Choice Hotels International, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Choice is primarily a hotel franchisor, with five owned Cambria hotels. At quarter-end, its system comprised 7,111 open hotels and 944 hotels in the development pipeline.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $278.3 million | $151.7 million | $461.3 million | $369.9 million |
| Operating income | $119.0 million | $7.9 million | $163.0 million | $54.7 million |
| Net income (loss) | $85.9 million | $(2.4) million | $108.2 million | $53.0 million |
| Diluted EPS | $1.53 | $(0.04) | $1.93 | $0.95 |
- Q2 revenue excluding marketing and reservation system activity, a company-reported non-GAAP measure, was $142.4 million versus $72.1 million. Royalty fees rose 112.6%; domestic RevPAR increased 96.2% year over year.
- Domestic Q2 RevPAR remained 1.1% below Q2 2019. The year-over-year comparison reflects the severe pandemic impact on Q2 2020.
- Reported operating margin was approximately 42.8% in Q2 2021 versus 5.2% in Q2 2020; these ratios use total revenue, including marketing-system revenue that is contractually matched to related spending.
- Six-month operating cash flow was $102.4 million, compared with $1.5 million in 2020. Investing cash outflow was $33.0 million; financing cash inflow was $3.8 million. Cash increased to $308.0 million from $234.8 million at year-end.
- Long-term debt was $1.060 billion. The $600 million revolving facility was undrawn; management reported approximately $908 million of cash and available borrowing capacity. Current assets were $607.5 million and current liabilities $316.0 million.
- Six-month marketing and reservation system revenue exceeded related expenses by $16.1 million, versus expenses exceeding revenue by $29.7 million in the prior-year period.
Changes, outlook and key risks
- Improved travel demand drove higher royalties and operating income, while SG&A declined year over year through lower credit-loss provisions and cost-containment measures. The six-month 2021 results also included a $4.8 million impairment of an equity-method investment and a $2.6 million gain on sales of investments.
- The prior-year six-month tax comparison is unusual: 2020 included a $30.6 million tax benefit related to an international reorganization. The 2021 six-month effective tax rate was 23.0%, versus (92.3)% in 2020.
- Management said industry recovery had commenced but could take multiple years to return to 2019 operating performance. COVID-19 resurgences and variants, vaccination pace, travel demand, and franchisee access to capital and construction resources remain uncertain. Management said cash flow and financing capacity should meet expected needs and reported compliance with credit covenants; total leverage ratio was 3.08x.
- No full-year earnings or revenue guidance is provided in the filing. Management anticipated marketing and reservation system revenues to be in line with expenses for full-year 2021. It expected approximately $25 million of 2021 dividends at the then-current rate, subject to board declaration. A quarterly dividend of $0.225 per share was declared in May; the share-repurchase program resumed, though program purchases in the first half were limited.
- Capital commitments include up to $271.4 million of franchise incentive payments, subject to franchisee conditions; $8.3 million of potential joint-venture contributions; and $7.7 million of conditional franchisee financing. Cambria-related financial support outstanding was $541.7 million; management expected outstanding support not to exceed $725 million over the next three to five years.
- Net notes receivable were $138.8 million, including $68.7 million on non-accrual status; $42.0 million of notes were past due. Credit quality, collateral values, and franchisee repayment capacity merit attention. Maximum principal exposure under limited payment guarantees was $5.7 million, with performance considered remote by the Company.
- The Company reported no material litigation expected to have a material adverse effect, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30, 2021.
Important facts for investors to verify
- Whether the RevPAR recovery persists and progresses beyond the 2019 comparison, particularly amid changing pandemic conditions.
- Whether development-pipeline hotels open as planned and the associated franchise incentives and Cambria investments generate returns.
- Credit performance of notes receivable, especially non-accrual and past-due loans, and any changes in loss allowances or collateral valuations.
- Debt maturities, covenant headroom, and the effect of dividends and resumed repurchases on liquidity and leverage.
- The sustainability of earnings growth after considering prior-year pandemic comparisons, the unusual 2020 tax benefit, and investment-related gains and impairments.