Business context and reporting period
Choice Hotels International, Inc. is primarily a hotel franchisor. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the same period in 2021. At quarter-end, its system included 6,996 open hotels with 577,714 rooms and 903 hotels with 81,526 rooms under construction, awaiting conversion or approved for development.
Financial results and position
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $257.7 million | $182.9 million |
| Revenue excluding marketing and reservation activities | $131.1 million | $91.4 million |
| Operating income | $99.4 million | $44.0 million |
| Net income | $67.4 million | $22.3 million |
| Diluted EPS | $1.20 | $0.40 |
| Operating margin | 38.6% | 24.0% |
| Net margin | 26.1% | 12.2% |
| Cash provided by operating activities | $63.9 million | $0.1 million |
Revenue excluding marketing and reservation system activities, a company-defined non-GAAP measure, increased 43.4%. Marketing and reservation system revenues exceeded related expenses by $12.9 million, compared with a $6.7 million deficit in Q1 2021. The company says these fees are restricted to system-wide marketing and reservation services, and it generally excludes them when assessing operating performance.
At March 31, cash and cash equivalents were $527.2 million. Total debt was $1.061 billion, including $216.5 million due July 1, 2022; the $600 million revolving credit facility was undrawn. The company reported a 2.17x total leverage ratio and compliance with credit covenants. Management described cash, available borrowing capacity and operating cash flows as sufficient for expected needs for at least the next 12 months.
Investing cash outflow was $22.5 million, including $26.8 million of property and equipment investment and $8.5 million of proceeds from a land sale. Financing cash outflow was $25.8 million, including $14.8 million of treasury stock purchases and $13.2 million of dividends paid. The quarterly dividend declared was $0.2375 per share. The filing estimates aggregate 2022 regular dividends of approximately $53 million at the then-current rate and share count, subject to board declarations and other conditions.
Material changes versus Q1 2021
- Revenue rose 40.9%; operating income increased $55.4 million and net income increased $45.1 million.
- Domestic RevPAR increased 35.9%, driven by a 21.2% rise in average daily rate and a 570-basis-point increase in occupancy. Domestic RevPAR was 10.4% above Q1 2019.
- Domestic royalty fees increased 38.0% to $87.0 million. The effective royalty rate rose 3 basis points to 5.05%, while domestic franchised rooms declined 2.8% year over year.
- Domestic franchise awards totaled 93 agreements for 11,377 rooms, versus 89 agreements for 11,780 rooms. Relicensing contracts increased to 138 from 52.
- International royalty fees rose $0.8 million despite a smaller international system. International open hotels and rooms declined year over year.
- Affiliate results improved to a net gain of $0.2 million from a $6.0 million net loss, which included a $4.8 million impairment in Q1 2021. Cash from operations increased substantially, reflecting higher operating income and working-capital timing.
Outlook, commentary, risks and unusual items
The filing provides no specific full-year revenue or earnings guidance. Management cited improved travel and operating trends, the company’s leisure-oriented mix and drive-to-market presence, and its primarily franchise-based model. It cautioned that the outlook remains subject to COVID-19 resurgences or variants, travel demand and consumer confidence, economic conditions, and the availability of construction labor, materials, financing and approvals. Management also noted inflation monitoring; it believes moderate inflation may generally be accompanied by comparable or greater hotel room-rate increases.
Commitments included up to $277.0 million of conditional franchise agreement acquisition payments, $7.8 million of potential affiliate capital contributions, and approximately $6.2 million of conditional franchisee loan or credit commitments. The company reported approximately $473.7 million of balance-sheet support for Cambria and Everhome Suites, generally targeted for recycling within five years, and a current board-authorized investment ceiling of $975 million. Limited payment guarantees had maximum principal exposure of $5.7 million plus expenses and accrued interest; management considered performance remote.
In April 2022, the company settled a collateral-dependent loan through a deed in lieu of foreclosure and acquired an operating hotel, to be recorded as an asset acquisition in Q2. It also entered purchase and sale agreements in April and May to sell two owned hotels, with sales expected in 2022 and gains anticipated upon closing. These are subsequent events, not Q1 results. Management said ordinary-course litigation was not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How the $216.5 million July 2022 note maturity was repaid or refinanced, and the resulting effect on liquidity, debt and interest expense.
- Whether the strong Q1 RevPAR and franchise-fee trends continued, particularly in light of COVID-19, economic and travel-demand uncertainty.
- Progress and conversion rates for the hotel development pipeline, and the extent to which conditional franchise incentives and other commitments are drawn.
- Closing, proceeds and realized gains from the two planned hotel sales, and the accounting and operating impact of the hotel acquired in the April loan settlement.
- Future capital allocation, including dividends, share repurchases, and investment levels relative to the stated authorization and liquidity needs.