Choice Hotels International, Inc. (NYSE: CHH) today reported its results for the three months ended June 30, 2019. Highlights include:
- Net income was $74.4 million for the second quarter 2019, representing diluted earnings per share (EPS) of $1.33.
- Adjusted net income, excluding certain items described in Exhibit 6, increased 5% to $66.7 million from the 2018 second quarter.
- Adjusted EPS was $1.19, a 7% increase from the 2018 second quarter.
- Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the second quarter were $100.4 million, an increase of 6.5% from the same period of 2018.
- The company exceeded the top end of its second quarter 2019 adjusted EPS guidance by $0.04 per share and raised its full year adjusted EPS by $0.07 at the midpoint of the range.
- The company raised its full year 2019 Adjusted EBITDA guidance by $2.0 million at the midpoint of the range.
Additionally, during the second quarter of 2019, the company:
- Entered the final stages of the $2.5 billion transformation of its flagship Comfort brand. Only one-third of Comfort hotels is either under renovation or will undergo renovations in the second half of the year, a significant milestone for the multi-year initiative.
- Achieved 16% growth in the number of domestic rooms in its upscale brands, Cambria and Ascend, as of June 30, 2019, from the second quarter 2018.
- Expanded the number of domestic hotels in its extended stay brands to over 380, a 7% increase from June 30, 2018, and increased the extended stay domestic pipeline by 18% to over 250 hotels.
- Grew Choice Privileges, the company’s award-winning loyalty program, to over 42 million members.
“We’re pleased to report another quarter of excellent financial performance and a positive outlook for the remainder of the year,” said Patrick Pacious, president and chief executive officer, Choice Hotels. “We’re especially pleased that the transformation of our flagship Comfort brand is progressing on schedule and paying off: renovated hotels are outperforming the segment and capturing more business travel while developer demand remains strong. Additionally, our strategic investment in the upscale Cambria brand is propelling its rapid growth across the country—this summer alone, seven Cambria hotels are expected to open their doors in top-tier markets, which, together, represent more than 1,200 upscale rooms that will join our upscale portfolio.”
Additional details from the company’s 2019 second quarter results are as follows:
- Total revenues for the three months ended June 30, 2019, were $317.7 million, an increase of 8% from total revenues reported for the same period of 2018.
- Total revenues, excluding marketing and reservation system fees, for the second quarter increased 5% over the prior year comparable period to $145.2 million.
- Domestic royalty fees for the second quarter totaled $100.8 million, a 3% increase from the second quarter of 2018.
- The company’s effective domestic royalty rate increased 10 basis points for the second quarter, compared to the same period of the prior year.
- Domestic systemwide revenue per available room (RevPAR) declined 0.1% for the second quarter, compared to the same period of the prior year. Comfort hotels that have completed renovations outpaced their competitive set by 60 basis points, driven by both business and leisure travel.
- Procurement services revenue increased 17% in the second quarter to $20.8 million, compared to the same period of the prior year.
- The number of domestic franchised hotels and rooms, as of June 30, 2019, increased 2.0% and 2.1%, respectively, from June 30, 2018.
- International franchised hotels and rooms, as of June 30, 2019, increased 4.1% and 5.4%, respectively, from June 30, 2018.
- The company achieved 5.4% and 5.1% net unit growth in the Clarion and Quality brands, respectively, further strengthening its midscale presence.
- The company awarded 181 domestic franchise agreements in the second quarter of 2019, including 107 awarded in the month of June, the largest number of agreements awarded in June in the company’s history as a public company.
- The company’s total domestic pipeline of hotels awaiting conversion, under construction, or approved for development, as of June 30, 2019, increased 4% to 988 from June 30, 2018.
- The new-construction domestic pipeline totaled 753 hotels, as of June 30, 2019, a 7% increase from June 30, 2018.
- The company’s total international pipeline of hotels awaiting conversion, under construction, or approved for development totaled 123, as of June 30, 2019, versus 74 hotels as of June 30, 2018.
Use of Cash Flows
During the six months ended June 30, 2019, the company paid cash dividends totaling approximately $24 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.
During the six months ended June 30, 2019, the company repurchased approximately 0.5 million shares of common stock for approximately $42 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 June 30, 2019, the company had authorization to purchase up to 1.7 million additional shares of common stock under its share repurchase program.
Hotel Development & Financing
The company has allocated up to $725 million to its program that encourages growth of the upscale Cambria Hotels brand. Investments under this program may include joint-venture investments, forgivable key-money loans, senior mortgage loans, development loans and mezzanine lending, as well as hotel ownership and the operation of a land-banking program. With respect to lending, hotel ownership and joint-venture investments, the company generally expects to recycle these investments within a five-year period. As of June 30, 2019, the company had approximately $393 million reflected on its consolidated balance sheet pursuant to these financial support activities.
In late July 2019, the company redeemed a third party’s remaining equity stake in a joint venture that held four key Cambria hotels, increasing the outstanding investment under the current Cambria program to approximately $553 million. The redemption of the remaining joint venture interest in these strategically important hotels reflects the company’s continued investment in accelerating the brand’s development. These hotels not only provide a strategic benefit to the brand but are also expected to generate financial returns for the company’s shareholders. The company does not anticipate owning these hotels on a permanent basis and will consider a sale to a franchisee in the future.
Loss on Sale and Impairment of Assets
During the three and six months ended June 30, 2019, the company recognized a loss on sale and asset impairments totaling $4.6 million and $14.9 million, respectively, related to its reporting unit that provided 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 determined that the technology and services were no longer required to support the company’s growth plans. As a result, the company reached an agreement to divest the reporting unit and completed the sale of the business during the second quarter of 2019.
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, the gain (loss) on sale and impairment of assets as well as other items. See Exhibit 7 for the calculation of adjusted forecasted results and the reconciliation to the comparable GAAP measures.
The company’s outlook does not reflect the third quarter 2019 redemption of a third party’s remaining equity stake in a joint venture that held four strategically located Cambria hotels. The company currently estimates that the redemption and financial reporting consolidation will generate incremental EBITDA of approximately $3 to $5 million for the remainder of the year. The company is currently completing its purchase price accounting and expects to report the impact of the transaction on net income and EPS in its third quarter earnings release.
- Net income for full-year 2019 is expected to range between $200 million and $206 million, or $3.58 to $3.68 per share.
- Adjusted EPS for full-year 2019 is expected to range between $4.16 and $4.22, representing an increase of $0.07 at the midpoint from the company’s previous guidance. The company expects full-year 2019 adjusted net income to range between $232 million and $236 million.
- Third quarter 2019 adjusted EPS is expected to range between $1.25 and $1.29.
- Adjusted EBITDA for full-year 2019 is expected to range between $358 million and $363 million, representing an increase of $2.0 million at the midpoint from the company’s previous guidance.
- The company’s outlook for adjusted EBITDA and adjusted EPS is 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.
- Net domestic units for 2019 are expected to increase by approximately 2%.
- Domestic RevPAR for the third quarter of 2019 is expected to range between 0% and 2% versus the same period of the prior year. Domestic RevPAR is expected to range 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 third quarter and 21.5% for full-year 2019, respectively.