Choice Hotels International, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Choice is primarily a hotel franchisor, operating 7,463 hotels with 627,694 rooms; its global development pipeline included 980 hotels and 99,076 rooms. The 2023 results include a full period of Radisson Hotels Americas operations, acquired August 11, 2022, while 2022 results include only the post-acquisition period.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $425.6 million | $414.3 million | $1,185.8 million | $1,040.0 million |
| Operating income | $135.0 million | $145.0 million | $337.3 million | $401.8 million |
| Net income | $92.0 million | $103.1 million | $229.6 million | $276.6 million |
| Diluted EPS | $1.81 | $1.85 | $4.47 | $4.93 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $247.2 million | $265.2 million |
Q3 revenue rose 2.7%, while operating income fell 6.9% and net income fell 10.7%. For the nine-month period, revenue increased 14.0%, but operating income declined 16.0% and net income declined 17.0%. Reported operating margin was approximately 31.7% in Q3 and 28.4% for nine months, compared with 35.0% and 38.6%, respectively, in 2022.
Royalty, licensing and management fees were $148.5 million in Q3, up from $144.0 million, and $396.5 million for nine months, up from $356.2 million. Domestic system-wide RevPAR rose 1.4% for nine months, reflecting a 3.0% increase in average daily rates offset partly by occupancy down 100 basis points. Q3 domestic RevPAR declined 0.8% as occupancy fell 130 basis points.
Revenue excluding reimbursable franchised and managed property revenue and the prior-year extraordinary termination fee was $219.6 million in Q3 versus $201.0 million, and $622.4 million for nine months versus $510.7 million. These are company-defined non-GAAP figures.
Balance sheet, debt and capital allocation
- At September 30, 2023, cash was $36.4 million, total assets $2.23 billion and total shareholders’ equity $72.4 million.
- Total debt was $1.396 billion, including $549.4 million drawn on the $850 million revolving credit facility. The company reported a 2.34x total leverage ratio and compliance with its credit agreement covenants.
- Management reported $334.9 million of primary liquidity, including cash and available revolver capacity, and expects available liquidity, operating cash flows and debt-market access to meet expected needs. Current liabilities exceeded current assets by approximately $66.2 million.
- Nine-month capital spending on property and equipment was $81.4 million. The company repurchased 2.4 million shares for $292.9 million, including excise tax, and paid $42.1 million in dividends. The quarterly dividend was increased 21% to $0.2875 per share; projected 2023 dividends were $1.15 per share, subject to board approval.
Material changes and unusual items
- Reported income comparisons were affected by prior-year items: Q3 2022 included $22.7 million of WoodSpring termination-fee revenue and a $13.4 million net gain on asset and business sales; nine-month 2022 included the same termination fee and a $16.7 million gain.
- Interest expense increased $6.8 million in Q3 and $14.4 million for nine months, primarily from higher revolving borrowings and interest rates. Nine-month SG&A increased $37.6 million, including higher deferred-compensation expense and corporate costs; Q3 SG&A declined $15.3 million, partly due to lower Radisson integration and restructuring costs.
- Nine-month cash from operations declined $18.0 million. Net franchise agreement acquisition-cost payments rose to $72.9 million from $32.9 million, while the surplus from franchised and managed property activities fell to $19.5 million from $55.4 million.
- The company finalized the Radisson Hotels Americas purchase-price allocation in Q3 2023. The acquisition’s accounting purchase price was $673.9 million.
Outlook, risks and contingencies
- No specific earnings or revenue forecast is provided in this filing. Management expects liquidity sources to be sufficient for anticipated operating, investing and financing requirements. The hotel pipeline supports growth, but openings may be delayed or not occur because of financing access, construction costs and labor, or permitting.
- Management continues to support development of Cambria and Everhome through financing, investments and guarantees. Such support totaled approximately $436.7 million on the balance sheet; the company targets recycling investments within five years and expects them not to exceed $975 million under current authorization. It also had up to $350.3 million of conditional franchise agreement acquisition-payment commitments.
- The company disclosed a proposal to acquire Wyndham Hotels & Resorts for $90 per share in cash and stock. Wyndham had rejected the proposal; there is no assurance a transaction will result.
- Variable-rate debt was approximately $545 million at an effective rate of 6.40%. A hypothetical 10% rate change would change annual interest expense by approximately $3.5 million. Principal risks include economic and travel-demand changes, integration and realization of Radisson synergies, franchisee financial health, labor and construction constraints, inflation, cybersecurity, indebtedness and the Wyndham proposal.
- Maximum unrecorded exposure under limited payment guarantees for certain affiliate developments was $4.5 million plus specified interest and expenses; management considered performance unlikely. A separate hotel-management guarantee had a maximum of $22 million, with no liability recorded. Management did not expect ordinary-course litigation to have a material adverse effect.
Key facts for investors to verify
- How much reported growth reflects the full-year inclusion of Radisson and how much represents comparable underlying system performance.
- Whether hotel occupancy, RevPAR and pipeline conversions sustain royalty growth, particularly given Q3 domestic RevPAR softness.
- Effects of revolving-credit borrowings and interest rates on interest expense, leverage and covenant headroom.
- Cash requirements and returns from share repurchases, dividends, development support and the $350.3 million of conditional franchise-payment commitments.
- Progress and potential financing or execution implications of the Wyndham proposal, and the likelihood of realizing Radisson integration benefits.