Company Results

Choice Hotels Reports Fourth Quarter Franchising EBITDA and Diluted EPS Increase 8% and 10%, Respectively

Choice Hotels International Reports Fourth Quarter And Full-Year 2013 Results

Choice Hotels

Choice Hotels International, Inc., (NYSE:CHH) today reported the following highlights for the fourth quarter and full-year 2013:

Fourth Quarter Highlights

  • Diluted earnings per share ("EPS") for the three months ended December 31, 2013 totaled $0.46, an increase of 10% from the same period of 2012.
  • Earnings before interest, taxes, depreciation and amortization ("EBITDA") from franchising activities for the three months ended December 31, 2013totaled $52.2 million, an increase of 8% from the same period of 2012. 
  • Franchising revenues for the three months ended December 31, 2013 totaled $78.8 million, an increase of 2% from the same period of 2012. 
  • Domestic system-wide revenue per available room ("RevPAR") increased 1.3% for the three months ended December 31, 2013 from the same period of 2012 as hotel operations in the Northeast and Mid-Atlantic regions as well as hotels near national parks were impacted by the government shutdown. Domestic RevPAR results reflect occupancy and average daily rates increases of 50 basis points and 0.4%, respectively.  
  • Initial franchise and relicensing fees for the three months ended December 31, 2013 totaled $5.8 million, an increase of 11% from the same period of 2012.
  • The company executed 215 new domestic hotel franchise contracts for the three months ended December 31, 2013 compared to 214 new domestic hotel franchise contracts for the same period of 2012. Domestic hotel contracts executed during the three months ended December 31, 2012 included an agreement with affiliates of Colony Capital, a private international investment firm, and hospitality management company Aimbridge Hospitality, to convert 46 properties, formerly operated as Jameson Inns, to the company's Quality Inn, Comfort Inn and Econo Lodge brands. Excluding this transaction, domestic franchise agreements executed during the fourth quarter of 2013 increased 28% from the same period of 2012.
  • Domestic relicensing and contract renewal transactions for the three months ended December 31, 2013 totaled 85 contracts, an increase of 8% from the same period of 2012.
  • Franchising selling, general and administrative expenses ("SG&A") for the three months ended December 31, 2013 totaled $26.6 million, a 7% decline from the same period of 2012. Excluding a loss on settlement of the company's pension plan during the fourth quarter of 2012 totaling $1.8 million, franchising SG&A declined by approximately $0.1 million.

"We are pleased with our fourth quarter operating results which reflect a continued improvement in the domestic franchise development environment," saidStephen P. Joyce, president and chief executive officer of Choice Hotels International. "Our development results reflect a 14% increase in our conversion franchise agreements over the prior year and we expect that the conversion franchise sales environment will continue to improve. In addition, we are optimistic that the new construction environment for our brand segments will gradually improve in 2014 and beyond."

Full-Year Highlights

  • EBITDA from franchising activities in 2013 totaled $214.3 million, an increase of $10.7 million or 5% from 2012. 
  • Franchising revenues in 2013 totaled $316.4 million, an increase of $14.2 million or 5% from 2012. 
  • Domestic royalty fees in 2013 totaled $242.5 million, an increase of 3% from 2012.
  • Domestic system-wide RevPAR increased 3.0% in 2013 as occupancy and average daily rates increased 80 basis points and 1.6%, respectively.   
  • Domestic unit and room growth increased 1.9% and 1.1% from December 31, 2012, respectively. 
  • Initial franchise and relicensing fees in 2013 totaled $18.7 million, an increase of $4.5 million or 32% from 2012.
  • The company executed 530 new domestic hotel franchise contracts in 2013, an increase of 57 contracts or 12% from 2012.
  • Domestic relicensing and contract renewal transactions in 2013 totaled 289 contracts, an increase of 52 contracts or 22% from 2012.
  • Procurement services revenues in 2013 totaled $20.7 million, an increase of $2.7 million or 15% from 2012.
  • Franchising SG&A expenses in 2013 totaled $102.1 million, a 3.6% increase from 2012.
  • Franchising margins for 2013 were 65.0%, an increase of 10 basis points from 2012.
  • Publicly launched and executed initial third-party customer contracts for the SkyTouch Technology division of the company ("SkyTouch"), a division that develops and markets cloud based technology products, including inventory management, pricing and connectivity to third party channels, to hoteliers not under franchise agreements with the company.

"Our investment in additional growth opportunities that are complementary to our core hotel franchising business model has resulted in our strategic alliance with Bluegreen Vacations as well as the launch of our SkyTouch division. We are pleased with the progress we have achieved in both of these initiatives. Our alliance with Bluegreen Vacations has resulted in more than 20 new Ascend Hotel Collection hotels and has generated approximately $3.5 million of total revenues in 2013."

"In addition, we have executed several customer contracts for the SkyTouch division. These new customers join more than 5,500 of our current franchisees who already use our cloud-based technology systems. Together, our new and existing users generate more than $30 million of corporate and marketing and reservation system revenues for the company," said Joyce.

Use of Free Cash Flow

The company has historically used its free cash flow (cash flow from operations less cash flow from investing activities) to return value to shareholders, primarily through share repurchases and dividends.

Dividends

The company's current quarterly dividend rate per common share is $0.185, subject to declaration by our board of directors. During 2013 and 2012, the company paid $32.8 million and $654.1 million in cash dividends to shareholders, respectively.  The cash dividends paid during 2013 reflect the company's decision to pay the first quarter of 2013 quarterly cash dividend in December 2012. In addition, cash dividends paid during 2012 include a special cash dividend in the amount of $10.41 per share or approximately $600.7 million paid on August 23, 2012.

As a result of the debt financing transactions entered into in the second and third quarters of 2012 to fund the payment of a special cash dividend, earnings per share in 2013 were impacted by $15.3 million of additional interest expense compared to the prior year.

Share Repurchases

The company did not repurchase any shares of common stock under its share repurchase program during 2013. However, the company currently has authorization to purchase up to 1.4 million shares under this program.  We may make repurchases from time to time under our share repurchase program in the open market and through privately negotiated transactions, subject to market and other conditions.  There is no time limit on this authorization and no minimum number of share repurchases has been fixed. Since Choice announced its stock repurchase program on June 25, 1998, the company has repurchased 45.3 million shares of its common stock for a total cost of $1.1 billion through December 31, 2013. Considering the effect of a two-for-one stock split in October 2005, the company has repurchased 78.3 million shares through December 31, 2013 under the share repurchase program at an average price of $13.89 per share.

Other

Our board of directors previously authorized a program which permits us to offer financing, investment and guaranty support to qualified franchisees as well as allows us to acquire and resell real estate to incent franchise development primarily for the Cambria brand in strategic markets. Over the next several years, we expect to continue to deploy capital opportunistically pursuant to this program to promote growth of our brands.  Our current expectation is that our annual investment in this program will range between $20 million and $40 million per year and we generally expect to recycle these investments over a 5 year period. However, the amount and timing of the investment in this program will be dependent on market and other conditions.  Notwithstanding this program, the company expects to continue to return value to its shareholders through a combination of share repurchases and dividends, subject to board declaration, market and other conditions. 

Balance Sheet

As of December 31, 2013, the company had total debt (long-term plus current portion) of $794 million and cash and cash equivalents totaling $168 millionresulting in net debt of $626 million.  As of December 31, 2012, the company had total debt of $855 million and cash equivalents totaling $134 millionresulting in net debt of $721 million.

As of December 31, 2013 and 2012, the company had outstanding mezzanine financing, real estate investments and sliver equity investments totaling $64 million and $68 million, respectively, pursuant to its program to offer financing and investment support to incent franchise development for the Cambria brand in strategic markets.  These investments are reported in other current assets and other assets on the company's consolidated balance sheet.

Outlook

The company's consolidated 2014 outlook reflects continued growth of the company's core franchising business, continued investment in and expanded revenue contribution from the SkyTouch division and the sale of the three company-owned Mainstay hotels described below and the following assumptions:

  • All figures assume no repurchases of common stock under the company's share repurchase program; and
  • The effective tax rate is expected to be 30.5% for the first quarter and full-year 2014.

Franchising

  • EBITDA from franchising activities for full-year 2014 are expected to range between $227 million and $232 million, an increase from 2013 of approximately 6% to 8%;
  • Net domestic unit growth is expected to increase by approximately 2% in 2014;
  • RevPAR is expected to increase approximately 4% for the first quarter and 3.5% to 4.5% for full-year 2014; and
  • The effective royalty rate is expected to decline 3 basis points for full-year 2014.

SkyTouch

  • Reductions in EBITDA from our investment in the SkyTouch division for full-year 2014 are expected to be approximately $21.5 million;
  • Execution of third-party contracts with annualized revenue expected to range between $4 million and $6 million resulting in realized revenues for the year ended December 31, 2014 totaling approximately $2.0 million; and
  • SG&A expenses are forecasted to be approximately $23.5 million related to investment in business development, sales and marketing and continued software development expenditures related to the division's cloud-based hotel operating system technology related products and services.

Hotel Operations

  • The company has entered into purchase and sale agreements for its three company-owned MainStay properties. These transactions are expected to close during the first quarter of 2014 and to generate net pre-tax proceeds of approximately $12 million;
  • The new owners of the  hotels will execute new franchise agreements and remain in the franchise system;
  • Company EBITDA projections exclude the three company-owned Mainstay properties which generated EBITDA of approximately $1.1 million in 2013; and
  • Diluted EPS for the first quarter and full-year 2014 includes a gain on sale of the three company-owned Mainstay properties totaling $0.03.

Consolidated Outlook

The company's first quarter 2014 diluted EPS is expected to be $0.29. The company expects full-year 2014 diluted EPS to range between $1.84 and $1.92. EBITDA for full-year 2014 are expected to range between $205 million and $211 million.

 

Choice Hotels International, Inc.

 

Exhibit 1

Consolidated Statements of Income

(Unaudited)

Three Months Ended December 31,

For the Year Ended December 31,

Variance

Variance

2013

2012

$

%

2013

2012

$

%

(In thousands, except per share amounts)

REVENUES:

Royalty fees

$   66,007

$  66,020

$    (13)

(0%)

$ 267,229

$ 260,782

$   6,447

2%

Initial franchise and relicensing fees

5,843

5,250

593

11%

18,686

14,203

4,483

32%

Procurement services

4,464

3,972

492

12%

20,668

17,962

2,706

15%

Marketing and reservation 

100,718

100,160

558

1%

403,099

384,784

18,315

5%

Hotel operations

1,174

1,133

41

4%

4,774

4,573

201

4%

Other

2,489

1,771

718

41%

9,851

9,205

646

7%

      Total revenues

180,695

178,306

2,389

1%

724,307

691,509

32,798

5%

OPERATING EXPENSES:

Selling, general and administrative

29,489

29,779

(290)

(1%)

113,567

101,852

11,715

12%

Depreciation and amortization

2,395

2,237

158

7%

9,469

8,226

1,243

15%

Marketing and reservation

100,718

100,160

558

1%

403,099

384,784

18,315

5%

Hotel operations

936

896

40

4%

3,678

3,505

173

5%

Total operating expenses

133,538

133,072

466

0%

529,813

498,367

31,446

6%

Operating income

47,157

45,234

1,923

4%

194,494

193,142

1,352

1%

OTHER INCOME AND EXPENSES, NET:

Interest expense

10,203

10,366

(163)

(2%)

42,537

27,189

15,348

56%

Interest income

(568)

(384)

(184)

48%

(2,547)

(1,540)

(1,007)

65%

Loss on extinguishment of debt

-

-

-

NM

-

526

(526)

(100%)

Other (gains) and losses

(514)

148

(662)

(447%)

(1,780)

(1,989)

209

(11%)

Equity in net income of affiliates

(294)

(224)

(70)

31%

(634)

(212)

(422)

199%

Total other income and expenses, net

8,827

9,906

(1,079)

(11%)

37,576

23,974

13,602

57%

Income before income taxes

38,330

35,328

3,002

8%

156,918

169,168

(12,250)

(7%)

Income taxes

10,998

10,877

121

1%

44,317

48,481

(4,164)

(9%)

Net income

$   27,332

$  24,451

$ 2,881

12%

$ 112,601

$ 120,687

$ (8,086)

(7%)

Basic earnings per share

$       0.47

$      0.42

$  0.05

12%

$      1.92

$      2.08

$   (0.16)

(8%)

Diluted earnings per share

$       0.46

$      0.42

$  0.04

10%

$      1.91

$      2.07

$   (0.16)

(8%)

 

Choice Hotels International, Inc.

Exhibit 2

Consolidated Balance Sheets

(In thousands, except per share amounts)

 December 31, 

 December 31, 

2013

2012

(Unaudited)

ASSETS

Cash and cash equivalents

$           167,795

$         134,177

Accounts receivable, net

53,521

52,270

Investments, employee benefit plans, at fair value

400

3,486

Other current assets

36,930

43,537

Total current assets

258,646

233,470

Fixed assets and intangibles, net

141,858

130,937

Advances, marketing and reservation activities

19,127

42,179

Investments, employee benefit plans, at fair value

15,950

12,755

Other assets

104,318

91,431

Total assets

$           539,899

$         510,772

LIABILITIES AND SHAREHOLDERS' DEFICIT

Accounts payable and accrued expenses

$              98,288

$            94,266

Deferred revenue

61,188

71,154

Deferred compensation & retirement plan obligations

2,492

2,522

Current portion of long-term debt

10,088

8,195

Other current liabilities

2,282

-

Total current liabilities

174,338

176,137

Long-term debt

783,471

847,150

Deferred compensation & retirement plan obligations  

22,527

20,399

Other liabilities

23,808

15,990

Total liabilities

1,004,144

1,059,676

Common stock, $0.01 par value

586

582

Additional paid-in-capital

117,768

110,246

Accumulated other comprehensive loss

(6,217)

(4,216)

Treasury stock, at cost

(918,031)

(927,776)

Retained earnings

341,649

272,260

Total shareholders' deficit

(464,245)

(548,904)

Total liabilities and shareholders' deficit

$           539,899

$         510,772

 

Choice Hotels International, Inc.

Exhibit 3

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

Year Ended December 31,

Revised (1)

2013

2012

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$            112,601

$          120,687

Adjustments to reconcile net income to net cash provided 

 by operating activities:

  Depreciation and amortization  

9,469

8,226

  Provision for bad debts, net

2,724

2,896

  Non-cash stock compensation and other charges

11,271

12,375

  Non-cash interest and other loss

1,545

292

  Loss on extinguishment of debt

-

526

  Deferred income taxes

(8,024)

(540)

  Dividends received from equity method investments

1,445

1,310

  Equity in net income of affiliates

(634)

(212)

Changes in assets and liabilities:

  Receivables

(6,730)

(5,239)

  Advances to/from marketing and reservation activities, net

42,405

30,313

  Forgivable notes receivable, net

(8,347)

(10,898)

  Accounts payable

2,304

11

  Accrued expenses

(9,595)

12,376

  Income taxes payable/receivable

4,807

(3,193)

  Deferred revenue

(9,861)

2,188

  Other assets

(3,197)

(3,476)

  Other liabilities

9,857

(17,520)

 NET CASH PROVIDED BY OPERATING ACTIVITIES 

152,040

150,122

CASH FLOWS FROM INVESTING ACTIVITIES:

Investment in property and equipment

(31,524)

(15,443)

Equity method investments

(5,685)

(20,285)

Purchases of investments, employee benefit plans

(2,676)

(1,697)

Proceeds from sales of investments, employee benefit plans

4,168

11,223

Issuance of mezzanine and other notes receivable

(1,095)

(23,736)

Collections of mezannine and other notes receivable

9,748

3,270

Proceeds from sale of assets

243

-

Other items, net

(728)

(433)

 NET CASH USED IN INVESTING ACTIVITIES 

(27,549)

(47,101)

CASH FLOWS FROM FINANCING ACTIVITIES:

Net borrowings (repayments) pursuant to revolving credit facilities

(57,000)

57,000

Principal payments on long-term debt

(8,204)

(4,422)

Proceeds from the issuance of long-term debt

3,360

543,500

Purchase of treasury stock

(3,965)

(22,586)

Dividends paid

(32,799)

(654,092)

Excess tax benefits from stock-based compensation

1,460

1,559

Debt issuance costs

-

(4,759)

Proceeds from exercise of stock options

8,864

7,090

 NET CASH USED IN FINANCING ACTIVITIES

(88,284)

(76,710)

Net change in cash and cash equivalents

36,207

26,311

Effect of foreign exchange rate changes on cash and cash equivalents

(2,589)

809

Cash and cash equivalents at beginning of period

134,177

107,057

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$            167,795

$          134,177

(1) The presentation of the Company's forgivable notes receivable for the year ended December 31, 2012 has been revised from

      prior year disclosures. See Note 1 to the Company's Form 10-Q filed with the SEC on November 12, 2013 for additional information.

 

Exhibit 4

CHOICE HOTELS INTERNATIONAL, INC.

SUPPLEMENTAL OPERATING INFORMATION 

DOMESTIC HOTEL SYSTEM

(UNAUDITED)

For the Year Ended 

December 31, 2013*

For the Year Ended 

December 31, 2012*

Change

Average 

Daily

Average 

Daily

Average

Daily

Rate

Occupancy

RevPAR

Rate

Occupancy

RevPAR

Rate

Occupancy

RevPAR

Comfort Inn

$      83.21

59.9%

$  49.87

$     81.55

59.4%

$ 48.42

2.0%

50

bps

3.0%

Comfort Suites

86.89

62.8%

54.53

85.47

61.7%

52.74

1.7%

110

bps

3.4%

Sleep

74.35

58.5%

43.46

72.40

56.3%

40.77

2.7%

220

bps

6.6%

Quality

70.19

53.0%

37.17

69.46

51.6%

35.85

1.1%

140

bps

3.7%

Clarion

75.20

50.9%

38.30

74.94

49.4%

37.03

0.3%

150

bps

3.4%

Econo Lodge

56.56

48.7%

27.52

55.78

48.5%

27.05

1.4%

20

bps

1.7%

Rodeway

54.25

51.6%

27.96

53.36

50.8%

27.13

1.7%

80

bps

3.1%

MainStay

72.46

68.0%

49.27

69.34

70.4%

48.81

4.5%

(240)

bps

0.9%

Suburban

42.67

70.1%

29.91

41.61

69.7%

29.01

2.5%

40

bps

3.1%

Ascend Hotel Collection

120.97

64.3%

77.82

113.33

64.4%

72.94

6.7%

(10)

bps

6.7%

Total 

$      74.76

56.3%

$  42.08

$     73.60

55.5%

$ 40.84

1.6%

80

bps

3.0%

* Operating statistics represent hotel operations from December through November

For the Three Months Ended 

December 31, 2013*

For the Three Months Ended 

December 31, 2012*

Change

Average 

Daily

Average 

Daily

Average

Daily

Rate

Occupancy

RevPAR

Rate

Occupancy

RevPAR

Rate

Occupancy

RevPAR

Comfort Inn

$      82.52

60.3%

$  49.71

$     81.67

60.0%

$ 48.98

1.0%

30

bps

1.5%

Comfort Suites

85.31

62.1%

52.96

85.01

61.4%

52.21

0.4%

70

bps

1.4%

Sleep

73.87

57.9%

42.74

72.70

56.5%

41.05

1.6%

140

bps

4.1%



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