Choice Hotels International, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Choice is primarily a hotel franchisor, with five owned Cambria hotels. Its system included 7,145 open hotels and 1,055 hotels in development or awaiting conversion.
Financial results and liquidity
- Revenue: $218.2 million, essentially unchanged from $218.3 million a year earlier. Excluding marketing and reservation system fees, revenue was $107.8 million, down 0.4%.
- Operating income: $46.3 million versus $45.1 million; operating margin was approximately 21.2% versus 20.6%.
- Net income and EPS: Net income was $55.5 million, or $0.99 diluted EPS, compared with $30.1 million and $0.54. The improvement chiefly reflects a $30.6 million tax benefit from a foreign-entity reorganization; the effective tax rate was negative 82.5%. Excluding that reorganization, management reported an 18.1% effective rate.
- Cash flow: Operating cash flow was $5.8 million, down from $17.9 million. Investing used $14.8 million; financing provided $297.9 million, largely reflecting revolver borrowing. Cash increased to $322.0 million from $33.8 million at year-end.
- Debt and liquidity: Debt totaled $1.216 billion at quarter-end, up from $851.6 million at December 31, 2019. The company drew $396.8 million on its $600 million revolving facility, primarily as a precautionary liquidity measure. Management reported approximately $507 million of cash plus available revolver capacity. On April 16, it entered a $250 million term loan and used the proceeds to reduce revolver borrowings.
- Other balance-sheet items: Total assets were $1.704 billion and shareholders’ deficit was $43.9 million. The allowance for notes receivable losses rose to $13.1 million from $4.6 million at year-end, mainly reflecting adoption of the expected-credit-loss standard and its $6.8 million after-tax opening retained-earnings adjustment.
Material changes versus Q1 2019
- Domestic royalty fees fell 12% to $66.3 million as domestic RevPAR declined 15.0%; occupancy was 46.1% versus 52.2%, and average daily rate fell 3.8%. March RevPAR was down 36.5% year over year.
- Domestic franchised rooms grew 2.7%, and the effective royalty rate rose 10 basis points to 4.94%, partly offsetting weaker hotel performance. International royalty fees also declined, despite system growth.
- Marketing and reservation system expenses exceeded related revenue by $20.1 million, compared with a $9.8 million deficit a year earlier. SG&A fell $10.7 million, partly because the vacation-rental software business had been sold in 2019; 2019 also included $10.4 million of goodwill and long-lived-asset impairments that did not recur.
- Owned hotels contributed $9.4 million of revenue and $6.0 million of expense, reflecting hotels acquired or opened in 2019. A $0.6 million debt-extinguishment loss followed repayment of the construction loan.
Outlook, actions and risks
- COVID-19 sharply reduced travel demand late in the quarter. Domestic occupancy was below 50% for March and fell to roughly 26%–33% daily in the final ten days; the company said weaker trends continued into April and May. About 10% of domestic hotels were temporarily suspended at March 31, versus about 3% on May 6; approximately one-quarter of international hotels were temporarily suspended at March 31.
- Management expected a significant effect on Q2 results and did not expect material industry improvement until virus spread was contained, restrictions eased and economic forecasts improved. It gave no quantitative earnings or revenue guidance. The duration and severity of the downturn were uncertain.
- Mitigation actions included franchisee fee deferrals and relief, executive compensation reductions, furloughs and layoffs, a hiring freeze, suspension of the 401(k) match, reduced discretionary spending and investment, and suspension of share repurchases. Future undeclared dividends were suspended for at least the remainder of 2020; management provided no resumption timetable.
- Management cited the largely franchise-based model, suburban/small-town/interstate hotel mix, relative brand performance and potential leisure-travel recovery as supports, while warning that franchisee distress, fee collection, hotel closures, pipeline openings and reduced vendor activity could weigh on results and cash flows.
- The company reported compliance with its credit-facility covenants at March 31 and a 3.03x total leverage ratio. Risks include higher debt, covenant compliance, interest-rate and market exposure, and uncertainty around franchisee financing and hotel development. Management said ordinary-course litigation was not expected to have a material adverse effect; limited payment-guaranty exposure was capped at $7.5 million of principal, plus related costs and interest, and was considered remote.
Important facts for investors to verify
- How post-quarter occupancy, RevPAR, hotel suspensions and franchisee fee collections developed, and whether the reported May trends persisted.
- The scope and timing of fee deferrals or relief, marketing-system deficits, and credit-loss allowances as franchisee conditions evolve.
- Liquidity and debt after the April term loan, including revolver availability, leverage, covenant headroom and refinancing needs.
- The sustainability of earnings and EPS excluding the one-time tax benefit, and the effects of cost reductions and discontinued shareholder returns.
- Whether the development pipeline, committed franchisee financing and Cambria investment plans proceed; the filing notes that commitments are conditional and pipeline hotels may not open.