Choice Hotels International, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Results include Radisson Hotels Americas, acquired August 11, 2022; the comparable 2022 quarter does not. Accordingly, year-over-year comparisons are not fully like-for-like.
Business context and operating performance
Choice is primarily a hotel franchisor, with owned and managed hotel operations and related services. At quarter-end, its system comprised 7,467 open hotels and 626,824 rooms, plus a development pipeline of 988 hotels and 96,111 rooms.
- Domestic system-wide RevPAR increased 5.9%, reflecting a 5.2% increase in average daily rate and a 34-basis-point increase in occupancy. Domestic franchised rooms grew 8.2% year over year, including Radisson rooms.
- Royalty, licensing and management fees rose 18.5% to $107.5 million. The company attributed the increase to Radisson contributions, higher RevPAR, system growth and a modest increase in effective royalty rate.
- Hotel Franchising & Management segment operating income was $105.5 million, versus $107.3 million. Corporate & Other operating loss widened to $27.6 million from $7.9 million.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $332.8 million | $257.7 million |
| Revenue excluding reimbursable franchised and managed property revenue (non-GAAP) | $175.0 million | $131.1 million |
| Operating income | $77.9 million | $99.4 million |
| Net income | $52.8 million | $67.4 million |
| Diluted EPS | $1.02 | $1.20 |
| Operating cash flow | $12.0 million | $63.9 million |
- Total revenue increased 29.1%, while revenue excluding reimbursable amounts increased 33.5%. Reimbursable franchise and managed-property revenues are largely offset by related expenses and can affect reported revenue and operating comparisons.
- Operating income fell 21.7% and net income fell 21.6%. Approximate GAAP operating margin declined to 23.4% from 38.6%; the pass-through revenue and expense structure affects this comparison.
- Management cited lower surplus from franchised and managed-property activities, Radisson integration and restructuring costs, higher depreciation and amortization, and higher interest expense as factors weighing on earnings. Q1 included $10.4 million of Radisson-related restructuring and transition expenses.
- Operating cash flow declined $51.9 million, with management citing lower property-activity surplus, restructuring and integration costs, higher franchise agreement acquisition payments, borrowing costs and working-capital timing. Net advances for franchise agreement acquisition costs were $28.1 million, versus $12.4 million.
- Cash and cash equivalents were $31.7 million at March 31, down from $41.6 million at December 31, 2022. Total debt was $1.379 billion, compared with $1.204 billion at year-end; long-term debt was $1.375 billion. Revolver borrowings were $533.6 million at an effective rate of 5.87%.
- The company reported $345.7 million of cash and available borrowing capacity, compliance with credit covenants, and a 2.39x total leverage ratio. Its revolving credit facility was increased from $600 million to $850 million in February 2023 and its U.S. dollar benchmark changed from LIBOR to adjusted SOFR.
- Investing cash outflow was $29.5 million; financing cash inflow was $7.4 million. Financing included $176.0 million of net revolver borrowings and $160.5 million of treasury-stock purchases. The company repurchased 1.2 million shares under its program for $146.8 million and paid $12.8 million in dividends.
Outlook, risks and unusual items
- The filing gives no specific financial forecast or quantified earnings guidance. Management stated that operating cash flows and available borrowing capacity are expected to be sufficient for anticipated operating, investing and financing needs.
- The board increased the quarterly dividend 21% to $0.2875 per share, effective for the April 2023 payment. The indicated 2023 annual rate is $1.15 per share, subject to future board declarations.
- Management expects to recycle approximately $502.0 million of existing hotel development, affiliate investment and lending support, generally within five years; current authorization limits outstanding investment to $975 million. An additional $334.6 million of franchise agreement acquisition payments is committed, subject to franchisee conditions.
- Other commitments include $11.6 million of potential affiliate contributions, approximately $0.7 million of conditional franchisee financing, and a third-party hotel management guarantee capped at $22 million. Management said future performance under the latter is expected to be sufficient and recorded no liability. Limited payment guarantees related to affiliates have maximum principal exposure of $5.7 million; management considered performance remote.
- Key disclosed risks include economic and travel-demand changes, interest rates and access to capital, Radisson integration and synergy realization, franchisee financial distress, labor shortages, inflation, cybersecurity, foreign currency and hotel development risks. The filing reported no material change to the risk factors in the 2022 Form 10-K.
- Management and legal counsel did not expect ongoing ordinary-course litigation to have a material adverse effect. Disclosure controls were assessed as effective at March 31, 2023; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of revenue and operating performance growth reflects Radisson’s inclusion rather than underlying comparable-system trends.
- Whether operating cash flow recovers after the quarter’s working-capital timing and elevated franchise incentive payments.
- Revolver utilization, borrowing costs, leverage and covenant headroom, particularly given variable-rate debt.
- Progress integrating Radisson, realizing expected synergies and completing the acquisition’s still-preliminary purchase-price allocation.
- The funding and timing of the $334.6 million conditional franchise-payment commitments and other development and guarantee exposures.
- Whether the increased dividend and share repurchases remain supported by cash generation and liquidity.