Choice Hotels International, Inc. (NYSE: CHH) today reported its results for the three months and year ended December 31, 2018. Highlights include:
- Net income was $31.5 million for the fourth quarter 2018 and $216.4 million for the full year, representing diluted earnings per share (EPS) of $0.56 and $3.80, respectively.
- Adjusted net income, excluding certain items described in Exhibit 6, increased 34 percent in 2018 to $221.5 million over the prior year.
- The company's full year adjusted EPS increased 34 percent over the prior full year period to $3.89, while full year adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 14 percent over 2017 to $341 million.
- The company exceeded the top end of its full year adjusted EBITDA guidance by $1 million and the top end of its fourth quarter and full year adjusted EPS guidance by $0.03 per share.
- The company repurchased 1.9 million shares of common stock for an aggregate cost of $149 million for the full year 2018.
- The company awarded 756 new domestic franchise contracts, making 2018 the company's best development year in over a decade.
- Total domestic pipeline of hotels awaiting conversion, under construction, or approved for development, as of December 31, 2018 surpassed 1,000 hotels, representing the largest domestic pipeline in the company's history.
Additionally, during 2018, the company:
- Achieved a 14 percent growth in the number of rooms in the company's upscale brands, Cambria and Ascend as of December 31, 2018 from December 31, 2017.
- Further strengthened its midscale presence by unveiling and awarding 21 domestic franchise agreements for Clarion Pointe, a midscale select-service brand extension of Clarion that meets strong demand from guests and hotel owners alike.
- Awarded 161 new franchise agreements across the company's extended stay portfolio of brands following the acquisition of WoodSpring Suites, the nation's fastest-growing economy hotel brand.
- Continued the $2.5 billion transformation of its flagship Comfort brand, which is progressing on schedule.
"Our strong 2018 performance represents more than a singular good year—it builds on years of success and validates our long-term focus," said Patrick Pacious, president and chief executive officer, Choice Hotels. "As Choice celebrates 80 years in business, these impressive results are proof that investing in our current brands, launching new brands, and further enhancing our business-delivery capabilities have provided a runway for long-term growth."
Additional details for the company's 2018 fourth quarter and full year results are as follows:
- Total revenues for the fourth quarter and full year 2018 were $245 million and $1 billion, respectively, an increase of 11 percent from the total revenues reported for the same periods of 2017.
- Total hotel franchising revenues for full year 2018 increased 12 percent over the prior year to $483.4 million and increased 13 percent from the fourth quarter of the prior year to $114.5 million.
- Adjusted EBITDA from hotel franchising activities for the full year was $346.6 million, a 14 percent increase from full year 2017. Adjusted EBITDA from hotel franchising activities for the fourth quarter was $77.5 million, a 12 percent increase from the fourth quarter of the prior year.
- Adjusted EPS increased 29 percent in fourth quarter 2018 to $0.88 over the prior year fourth quarter.
- Full year domestic royalties increased 11 percent, to $354.7 million, from the same period of 2017. Domestic royalty fees for the fourth quarter totaled $80.3 million, a 10 percent increase from the fourth quarter of 2017.
- The number of domestic franchised hotels and rooms, as of December 31, 2018, increased 6.6 percent and 9.0 percent, respectively, from December 31, 2017.
- International franchised hotels and rooms as of December 31, 2018, increased 2.8 percent and 5.8 percent, respectively, from December 31, 2017.
- Opened the 40th location, initiated a record number of ground-breakings and have 23 hotels under active construction for its upscale Cambria brand.
- Opened the 1,600th domestic Quality brand hotel, proving its timelessness and consistent demand.
- Effective domestic royalty rate for full year 2018 increased 14 basis points over the prior year and increased 11 basis points for the fourth quarter 2018 over the prior year fourth quarter.
- Domestic systemwide revenue per available room (RevPAR) increased 0.7 percent and 1.2 percent for the fourth quarter and full year 2018, respectively, compared to the same periods of the prior year.
- New executed domestic franchise agreements totaled 287 in the fourth quarter of 2018, bringing the total full year executed domestic franchise agreements to 756, an increase of 7 percent over the prior year.
- New domestic franchise agreements for the company's extended-stay brands totaled 161 for the full year 2018, an increase of 156 percent (37 percent excluding WoodSpring Suites) from the comparable period of 2017.
- New construction domestic franchise agreements increased 30 percent for full year 2018 compared to full year 2017.
- The company awarded 155 new conversion domestic franchise agreements in the fourth quarter of 2018, bringing the total full year new conversion domestic franchise agreements to 434.
- The company's total domestic pipeline of hotels awaiting conversion, under construction, or approved for development, as of December 31, 2018, increased 20 percent to 1,026 hotels from December 31, 2017.
- The new-construction domestic pipeline totaled 773 hotels at December 31, 2018, a 27 percent increase from December 31, 2017.
Use of Cash Flows
During full year 2018, the company paid cash dividends totaling approximately $49 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 full year 2018, the company repurchased approximately $149 million in shares of common stock 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 December 31, 2018, the company had authorization to purchase up to 2.2 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 $105 million in support of the brand's development during the year ended December 31, 2018. The company also recycled approximately $10 million of prior investments in Cambria Hotels development projects, resulting in net advances of $95 million for the year ended December 31, 2018. 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 December 31, 2018, the company had approximately $342 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.
Effective January 1, 2018, the company adopted the new revenue recognition standard ("ASC 606") on a full retrospective basis. As a result, the condensed financial statements for the three months and year ended December 31, 2017, have been recast as if the new revenue standard had been adopted on January 1, 2016. The adoption of ASC 606 did not change the timing of cash flows or cash available for return to shareholders but did alter the timing of earnings recognition. In addition, the adoption of ASC 606 resulted in changes in classifications of certain items within the company's financial statements. A discussion of the revenue recognition changes can be found in the 2017 Form 10-K the company filed on March 1, 2018, as well as the quarterly reports filed on Form 10-Q for the three, six and nine months ended in 2018 which are available on Choice's Investor Relations website at http://investor.choicehotels.com/.
The adjusted numbers in the company's outlook exclude the net surplus or deficit generated from the company's marketing and reservation system activities, 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 $193 million and $201 million, or $3.44 to $3.58 per diluted share.
- Adjusted diluted EPS for full-year 2019 is expected to range between $4.00 to $4.13. The company expects full-year 2019 adjusted net income to range between $224 million and $232 million.
- The company's first quarter 2019 adjusted diluted EPS is expected to range between $0.72 to $0.76.
- 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 percent and 3 percent.
- Domestic RevPAR is expected to remain unchanged for the first quarter of 2019 against a strong comparable of 3.5 percent growth in the first quarter of 2018. Domestic RevPAR is expected to increase between 0.5 percent and 2.0 percent 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 22 percent for first quarter and full-year 2019.
- 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.
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