Choice Hotels International, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. Choice is primarily a hotel franchisor, operating 7,021 hotels with 569,108 rooms; its pipeline comprised 1,082 hotels with 87,061 rooms. Hotel franchising represents approximately 99% of revenue. The company adopted Topic 606 retrospectively, and comparative figures reflect that accounting change.
Financial performance and position
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Total revenue | $1,041.3 million | $941.3 million | Up 10.6% |
| Hotel franchising revenue | $483.4 million | $430.9 million | Up 12.2% |
| Operating income | $318.5 million | $289.7 million | Up 9.9%; operating margin 30.6%, versus 30.8% |
| Net income | $216.4 million | $122.3 million | Up 76.9%; diluted EPS $3.80 versus $2.15 |
| Operating cash flow | $242.9 million | $257.4 million | Down $14.5 million |
| Cash and cash equivalents | $26.6 million | $235.3 million | Down substantially after acquisition, investment and shareholder returns |
| Total debt | $754.6 million | $726.5 million | Up $28.1 million; long-term debt was $753.5 million |
Domestic royalty fees rose 11%, reflecting 9.0% growth in franchised rooms, 1.2% RevPAR growth and a higher effective royalty rate (4.75% versus 4.61%). Domestic RevPAR was $51.65, up 1.2%; ADR rose 1.5%, while occupancy fell 10 basis points to 63.3%. The filing reports a 1.97x total leverage ratio and compliance with credit-facility covenants at year-end. The $600 million revolving facility had $87.6 million drawn.
Fourth-quarter revenue was $245.0 million versus $221.5 million; operating income was $52.0 million versus $64.6 million. Net income was $31.5 million versus a $9.8 million loss in fourth-quarter 2017, when the tax-law changes materially reduced results.
Material changes versus 2017
- Choice acquired WoodSpring on February 1, 2018, adding 239 hotels at acquisition. The purchase consideration was $231.6 million, including $231.3 million cash paid net of cash acquired. WoodSpring contributed $18.9 million in royalties and was a significant source of franchising growth.
- Procurement services revenue increased 29% to $52.1 million. Franchise agreements awarded rose to 756 from 704, representing 60,161 rooms versus 53,042.
- Net income benefited from a lower effective tax rate: 20.8% in 2018 versus 50.9% in 2017. The prior-year rate included a $35.3 million transition tax and a $13.2 million deferred-tax-asset write-down related to U.S. tax reform.
- Operating cash flow declined despite higher operating income, partly because net cash advances for franchise agreement acquisition costs increased to $52.9 million from $30.6 million.
- Choice repurchased 1.8 million shares for $141.2 million and paid $48.7 million in dividends during 2018. Shareholders’ deficit was $183.8 million at year-end.
Outlook, risks and unusual items
- No specific consolidated earnings or revenue guidance is provided. Management said cash flow and available financing capacity should meet expected operating, investing and financing needs. It estimated 2019 regular dividends of approximately $47.9 million, subject to board approval and business conditions.
- Choice expects to deploy approximately $725 million over three to five years in support of Cambria development, subject to market and other conditions. At year-end, it had $342.0 million outstanding under related financial-support activities, plus significant conditional commitments, including $257.3 million for franchise agreement incentives.
- Fourth-quarter charges included a $4.3 million non-cash goodwill impairment for the SaaS vacation-rental business and a $2.8 million loan valuation allowance. The company said it would reassess that business’s assets in first-quarter 2019 after a key customer gave notice purporting to terminate its contract. Choice disputed the notice; any additional impairment was not estimable.
- In February 2019, Choice agreed to repurchase a previously transferred $24.4 million interest in a $50.1 million franchisee note while restructuring negotiations continued. The 2018 statements did not recognize this subsequent event.
- Principal risks include lodging demand and room-rate fluctuations, competition for franchisees and bookings, reliance on franchisee performance, cybersecurity and privacy incidents, international and currency exposure, debt and interest-rate risk, and potential losses on franchisee loans, investments and guarantees. Management reported no material litigation expected to adversely affect financial position, results or cash flows.
- Operating leases totaled $44.9 million in future minimum payments. Adoption of the new lease standard in 2019 was expected to materially increase reported assets and liabilities, with no material income-statement effect anticipated.
Investor verification priorities
- Assess how much 2018 growth came from WoodSpring acquisition effects versus organic room growth, royalty pricing and RevPAR.
- Review the cash decline, acquisition funding, share repurchases, debt maturities and remaining availability under the revolving facility.
- Track the $50.1 million franchisee note, its restructuring and the $24.4 million repurchase, along with the adequacy of loan-loss reserves.
- Monitor the disputed SaaS customer termination and any resulting impairment of remaining goodwill or intangible assets.
- Evaluate Cambria investment commitments and franchise incentive advances against hotel openings, repayment prospects and returns.