Choice Hotels International, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Choice is primarily a hotel franchisor, with six owned Cambria hotels. At quarter-end, its system included 6,970 open hotels (574,888 rooms) and 908 hotels in the development pipeline (82,629 rooms).
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $368.0 million | $278.3 million | $625.7 million | $461.3 million |
| Operating income | $157.3 million | $119.0 million | $256.7 million | $163.0 million |
| Net income | $106.2 million | $85.9 million | $173.6 million | $108.2 million |
| Diluted EPS | $1.89 | $1.53 | $3.08 | $1.93 |
| Operating cash flow | Not presented for the quarter | $159.3 million | $102.4 million |
- Q2 revenue rose 32.2% and net income rose 23.6% year over year; six-month revenue rose 35.6% and net income rose 60.4%.
- Operating margin was approximately 42.8% in Q2, broadly unchanged from the prior-year quarter; the six-month margin increased to approximately 41.0% from 35.3%.
- Q2 domestic RevPAR increased 14.3% year over year and 13.0% versus Q2 2019, driven by a 15.3% increase in average daily rate, partly offset by a 50-basis-point occupancy decline.
- Cash and cash equivalents were $607.2 million at June 30. Total debt was $1.061 billion, including $216.6 million due July 1, 2022; the $600 million revolving credit facility was undrawn. Management described cash plus available revolver capacity as approximately $1.2 billion.
- Six-month investing cash outflow was $24.0 million, including $49.9 million of property and equipment spending; financing cash outflow was $39.3 million. The company paid $26.5 million in dividends and repurchased $9.9 million of shares under its repurchase program.
Material changes versus the prior period
- Growth reflected stronger hotel demand and room rates, increased royalty and procurement revenues, and higher marketing and reservation system revenues. The latter program’s revenues exceeded its expenses by $48.5 million in the first half, versus $16.1 million a year earlier; those fees are contractually dedicated to system activities.
- Domestic royalty growth occurred despite a 2.9% decline in domestic franchised rooms. The domestic system had 85 fewer hotels and 13,640 fewer rooms than a year earlier. International system size also declined, while international royalty revenue increased with improved RevPAR.
- SG&A increased $9.4 million in Q2, reflecting higher compensation, benefits, travel and events as pandemic-era cost measures eased. A $3.3 million Q2 gain on sale of business and assets also contributed to operating income.
- Operating cash flow increased $56.9 million year over year, primarily from higher operating income and working-capital timing. Property and equipment investment more than doubled from $23.4 million to $49.9 million.
Outlook, risks and unusual items
- No specific financial guidance is provided in the supplied filing text. Management expects cash, operating cash flow and borrowing capacity to cover expected needs for at least 12 months, including the pending Radisson transaction.
- On June 12, Choice agreed to acquire Radisson Hotels Americas for approximately $675 million, adding about 67,000 rooms. The transaction had not closed as of August 4, 2022; management expected an August closing and anticipated drawing on the revolver. Risks include financing, integration, execution, added debt and failure to achieve anticipated benefits.
- The $216.6 million 2012 Senior Notes were repaid at maturity on July 1, 2022. The filing reports a 2.09x total leverage ratio at June 30 and compliance with applicable credit covenants.
- On July 19, an ownership group gave notice of its intent to exit 111 open WoodSpring properties in September; the company said it would evaluate the matter in Q3. Potential effects on royalties and termination fees were not quantified.
- A Cambria hotel classified as held for sale at June 30 was sold in July; the company expected to recognize an approximately $16 million gain in Q3. A separate hotel sale completed in Q2 contributed to the reported Q2 gain. In April, the company also received an operating hotel valued at $20.4 million in settlement of collateralized franchisee loans.
- Risks include COVID-19 resurgence and travel-demand uncertainty, inflation, franchisee financial stress, development costs and delays, foreign currency exposure, and market fluctuations. Management reported no material litigation expected to adversely affect the company and stated disclosure controls were effective at quarter-end.
Investor verification priorities
- Confirm whether and when the Radisson acquisition closed, its final funding mix, resulting debt and integration costs, and realized benefits.
- Assess the impact of the planned exit of 111 WoodSpring hotels, including actual departures, termination-fee collections and royalty effects.
- Track RevPAR, occupancy, room growth and pipeline conversion, particularly given declining domestic and international system room counts.
- Review the Q3 recognition and cash proceeds from the July Cambria sale, and distinguish recurring earnings from asset-sale gains and deferred-compensation investment fluctuations.
- Monitor liquidity and covenant headroom after repayment of the 2022 notes, acquisition funding, capital spending and shareholder returns.
- Evaluate franchisee loan and receivable credit quality: notes receivable totaled $113.9 million before allowances, with $17.4 million past due over 90 days at June 30.