. “Our brands continue to appeal to a wide range of guests for both leisure and business travel. In addition, our strategic investments in our midscale, upscale and extended-stay brands position us to continue to strengthen our appeal to leisure travelers and accelerate our growth in the business travel segment.”   

Additional details from the company’s 2019 first quarter results are as follows:

Revenues

  • Total revenues for the three months ended March 31, 2019, were $218.3 million, an increase of 4% from total revenues reported for the same period of 2018.
  • Total revenues, excluding marketing and reservation system fees, for the first quarter increased 6% over the prior year to $108.3 million.
  • Domestic royalty fees for the first quarter totaled $75.6 million, a 5% increase from the first quarter of 2018.
  • Effective domestic royalty rate increased 12 basis points for the first quarter, compared to the same period of the prior year.
  • Domestic systemwide revenue per available room (RevPAR) declined 0.7% for the first quarter, compared to the same period of the prior year, primarily due to the Comfort transformation, which is progressing ahead of schedule and saw more hotels under renovation during the quarter than forecasted; the government shutdown; and tougher comparable results due to prior year hurricane activity. Excluding one-time impacts, first quarter RevPAR increased by approximately 1%, compared to the same period of the prior year.
  • Comfort hotels that have completed renovations are experiencing overall RevPAR growth of nearly 1 percent and had their business travel revenue growth double within one quarter of completing their renovations.
  • Procurement services revenues increased 20% in the first quarter to $11.9 million, compared to the same period of the prior year.

Development

  • The number of domestic franchised hotels and rooms, as of March 31, 2019, increased 2.1% and 1.8%, respectively, from March 31, 2018.
  • International franchised hotels and rooms as of March 31, 2019, increased 3.0% and 5.2%, respectively, from March 31, 2018.
  • The company opened two new Cambria hotels in Nebraska and New Jersey, both of which represent the first Cambria hotel in their respective states, and broke ground on an adaptive-reuse Cambria project in downtown Los Angeles, bringing the total number of active-construction projects for the brand to 23.
  • The company’s extended stay domestic franchised hotels, as of March 31, 2019, increased 5% from March 31, 2018.
  • The company’s total domestic pipeline of hotels awaiting conversion, under construction, or approved for development, as of March 31, 2019, increased 7% to 976 hotels from March 31, 2018.
  • The new-construction domestic pipeline totaled 749 hotels at March 31, 2019, a 10% increase from March 31, 2018.
  • The company’s total international pipeline of hotels awaiting conversion, under construction, or approved for development, as of March 31, 2019, increased from 42 hotels at March 31, 2018, to 128 hotels.
  • New executed domestic franchise agreements totaled 79 in the first quarter of 2019, including 32 new construction franchise agreements.

Use of Cash Flows

Dividends
During the three months ended March 31, 2019, the company paid cash dividends totaling approximately $12 million. Based on the current quarterly dividend rate of $0.215 per share of common stock, the company expects to pay dividends totaling approximately $48 million during 2019.

Stock Repurchases
During the three months ended March 31, 2019, the company repurchased approximately 0.4 million shares of common stock for approximately $32 million under its stock repurchase program, as well as through repurchases from employees in connection with tax withholding and option exercises relating to awards under the company’s equity incentive plans. At March 31, 2019, the company had authorization to purchase up to 1.8 million additional shares of common stock under its share repurchase program. 

Hotel Development & Financing
Pursuant to its program to encourage acceleration of the growth of the upscale Cambria Hotels brand, the company advanced approximately $47 million in support of the brand’s development during the three months ended March 31, 2019. The company also recycled approximately $20 million of prior investments in Cambria Hotels development projects, resulting in net advances of $27 million for the three months ended March 31, 2019. Advances under this program are primarily in the form of joint-venture investments, forgivable key-money loans, senior mortgage loans, development loans, and mezzanine lending, as well as through the operation of a land-banking program. As of March 31, 2019, the company had approximately $366 million reflected in its consolidated balance sheet pursuant to these financial support activities. With respect to lending and joint-venture investments, the company generally expects to recycle these loans and investments within a five-year period.

Impairment of Long-Lived Assets

During the three months ended March 31, 2019, the company recognized a $10.4 million impairment of goodwill and long-lived assets related to its reporting unit that provides software as a service (“SaaS”) technology solutions to vacation rental management companies primarily in Europe. The company purchased the reporting unit in 2015 to support its vacation rentals initiative but has determined that the technology and services are no longer required to support the company’s growth plans. As a result, the company is exploring strategic alternatives including a possible sale of the reporting unit.

Outlook

The adjusted numbers in the company’s outlook below exclude the net surplus or deficit generated from the company’s marketing and reservation system activities, impairment and disposal costs as well as other items. See Exhibit 7 for the calculation of adjusted forecasted results and the reconciliation to the comparable GAAP measures.

  • Net income for full-year 2019 is expected to range between $186 million and $196 million, or $3.31 to $3.49 per diluted share.
  • Adjusted diluted EPS for full-year 2019 is expected to range between $4.06 to $4.18. The company expects full-year 2019 adjusted net income to range between $228 million and $235 million.
  • Second quarter 2019 adjusted diluted EPS is expected to range between $1.11 to $1.15.
  • Adjusted EBITDA for full-year 2019 is expected to range between $354 million and $363 million.
  • Net domestic unit growth for 2019 is expected to range between 2% and 3%.
  • Domestic RevPAR for the second quarter of 2019 is expected to range between a 1% decline and a 1% increase from the same period of the prior year.  Domestic RevPAR is expected to increase between 0% and 1% for full year 2019.
  • The domestic effective royalty rate is expected to increase between 8 and 12 basis points for full-year 2019 as compared to full-year 2018.
  • The effective tax rate is expected to be approximately 23% for second quarter and 22% for full-year 2019, respectively.
  • Adjusted diluted EPS estimates are based on the current number of shares of common stock outstanding and, therefore, do not reflect any subsequent changes that may occur due to new equity grants or further repurchases of common stock under the company’s stock repurchase program.

About Choice Hotels 
Choice Hotels International, Inc. (NYSE: CHH) is one of the largest and most successful lodging franchisors in the world. With more than 7,000 hotels, representing nearly 570,000 rooms, in over 40 countries and territories as of March 31, 2019, the Choice® family of hotel brands provide business and leisure travelers with a range of high-quality lodging options from limited service to full-service hotels in the upscale, midscale, extended-stay and economy segments. The award-winning Choice Privileges® loyalty program offers members benefits ranging from everyday rewards to exceptional experiences. 

Choice Hotels International, Inc. and Subsidiaries

Exhibit 1

Condensed Consolidated Statements of Income

(Unaudited)

Three Months Ended March 31,

Variance

2019

2018

$

%

(In thousands, except per share amounts)

REVENUES

Royalty fees

$              80,353

$              76,698

$     3,655

5%

Initial franchise and relicensing fees

6,807

6,214

593

10%

Procurement services

11,947

9,938

2,009

20%

Marketing and reservation system

110,064

107,001

3,063

3%

Other

9,149

9,543

(394)

(4%)

      Total revenues

218,320

209,394

8,926

4%

OPERATING EXPENSES

Selling, general and administrative

39,514

40,864

(1,350)

(3%)

Depreciation and amortization

3,616

3,053

563

18%

Marketing and reservation system

119,839

119,228

611

1%

Total operating expenses

162,969

163,145

(176)

(0%)

Impairment of goodwill & long-lived assets

(10,401)

(10,401)

NM

Gain on sale of assets, net

100

100

NM

Operating income

45,050

46,249

(1,199)

(3%)

OTHER INCOME AND EXPENSES, NET

Interest expense

11,211

11,309

(98)

(1%)

Interest income

(2,613)

(1,609)

(1,004)

62%

Other (gains) losses

(2,198)

120

(2,318)

(1932%)

Equity in net loss of affiliates

2,171

5,968

(3,797)

(64%)

Total other income and expenses, net

8,571

15,788

(7,217)

(46%)

Income before income taxes

36,479

30,461

6,018

20%

Income taxes

6,398

5,375

1,023

19%

Net income 

$              30,081

$              25,086

$     4,995

20%

Basic earnings per share

$                  0.54

$                  0.44

$       0.10

23%

Diluted earnings per share

$                  0.54

$                  0.44

$       0.10

23%

 

 

Choice Hotels International, Inc. and Subsidiaries

Exhibit 2

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share amounts)

 March 31, 

 December 31, 

2019

2018

ASSETS

Cash and cash equivalents

$              31,810

$            26,642

Accounts receivable, net

153,969

138,018

Other current assets

64,892

79,124

Total current assets

250,671

243,784

Intangible assets, net

264,690

271,188

Goodwill

165,623

168,996

Property and equipment, net

134,861

127,535

Investments in unconsolidated entities

106,803

109,016

Notes receivable, net of allowances

83,808

83,440

Investments, employee benefit plans, at fair value

21,970

19,398

Operating lease right-of-use-assets

27,997

Other assets

117,393

115,013

Total assets

$        1,173,816

$      1,138,370

LIABILITIES AND SHAREHOLDERS’ DEFICIT

Accounts payable 

$              72,086

$            73,511

Accrued expenses and other current liabilities

66,966

92,651

Deferred revenue

77,065

67,614

Current portion of long-term debt

1,088

1,097

Liability for guest loyalty program

86,666

83,566

Total current liabilities

303,871

318,439

Long-term debt

804,730

753,514

Deferred revenue

111,113

110,278

Liability for guest loyalty program

54,188

52,327

Operating lease liabilities

27,470

Deferred compensation & retirement plan obligations  

26,879

24,212

Other liabilities

31,042

63,372

Total liabilities

1,359,293

1,322,142

Total shareholders’ deficit

(185,477)

(183,772)

Total liabilities and shareholders’ deficit

$        1,173,816

$      1,138,370

 

 

Choice Hotels International, Inc. and Subsidiaries

Exhibit 3

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

Three Months Ended March 31,

2019

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$                    30,081

$              25,086

Adjustments to reconcile net income to net cash provided

 by operating activities:

  Depreciation and amortization  

3,616

3,053

  Depreciation and amortization – marketing and reservation system 

4,521

5,071

  Franchise agreement acquisition cost amortization

2,685

2,154

  Impairment of goodwill and long lived assets

10,401

  Gain on sale of assets, net

(2,120)

  Provision for bad debts, net

2,983

3,389

  Non-cash stock compensation and other charges

3,989

3,787

  Non-cash interest and other (income) loss

(2,495)

974

  Deferred income taxes

(2,257)

2,582

  Equity in net losses from unconsolidated joint ventures, less distributions received

3,954

6,735

  Franchise agreement acquisition costs, net of reimbursements

(6,401)

(11,925)

  Change in working capital & other, net of acquisition

(31,014)

(36,354)

 NET CASH PROVIDED BY OPERATING ACTIVITIES 

17,943

4,552

CASH FLOWS FROM INVESTING ACTIVITIES:

Investment in property and equipment

(14,906)

(4,996)

Investment in intangible assets

(760)

(1,193)

Business acquisition, net of cash acquired

(231,317)

Proceeds from sales of assets

10,585

Contributions to equity method investments

(8,495)

(1,455)

Distributions from equity method investments

5,724

766

Purchases of investments, employee benefit plans

(1,603)

(1,669)

Proceeds from sales of investments, employee benefit plans

1,637

1,029

Issuance of notes receivable

(1,755)

(2,500)

Collections of notes receivable

5,096

150

Other items, net

197

 NET CASH USED IN INVESTING ACTIVITIES 

(4,280)

(241,185)

CASH FLOWS FROM FINANCING ACTIVITIES:

Net borrowings pursuant to revolving credit facilities

42,400

70,000

Proceeds from the issuance of long-term debt

8,491

212

Principal payments on long-term debt

(123)

(111)

Debt issuance costs

(914)

Purchase of treasury stock

(31,951)

(41,869)

Dividends paid

(12,163)

(12,265)

Payments on transfer of interest in notes receivable

(24,409)

Proceeds from exercise of stock options

9,203

23,052

 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

(8,552)

38,105

Net change in cash and cash equivalents

5,111

(198,528)

Effect of foreign exchange rate changes on cash and cash equivalents

57

26

Cash and cash equivalents at beginning of period

26,642

235,336

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$                    31,810

$              36,834

 

 

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

Exhibit 4

SUPPLEMENTAL OPERATING INFORMATION 

DOMESTIC HOTEL SYSTEM

(UNAUDITED)

For the Three Months Ended March 31, 2019

For the Three Months Ended March 31, 2018

Change

Average Daily

Average Daily

Average Daily

Rate

Occupancy

RevPAR

Rate

Occupancy

RevPAR

Rate

Occupancy

RevPAR

Comfort Inn

$             87.96

57.7%

$        50.77

$             88.73

58.2%

$       51.59

(0.9%)

(50)

bps

(1.6%)

Comfort Suites

95.15

65.7%

62.54

95.13

65.7%

62.46

0.0%

bps

0.1%

Sleep

81.48

59.7%

48.64

81.40

59.9%

48.76

0.1%

(20)

bps

(0.2%)

Quality

75.19

54.0%

40.59

75.83

54.2%

41.07

(0.8%)

(20)

bps

(1.2%)

Clarion

77.93

51.3%

39.99

79.62

51.9%

41.34

(2.1%)

(60)

bps

(3.3%)

Econo Lodge

58.86

49.2%

28.98

58.74

49.4%

29.02

0.2%

(20)

bps

(0.1%)

Rodeway

59.19

50.7%

30.02

60.06

51.9%

31.19

(1.4%)

(120)

bps

(3.8%)

WoodSpring Suites(1)

45.35

78.5%

35.62

44.97

78.5%

35.29

0.8%

bps

0.9%

MainStay

81.56

64.7%

52.78

77.38

63.6%

49.24

5.4%

110

bps

7.2%

Suburban

57.73

73.5%

42.44

53.50

73.7%

39.43

7.9%

(20)

bps

7.6%

Cambria Hotels

132.64

66.9%

88.73

129.05

66.4%

85.68

2.8%

50

bps

3.6%

Ascend Hotel Collection

117.81

52.1%

61.37

115.98

53.1%

61.55

1.6%

(100)

bps

(0.3%)

Total

$             76.75

57.7%

$        44.29

$             76.86

58.0%

$       44.61

(0.1%)

(30)

bps

(0.7%)

Effective Royalty Rate

For the Quarter Ended

3/31/2019

3/31/2018

System-wide(1)

4.84%

4.72%

(1) WoodSpring was acquired on February 1, 2018, however, ADR, Occupancy, RevPAR and effective royalty rate reflect operating performance for the three months ended March 31, 2018 

     as if the brand had been acquired on January 1, 2018

 

 

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

Exhibit 5

SUPPLEMENTAL HOTEL AND ROOM SUPPLY DATA

(UNAUDITED)

March 31, 2019

March 31, 2018

Variance

Hotels

Rooms

Hotels

Rooms

Hotels

Rooms

%

%

Comfort Inn

1,048

82,478

1,072

83,958

(24)

(1,480)

(2.2%)

(1.8%)

Comfort Suites

566

43,918

565

43,875

1

43

0.2%

0.1%

Sleep

396

28,111

385

27,443

11

668

2.9%

2.4%

Quality

1,642

126,735

1,562

121,665

80

5,070

5.1%

4.2%

Clarion

173

21,908

162

21,547

11

361

6.8%

1.7%

Econo Lodge

837

50,539

833

50,808

4

(269)

0.5%

(0.5%)

Rodeway

602

34,523

603

34,538

(1)

(15)

(0.2%)

(0.0%)

WoodSpring Suites

256

30,766

241

28,909

15

1,857

6.2%

6.4%

MainStay

64

4,281

58

4,111

6

170

10.3%

4.1%

Suburban

54

5,700

58

6,349

(4)

(649)

(6.9%)

(10.2%)

Cambria Hotels

41

5,797

37

5,301

4

496

10.8%

9.4%

Ascend Hotel Collection

179

14,956

163

13,239

16

1,717

9.8%

13.0%

Domestic Franchises

5,858

449,712

5,739

441,743

119

7,969

2.1%

1.8%

International Franchises

1,147

118,400

1,114

112,577

33

5,823

3.0%

5.2%

Total Franchises

7,005

568,112

6,853

554,320

152

13,792

2.2%

2.5%

 

 

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

Exhibit 6

SUPPLEMENTAL NON-GAAP FINANCIAL INFORMATION

(UNAUDITED)

REVENUES AND ADJUSTED OPERATING MARGINS, EXCLUDING MARKETING AND RESERVATION ACTIVITIES

(dollar amounts in thousands)

Three Months Ended March 31, 

2019

2018

Revenues, Excluding Marketing and Reservation Activities

Total Revenues

$              218,320

$               209,394

Adjustments:

     Marketing and reservation system revenues

(110,064)

(107,001)

Revenues, excluding marketing and reservation activities

$              108,256

$               102,393

Adjusted Operating Margins

Operating Margin:

Total Revenues

$              218,320

$               209,394

Operating Income

$                45,050

$                 46,249

     Operating Margin

20.6%

22.1%

Adjusted Operating Margins

Revenues, Excluding Marketing and Reservation Activities

$              108,256

$               102,393

Operating Income

$                45,050

$                 46,249

Mark to market adjustments on non-qualified retirement plan investments

2,173

(117)

Marketing and reservation system reimbursable (surplus) deficit

9,775

12,227

Acquisition related transition and transaction costs

4,236

Impairment of goodwill & long lived assets

10,401

Adjusted Operating Income

$                67,399

$                 62,595

     Adjusted Operating Margins

62.3%

61.1%

ADJUSTED SELLING, GENERAL AND ADMINISTRATION EXPENSES

(dollar amounts in thousands)

Three Months Ended March 31, 

2019

2018

Total Selling, General and Administrative Expenses

$                39,514

$                 40,864

Mark to market adjustments on non-qualified retirement plan investments

(2,173)

117

Acquisition related transition and transaction costs

(4,236)

Adjusted Selling, General and Administration Expenses

$                37,341

$                 36,745

ADJUSTED EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (“EBITDA”)

(dollar amounts in thousands)

Three Months Ended March 31, 

2019

2018

Net income 

$                30,081

$                 25,086

Income taxes

6,398

5,375

Interest expense

11,211

11,309

Interest income

(2,613)

(1,609)

Other (gains) losses

(2,198)

120

Equity in net loss of affiliates

2,171

5,968

Depreciation and amortization

3,616

3,053

Gain on sale of assets, net

(100)

Impairment of goodwill & long-lived assets

10,401

Mark to market adjustments on non-qualified retirement plan investments

2,173

(117)

Marketing and reservation system reimbursable (surplus) deficit

9,775

12,227

Franchise agreement acquisition costs amortization

1,521

1,225

Acquisition related transition and transaction costs

4,236

Adjusted EBITDA

$                72,436

$                 66,873

ADJUSTED NET INCOME AND ADJUSTED DILUTED EARNINGS PER SHARE (EPS)

(dollar amounts in thousands, except per share amounts)

Three Months Ended March 31, 

2019

2018

Net income 

$                30,081

$                 25,086

Adjustments:

Marketing and reservation system reimbursable (surplus) deficit

7,986

10,075

Impairment of goodwill & long-lived assets

9,149

Acquisition related transition and transaction costs

3,237

Adjusted Net Income

$                47,216

$                 38,398

Diluted Earnings Per Share

$                   0.54

$                     0.44

Adjustments:

Marketing and reservation system reimbursable (surplus) deficit

0.14

0.17

Impairment of goodwill & long-lived assets

0.16

Acquisition related transition and transaction costs

0.06

Adjusted Diluted Earnings Per Share (EPS)

$                   0.84

$                     0.67

 

 

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

Exhibit 7

SUPPLEMENTAL INFORMATION – 2019 OUTLOOK

(UNAUDITED)

Guidance represents the midpoint of the company’s range of estimated outcomes for the year ended December 31, 2019

ADJUSTED EBITDA FULL YEAR FORECAST

(dollar amounts in thousands)

Midpoint

2019 Guidance

Net income 

$           191,200

Income taxes

54,000

Interest expense

45,600

Interest income

(8,800)

Other (gains) losses

(2,200)

Depreciation and amortization

15,900

Gain on sale of assets, net

(100)

Franchise agreement acquisition costs amortization

6,800

Equity in net loss of affiliates

3,500

Marketing and reservation system reimbursable deficit

40,000

Impairment of goodwill & long lived assets

10,400

Mark to market adjustments on non-qualified retirement plan investments

2,200

Adjusted EBITDA

$           358,500

ADJUSTED DILUTED EARNINGS PER SHARE (EPS) FULL YEAR FORECAST

(dollar amounts in thousands, except per share amounts)

Midpoint

2019 Guidance

Net income 

$           191,200

Adjustments

Marketing and reservation system reimbursable deficit

31,200

Impairment of goodwill & long lived assets

9,100

Adjusted Net Income

$           231,500

Diluted Earnings Per Share 

$                3.40

Adjustments:

Marketing and reservation system reimbursable deficit

0.56

Impairment of goodwill & long lived assets

0.16

Adjusted Diluted Earnings Per Share (EPS)

$                4.12

 

 

SOURCE Choice Hotels International, Inc.