Company Results

Choice Hotels International Reports A 12% Increase In Second Quarter Income From Continuing Operations

New Domestic Hotel Franchise Sales Increase 20% - Second Quarter Franchising EBITDA Increases 12%

Choice Hotels

Choice Hotels International, Inc. (NYSE: CHH) reported the following highlights for the second quarter of 20141:

  • Diluted earnings per share ("EPS") from continuing operations for the three months ended June 30, 2014 totaled $0.60, an increase of 11 percent from the same period of 2013.
  • Earnings before interest, taxes, depreciation and amortization ("EBITDA") from franchising activities for the three months ended June 30, 2014 totaled $66.6 million, an increase of 12 percent from the same period of 2013. 
  • Franchising revenues for the three months ended June 30, 2014 totaled $93.8 million, an increase of 8 percent from the same period of 2013.
  • Franchising margins for the three months ended June 30, 2014 were 68.8 percent, an increase of 270 basis points from the same period of 2013.
  • Domestic royalty fees for the three months ended June 30, 2014 totaled $71.2 million, an increase of 7 percent from the same period of 2013. Domestic royalty fees for the three and six months ended June 30, 2014 and 2013 are based on our domestic franchisees' underlying gross room revenues for the periods April 1 through June 30 and January 1 through June 30 of 2014 and 2013, respectively. Domestic royalty fees based on domestic franchisee gross room revenues from March 1 through May 31, which corresponds to the Company's previous revenue recognition policy, were $66.6 million and $62.2 million for 2014 and 2013, respectively.
  • Domestic unit and room growth increased 1.8 percent and 0.9 percent from June 30, 2013, respectively. 
  • Domestic system-wide revenue per available room ("RevPAR") increased 7.6 percent in the second quarter of 2014 as occupancy and average daily rates increased 280 basis points and 2.9 percent, respectively from the same period of 2013. RevPAR for the three months ended June 30, 2014 and 2013 are based on our domestic franchisees' underlying gross room revenues for the period April 1 through June 30 of 2014 and 2013, respectively.
  • The company executed 125 new domestic hotel franchise contracts for the three months ended June 30, 2014, an increase of 20%, compared to 104 new domestic hotel franchise contracts for the same period of 2013.
  • The company's domestic pipeline of hotels under construction, awaiting conversion or approved for development increased 16% from June 30, 2013.

"During the second quarter, momentum in our core lodging business was very strong and we are pleased with our performance, which exceeded our expectations. We achieved continued net domestic unit growth, strong development results and a nearly 8% percent increase in domestic RevPAR," said Stephen P. Joyce, president and chief executive officer. "These trends supported double-digit percentage EBITDA growth and meaningful franchising margin expansion. We are optimistic that our performance will continue to be strong in the second half of 2014."

Discontinued Operations

In the first quarter of 2014, the company entered into a plan to sell its three owned hotels operated under the MainStay Suites brand. The company determined that the disposal of these hotels met the definition of a discontinued operation since the operations and cash flows of these components will be eliminated from the on-going operations of the company and the company will not have significant continuing involvement in the operations of the hotels after the disposal transaction.

At June 30, 2014, the company had disposed of all three of the owned MainStay Suites hotels and the new owners of each of those hotels had executed new franchise agreements with the company.

The company's consolidated statements of income for the three months and six months ended June 30, 2014 reflect these three company-owned hotels as discontinued operations. In addition, the company's statements of income for the three and six months ended June 30, 2013 have been reclassified to account for these operations as discontinued. Summarized financial information related to these discontinued operations is presented in Exhibit 9 of this press release.                  

Outlook

The company's consolidated 2014 outlook reflects continued growth of the company's core hotel franchising business, continued investment in the SkyTouch division and the sale of the three company-owned Mainstay Suites hotels described above as well as the following assumptions:

  • All figures assume no repurchases of common stock under the company's share repurchase program; and
  • The effective tax rate for continuing operations is expected to be 30.7% for the third quarter and full-year 2014.

Franchising

  • EBITDA from franchising activities for full-year 2014 are expected to range between $231 million and $234 million;
  • Approximately $2.5 million of the $3 million increase at the mid-point of our franchising EBITDA outlook compared to the outlook we furnished on April 28, 2014 in conjunction with our first quarter 2014 earnings announcement is due to year-to-date performance through June 30, 2014 and anticipated improved operating fundamentals and performance for the second-half of 2014.  The remainder of the increase is due to the change in accounting for royalty and certain marketing and reservation fees described below;
  • Net domestic unit growth for 2014 is expected to range between 1% and 2%;
  • RevPAR is expected to increase approximately 6.5% for the third quarter and 6.25% to 7.25% for full-year 2014; and
  • The effective royalty rate is expected to decline 4 basis points for full-year 2014.

SkyTouch

  • Reductions in EBITDA from our investment in SkyTouch for full-year 2014 are expected to be approximately $20 million, which is unchanged from the outlook we provided in April with our first quarter results;
  • We continue to expect execution of third-party contracts representing annualized revenue ranging between $4 million and $6 million with realized revenues for the year ended December 31, 2014 totaling approximately $1 million; and
  • SG&A expenses related to SkyTouch are forecast to be approximately $21 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 and related products and services.

Discontinued Operations

  • Company EBITDA projections exclude the three company-owned Mainstay Suites hotels which generated EBITDA of approximately $1.1 million in 2013; and
  • Diluted EPS projections for the full-year 2014 include a gain on sale of the three company-owned Mainstay Suites hotels totaling $0.03 per share.

Consolidated Outlook

The company's third quarter 2014 diluted EPS is expected to be $0.62. The company expects full-year 2014 diluted EPS to range between $1.92 and $1.96. Consolidated EBITDA for full-year 2014 are expected to range between $211 million and $214 million.

Items Impacting Comparability

We reported on August 5, 2014 that the company changed its accounting for royalty and certain marketing and reservation fees in order to comply with generally accepted accounting principles in the United States ("GAAP") by reporting these fees in the same period that the underlying gross room revenues are earned by our franchisees rather than one month in arrears (our historical practice).

We believe that this change in the timing of our revenue recognition for these fees will make it easier for analysts and investors to compare our results to other lodging companies.

The financial results and supplemental operating information as of and for the periods ended June 30, 2014 have been prepared in accordance with the new accounting practice.

As a result of this change, the income statement and cash flow statement included herein for the periods ended June 30, 2013 have been preliminarily restated based on currently available information to reflect our new accounting practice for these fees. The company plans to file the restated quarterly financial statements as soon as administratively possible. Until the restatement is complete, additional information may become available which could cause the company's current estimates to change.

Due to the seasonality of the company's business, the impact of the new revenue recognition practice will generally be positive for the first two quarters of the year and negative in the final two quarters of the year. However, this change is expected to result in immaterial positive revisions to total revenues, operating income and earnings per share for the full years ended December 31, 2013, 2012 and 2011. The company plans to file the revised annual financial statements in an amended Annual Report on Form 10-K. The December 31, 2013 balance sheet included in Exhibit 2 has been preliminarily revised to reflect this change.

More information about this accounting change and restatement can be found in the Company's Form 8-K filed on August 5, 2014.

About Choice Hotels

Choice Hotels International, Inc. franchises more than 6,300 hotels, representing more than 500,000 rooms, in the United States and more than 35 other countries and territories.  As of June 30, 2014, 423 hotels, representing more than 32,000 rooms, were under construction, awaiting conversion or approved for development in the United States.  Additionally, 93 hotels, representing approximately 8,300 rooms, were under construction, awaiting conversion or approved for development in more than 15 other countries and territories.  The company's Comfort Inn, Comfort Suites, Quality, Sleep Inn, Clarion, Cambria Hotel & Suites, MainStay Suites, Suburban Extended Stay Hotel, Econo Lodge and Rodeway Inn brands, as well as its Ascend Hotel Collection membership program, serve guests worldwide.

SkyTouch Technology is a division of Choice Hotels International, Inc. 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.

Statement Concerning Non-GAAP Financial Measurements Presented in this Press Release

EBITDA, franchising revenues, franchising SG&A, franchising EBITDA and franchising margins are non-GAAP financial measurements.  These measures should not be considered as an alternative to any measure of performance or liquidity as promulgated under or authorized by generally accepted accounting principles in the United States ("GAAP"), such as operating income, total revenues and operating margins.  The company's calculation of these measurements may be different from the calculations used by other companies and therefore comparability may be limited.  The company has included an exhibit accompanying this release that reconciles EBITDA, franchising revenues, franchising SG&A and franchising margins to the most comparable GAAP financial measures. We discuss management's reasons for reporting these non-GAAP measures below.

Earnings Before Interest, Taxes, Depreciation and Amortization: EBITDA reflects income from continuing operations excluding the impact of interest expense, interest income, provision for income taxes, depreciation and amortization, other (gains) and losses and equity in net income of unconsolidated affiliates. We consider EBITDA to be an indicator of operating performance because we use it to measure our ability to service debt, fund capital expenditures, and expand our business. We also use EBITDA, as do analysts, lenders, investors and others, to evaluate companies because it excludes certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be dependent on a company's capital structure, debt levels and credit ratings. Accordingly, the impact of interest expense on earnings can vary significantly among companies. The tax positions of companies can also vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provision for income taxes can vary considerably among companies. EBITDA also excludes depreciation and amortization because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies.

Franchising Revenues, Operating Income, EBITDA, SG&A and Margins:  The company reports franchising revenues, operating income, EBITDA, SG&A and margins which exclude marketing and reservation revenues and SkyTouch Technology operations.  Marketing and reservation activities are excluded since the company is required by its franchise agreements to use the fees collected for marketing and reservation activities; as such, no income or loss to the company is generated. Cumulative marketing and reservation system fees not expended are recorded as a liability in the company's financial statements and are carried over to the next year and expended in accordance with the franchise agreements. Cumulative marketing and reservation expenditures in excess of fees collected for marketing and reservation activities are deferred and recorded as an asset in the company's financial statements and recovered in future periods.  SkyTouch Technology is a division of the company 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. The operations for SkyTouch Technology are excluded since they do not reflect the company's core franchising business but are an adjacent, complimentary line of business. These non-GAAP measures are a commonly used measure of performance in our industry and facilitate comparisons between the company and its competitors.

Choice Hotels, Choice Hotels International, Comfort Inn, Comfort Suites, Quality, Sleep Inn, Clarion, Cambria Suites, MainStay Suites, Suburban Extended Stay Hotel, Econo Lodge, Rodeway Inn, Ascend Hotel Collection and SkyTouch Technologyare proprietary trademarks and service marks of Choice Hotels International.

© 2014 Choice Hotels International, Inc.  All rights reserved.

1   See the discussion under "Items Impacting Comparability" below for information about how the recently announced accounting change and restatement of certain 2013 interim periods impacts the comparative discussion of our results of operations contained herein.

Choice Hotels International, Inc.

Exhibit 1

Consolidated Statements of Income

(Unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

Restated

Variance

Restated

Variance

2014

2013

$

%

2014

2013

$

%

(In thousands, except per share amounts)

REVENUES:

Royalty fees

$                 77,670

$              72,638

$     5,032

7%

$              136,210

$               128,746

$       7,464

6%

Initial franchise and relicensing fees

4,722

4,416

306

7%

8,462

8,193

269

3%

Procurement services

8,020

7,546

474

6%

12,798

11,496

1,302

11%

Marketing and reservation 

103,766

104,072

(306)

(0%)

193,372

186,395

6,977

4%

Other

3,486

2,258

1,228

54%

6,558

4,271

2,287

54%

      Total revenues

197,664

190,930

6,734

4%

357,400

339,101

18,299

5%

OPERATING EXPENSES:

Selling, general and administrative

31,413

29,731

1,682

6%

58,093

56,399

1,694

3%

Depreciation and amortization

2,332

2,388

(56)

(2%)

4,610

4,429

181

4%

Marketing and reservation

103,766

104,072

(306)

(0%)

193,372

186,395

6,977

4%

Total operating expenses

137,511

136,191

1,320

1%

256,075

247,223

8,852

4%

Operating income

60,153

54,739

5,414

10%

101,325

91,878

9,447

10%

OTHER INCOME AND EXPENSES, NET:

Interest expense

10,710

10,807

(97)

(1%)

20,881

21,577

(696)

(3%)

Interest income

(347)

(659)

312

(47%)

(850)

(1,303)

453

(35%)

Other (gains) and losses

(474)

147

(621)

(422%)

(533)

(563)

30

(5%)

Equity in net (income) loss of affiliates

30

(60)

90

(150%)

65

81

(16)

(20%)

Total other income and expenses, net

9,919

10,235

(316)

(3%)

19,563

19,792

(229)

(1%)

Income from continuing operations before income taxes

50,234

44,504

5,730

13%

81,762

72,086

9,676

13%

Income taxes

14,955

12,880

2,075

16%

25,014

20,686

4,328

21%

Income from continuing operations, net of income taxes

35,279

31,624

3,655

12%

56,748

51,400

5,348

10%

Income (loss) from discontinued operations, net of income taxes

121

183

(62)

(34%)

1,762

150

1,612

1075%

Net income

$                 35,400

$              31,807

$     3,593

11%

$                58,510

$                51,550

$       6,960

14%

Basic earnings per share

Continuing operations

$                     0.61

$                  0.54

$      0.07

13%

$                   0.97

$                    0.88

$        0.09

10%

Discontinued operations

-

-

-

NM

0.03

-

0.03

NM

$                     0.61

$                  0.54

$      0.07

13%

$                   1.00

$                    0.88

$        0.12

14%

Diluted earnings per share

Continuing operations

$                     0.60

$                  0.54

$      0.06

11%

$                   0.96

$                    0.88

$        0.08

9%

Discontinued operations

-

-

-

NM

0.03

-

0.03

NM

$                     0.60

$                  0.54

$      0.06

11%

$                   0.99

$                    0.88

$        0.11

13%

 

 

Choice Hotels International, Inc.

Exhibit 2

Consolidated Balance Sheets

(In thousands, except per share amounts)

 June 30, 

 December 31, 

2014

2013

(Unaudited)

 (Preliminarily Revised) 

ASSETS

Cash and cash equivalents

$           211,542

$                          167,795

Accounts receivable, net

119,763

82,385

Fixed assets and intangibles, net

132,440

143,618

Notes receivable, net of allowances

34,492

31,872

Advances, marketing and reservation activities

-

5,844

Investments, employee benefit plans, at fair value

17,270

15,950

Other assets

112,935

103,809

Total assets

$           628,442

$                          551,273

LIABILITIES AND SHAREHOLDERS' DEFICIT

Accounts payable and accrued expenses

$           103,290

$                            98,288

Deferred revenue

67,365

61,188

Long-term debt

789,506

793,559

Deferred compensation & retirement plan obligations  

23,260

22,527

Other liabilities

57,531

28,582

Total liabilities

1,040,952

1,004,144

Common stock, $0.01 par value

584

586

Additional paid-in-capital

118,976

117,768

Accumulated other comprehensive loss

(4,756)

(6,217)

Treasury stock, at cost

(916,893)

(918,031)

Retained earnings

389,579

353,023

Total shareholders' deficit

(412,510)

(452,871)

Total liabilities and shareholders' deficit

$           628,442

$                          551,273

 

 

Choice Hotels International, Inc.

Exhibit 3

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

Six Months Ended June 30,

2014

2013

CASH FLOWS FROM OPERATING ACTIVITIES:

(Restated)

Net income

$                    58,510

$              51,550

Adjustments to reconcile net income to net cash provided 

 by operating activities:

  Depreciation and amortization  

4,610

4,695

  Gain on sale of assets

(2,849)

-

  Provision for bad debts, net

1,383

1,753

  Non-cash stock compensation and other charges

4,711

5,566

  Non-cash interest and other (income) loss

719

967

  Deferred income taxes

(9,273)

8,236

  Dividends received from equity method investments

546

535

  Equity in net loss of affiliates

65

81

Changes in assets and liabilities:

  Receivables

(39,518)

(40,349)

  Advances to/from marketing and reservation activities, net

31,522

5,631

  Forgivable notes receivable, net

(6,692)

(3,595)

  Accounts payable

8,316

9,893

  Accrued expenses

(5,247)

(18,463)

  Income taxes payable/receivable

15,198

1,198

  Deferred revenue

6,231

(3,318)

  Other assets

(1,102)

(1,664)

  Other liabilities

(1,298)

7,271

 NET CASH PROVIDED BY OPERATING ACTIVITIES 

65,832

29,987

CASH FLOWS FROM INVESTING ACTIVITIES:

Investment in property and equipment

(7,314)

(22,035)

Proceeds from sales of assets

12,216

-

Equity method investments

(6,946)

(1,851)

Purchases of investments, employee benefit plans

(1,220)

(1,580)

Proceeds from sales of investments, employee benefit plans

641

3,934

Issuance of mezzanine and other notes receivable

(2,223)

-

Collections of mezannine and other notes receivable

9,743

201

Other items, net

(296)

(304)

 NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 

4,601

(21,635)

CASH FLOWS FROM FINANCING ACTIVITIES:

Net borrowings pursuant to revolving credit facility

-

15,200

Principal payments on long-term debt

(4,112)

(4,095)

Proceeds from the issuance of long-term debt

26

-

Purchase of treasury stock

(4,544)

(3,651)

Dividends paid

(21,957)

(11,261)

Excess tax benefits from stock-based compensation

1,319

1,146

Proceeds from exercise of stock options

1,547

5,973

 NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES

(27,721)

3,312

Net change in cash and cash equivalents

42,712

11,664

Effect of foreign exchange rate changes on cash and cash equivalents

1,035

(2,051)

Cash and cash equivalents at beginning of period

167,795

134,177

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$                  211,542

$            143,790

 

 

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CHOICE HOTELS INTERNATIONAL, INC.

Exhibit 4

SUPPLEMENTAL OPERATING INFORMATION 

DOMESTIC HOTEL SYSTEM

(UNAUDITED)

For the Six Months Ended June 30, 2014

For the Six Months Ended June 30, 2013

Change

Average Daily

Average Daily

Average Daily

Rate

Occupancy

RevPAR

Rate

Occupancy

RevPAR

Rate

Occupancy

RevPAR

Comfort Inn

$             83.68

61.3%

$          51.31

$             81.41

58.6%

$         47.67

2.8%

270

bps

7.6%

Comfort Suites

89.35

65.7%

58.68

86.63

62.8%

54.43

3.1%

290

bps

7.8%

Sleep

75.94

61.3%

46.57

73.54

58.5%

43.00

3.3%

280

bps

8.3%

Quality

70.37

54.8%

38.57

68.89

52.2%

35.98

2.1%

260

bps

7.2%

Clarion

75.01

53.0%

39.75

73.77

50.1%

36.98

1.7%

290

bps

7.5%

Econo Lodge

55.75

49.7%

27.72

54.93

47.4%

26.05

1.5%

230

bps

6.4%

Rodeway

54.19

53.2%

28.85

52.12

50.4%

26.27

4.0%

280

bps

9.8%

MainStay

73.80

70.6%

52.11

71.66

67.5%

48.38

3.0%

310

bps

7.7%

Suburban

44.53

72.6%

32.34

42.64

71.3%

30.39

4.4%

130

bps

6.4%

Ascend Hotel Collection

117.13

59.2%

69.30

121.33

63.4%

76.89

(3.5%)

(420)

bps

(9.9%)



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