Choice Hotels International, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2021. Choice is primarily a hotel franchisor, with five owned Cambria hotels. Its system included 7,102 open hotels and 912 hotels in the development pipeline across the U.S. and more than 40 other countries and territories.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $323.4 million | $210.8 million | $784.7 million | $580.7 million |
| Operating income | $159.1 million | $50.7 million | $322.1 million | $105.4 million |
| Net income | $116.7 million | $14.5 million | $224.9 million | $67.5 million |
| Diluted EPS | $2.08 | $0.26 | $4.01 | $1.21 |
| Operating margin | 49.2% | 24.1% | 41.1% | 18.1% |
Revenue excluding marketing and reservation system activities, a company-defined non-GAAP measure, was $166.5 million in Q3 versus $103.6 million, and $400.3 million for nine months versus $283.5 million.
- Revenue and operating recovery: Q3 revenue increased 53% year over year, led by royalty fees, which rose $47.7 million. Domestic RevPAR increased 56.4% year over year and 11.4% versus Q3 2019; domestic royalty growth also reflected room-system growth and a higher effective royalty rate.
- Cash flow: Nine-month operating cash flow was $245.2 million, up from $69.7 million. Investing activities used $52.6 million, including $46.1 million in property and equipment spending. Cash increased to $415.1 million from $234.8 million at year-end 2020.
- Debt and liquidity: Total debt was $1.06 billion, including $216.2 million current debt due in 2022; long-term debt was $843.8 million. The $600 million revolving facility was undrawn. The company reported a 2.65x total leverage ratio and compliance with applicable financial covenants.
- Balance sheet: Total assets were $1.87 billion and shareholders’ equity was $212.1 million, compared with a $5.8 million deficit at December 31, 2020. Current assets were $711.0 million and current liabilities $590.6 million.
Material changes versus the prior period
- The recovery in travel demand sharply improved revenue, earnings and hotel operating metrics compared with the pandemic-affected 2020 periods. Q3 domestic occupancy was 64.9%, versus 52.1%; average daily rate was $94.59, versus $75.29.
- Nine-month marketing and reservation system revenues exceeded related expenses by $56.7 million, versus expenses exceeding revenue by $36.4 million in 2020. These activities are contractually dedicated to the franchise system.
- Q3 2020 included a $16.0 million debt-extinguishment loss and a $4.3 million asset impairment; nine-month 2020 results also included a $30.6 million tax benefit related to a foreign-entity reorganization, partly offset by a valuation allowance. These items affect comparisons.
- The company resumed dividends and share repurchases in 2021 after suspending them in 2020. It declared quarterly dividends of $0.225 per share in May and September; nine-month cash dividends paid were $12.5 million. Repurchases under the program totaled 36,328 shares for $4.2 million.
Outlook, commentary and risks
- Management said recovery had begun and cited stronger leisure demand, the company’s leisure-travel mix and drive-to-market exposure as potential advantages. It noted that a return to 2019 industry operating performance was expected to take multiple years. The filing provides no specific earnings or revenue guidance.
- Management expected full-year 2021 marketing and reservation system revenues to exceed related expenses, reflecting improved RevPAR and spending management, and expected to pay approximately $25 million in dividends during 2021.
- COVID-19 effects remained uncertain, including the potential for resurgences or variants, vaccination rates, travel demand and hotel closures. Management said cash flows and available financing were adequate for expected needs; it reported approximately $1.0 billion in cash and available borrowing capacity.
- Credit exposure warrants attention: $68.7 million of notes receivable were on non-accrual status, versus $28.9 million at year-end 2020; $26.8 million of notes were more than 90 days past due. The company recorded a $4.8 million impairment of an equity-method investment in Q1.
- Commitments included up to $269.2 million of franchise agreement acquisition payments, subject to franchisee conditions, and $7.5 million of future joint-venture contributions. The company reported $561.9 million outstanding under financial support activities and expects such support not to exceed $725 million over the next three to five years.
- Other notable items: a September settlement involving collateral-dependent loans resulted in a deed in lieu of foreclosure; the hotel was recorded as acquired October 1, 2021. A new office lease commenced after quarter-end, with an expected $34.6 million lease liability and $25.3 million right-of-use asset. Management said ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether RevPAR, royalty growth and the development pipeline remain resilient as pandemic conditions and travel demand evolve.
- The recoverability and performance of notes receivable, including non-accrual and past-due loans, and the hotel received through the deed-in-lieu settlement.
- Upcoming debt maturities, particularly the $216.2 million of notes due in 2022, and continued covenant compliance and revolving-credit availability.
- The extent and timing of franchisee financing commitments and Cambria-related investments, and the sustainability of dividends and share repurchases.
- How much reported earnings growth reflects ongoing operations versus comparison effects from 2020 impairments, debt-extinguishment costs and tax items.