Choice Hotels International, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter earnings report. Choice operates primarily as a hotel franchisor; results include Radisson Hotels Americas from its August 11, 2022 acquisition date.
Business context
At year-end, the system included 7,487 open hotels with 627,804 rooms and a pipeline of 988 hotels with 94,558 rooms, excluding master development agreement commitments. The company acquired Radisson Hotels Americas for approximately $673.9 million, adding about 67,000 rooms across the Americas and expanding its upscale and upper-upscale presence. Franchising remains the core business; nine hotels were owned and 13 were managed.
Financial performance and liquidity
- Revenue: $1.402 billion, up 31.1% from $1.069 billion in 2021. This total includes $702.8 million of franchised- and managed-property revenues, largely matched by related expenses. Excluding those reimbursable revenues and $22.6 million of extraordinary WoodSpring termination fees, revenue was $696.7 million versus $540.5 million, up 28.9%.
- Profit: Operating income was $478.6 million, up 11.6%; net income was $332.2 million, up 15.0%. Diluted EPS rose to $5.99 from $5.15. The reported results include the acquisition and unusual items described below.
- Franchise performance: Legacy Choice domestic RevPAR increased 12.4% year over year; average daily rate rose 10.8% and occupancy improved 80 basis points. Domestic legacy Choice royalty fees increased 11% to $425.4 million. The legacy Radisson brands contributed $19.5 million of royalty fees from acquisition through year-end.
- Cash flow: Operating cash flow was $367.1 million, down from $383.7 million. Investing activities used $442.4 million, including $550.4 million net cash paid for Radisson, partly offset by asset-sale proceeds. Financing activities used $394.2 million, including $434.8 million of treasury-stock purchases and $52.5 million of dividends.
- Debt and liquidity: Total debt was $1.204 billion at year-end, versus $1.060 billion a year earlier. The company had $41.6 million of cash and approximately $240 million of unused capacity on its $600 million revolving facility, or about $281.6 million combined. The facility had $360 million outstanding; the company reported a 2.13x total leverage ratio and compliance with covenants.
- Capital returns: Choice repurchased 3.7 million shares for $429.4 million and paid $52.5 million in dividends during 2022. The quarterly dividend was $0.2375 per share. Management estimated regular 2023 dividends at approximately $49.6 million at the then-current rate, subject to board approval and future conditions.
Material changes and unusual items
- Radisson acquisition accounting remained preliminary at filing; the company recorded $39.6 million of transaction, transition and severance expense. Radisson contributed $104.2 million of revenue and $1.2 million of net income for the post-acquisition period reported.
- Choice recognized $22.6 million of termination-fee revenue after an ownership group exited 110 WoodSpring properties. The system lost 90 WoodSpring hotels during 2022, while legacy Choice domestic rooms overall declined 3.3%.
- Net gains on sale of business and assets were $16.2 million, primarily from hotel and land sales. Operating income growth also reflected higher royalty and procurement revenue, offset by increased SG&A and a lower surplus from franchised- and managed-property activities.
- On February 14, 2023, after year-end, Choice increased its revolving credit commitments to $850 million and replaced LIBOR with adjusted SOFR for U.S. dollar borrowings.
Outlook, risks and contingencies
Management provided no specific numeric earnings or revenue guidance in the supplied filing text. It said operating cash flow and available financing capacity were expected to cover future needs, including those of Radisson, and cited the franchise-led model’s relatively low capital requirements. Domestic RevPAR had recovered above both 2021 and 2019 levels, but the company noted uncertainty from pandemic developments, inflation, economic conditions and travel demand.
Key risks include integrating Radisson and realizing expected benefits; hotel demand, room rates and franchisee financial health; labor shortages and rising costs; indebtedness and variable interest rates; competition from online travel intermediaries; cybersecurity and data privacy; litigation and regulatory changes; and climate-related impacts. The acquisition’s final purchase-price allocation could change. The company disclosed $330.4 million of conditional franchise-acquisition payment commitments, a $22 million maximum guarantee under a Radisson hotel management arrangement, and $5.7 million of principal exposure under other limited guarantees; management considered performance under the latter guarantees remote. Management and counsel did not expect ordinary-course litigation to materially affect financial position, results or cash flow.
The financial-statement audit received an unqualified opinion. Management and the auditor concluded internal control over financial reporting was effective, but Radisson—representing 34% of year-end assets and 7% of 2022 revenue—was excluded from the year-end internal-control assessment while integration proceeded.
Important facts for investors to verify
- How much of reported growth reflects Radisson and reimbursable system revenues versus comparable ongoing franchise performance.
- Whether Choice achieves integration benefits and completes Radisson’s preliminary purchase-price allocation without material valuation changes.
- The durability of RevPAR and royalty growth, especially given room declines in certain legacy brands and the WoodSpring exits.
- Cash available after acquisition spending, share repurchases, dividends and franchise-development commitments, alongside debt costs and refinancing needs.
- Progress in integrating Radisson controls and any subsequent changes to the disclosed acquisition, guarantee or litigation exposures.