Choice Hotels International, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company is primarily a hotel franchisor, with five owned Cambria hotels. Results were heavily affected by COVID-19 and its impact on travel and hotel demand.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $210.8 million | $310.7 million | $580.7 million | $846.7 million |
| Operating income | $51.1 million | $102.4 million | $105.3 million | $250.0 million |
| Net income | $14.5 million | $76.2 million | $67.5 million | $180.7 million |
| Diluted EPS | $0.26 | $1.36 | $1.21 | $3.23 |
| Operating margin | 24.2% | 33.0% | 18.1% | 29.5% |
| Net margin | 6.9% | 24.5% | 11.6% | 21.3% |
Margins are calculated using reported total revenue, which includes marketing and reservation system revenue and related expenses that are contractually restricted and generally expected to break even over time.
- Revenue drivers: Q3 royalty fees fell 29.9% to $79.7 million; domestic royalty fees declined 29% as domestic RevPAR fell 28.8%. Q3 systemwide domestic occupancy was 52.1%, down 11.3 percentage points, and average daily rate declined 13.4%. For the first nine months, domestic RevPAR fell 32.3%.
- Cash flow: Operating cash flow for the first nine months was $69.7 million, down from $191.0 million. Capital expenditures were $32.2 million. Cash and cash equivalents were $192.0 million at September 30, versus $33.8 million at year-end 2019.
- Debt and liquidity: Total debt was $1.065 billion, up from $851.6 million at year-end. The company reported approximately $792 million of cash plus available revolving-credit capacity; revolver borrowings had been repaid in full by quarter-end. The reported total leverage ratio was 3.54x, and the company said it complied with financial covenants.
- Credit exposure: Trade receivables included a $44.2 million credit-loss allowance, versus $18.5 million at year-end. Notes-receivable allowance increased to $16.3 million from $4.6 million; $28.9 million of notes were on non-accrual status, compared with $1.7 million at year-end.
Changes versus the prior comparable period
- Q3 revenue declined 32.2%, operating income 50.1%, and net income 81.0% year over year. For the first nine months, revenue declined 31.4% and operating income 57.9%.
- Q3 operating income was pressured by lower royalties and other revenue, a $6.7 million marketing-and-reservation-system deficit, and a $4.3 million office-building impairment. SG&A fell $6.9 million, partly offsetting the decline.
- Q3 included a $16.0 million loss on extinguishment of debt related to the term-loan payoff and tender offer for 2022 notes. The company issued $450 million of 3.70% senior notes due 2031, repaid its $250 million term loan, and repurchased about $183.4 million principal of 2022 notes for a total purchase price of $197.8 million.
- Nine-month net income benefited from a $30.6 million tax benefit tied to a foreign-entity reorganization, partly offset by a $5.1 million valuation allowance recorded in Q3. The nine-month effective tax rate was negative 30.8%.
- Marketing and reservation system expenses exceeded related revenues by $6.7 million in Q3 and $36.4 million for the first nine months; the prior-year nine-month period had a $1.2 million surplus.
Outlook, management commentary and risks
- Management expected significant COVID-19 impacts to continue in Q4 and throughout 2020, with recovery dependent on the course of the pandemic, travel restrictions, consumer demand and economic conditions. The filing provides no numeric earnings or revenue guidance.
- Domestic occupancy had improved from Q2’s 39.1% to 52.1% in Q3. Management cited the system’s suburban, small-town and interstate locations, leisure exposure and drive-to markets as potential relative recovery advantages, and reported brand performance ahead of upper-midscale, midscale and economy competitors. These are management assessments, not guarantees.
- The company deferred franchise fees, offered franchisee relief, reduced staffing and discretionary costs, and limited investment. It suspended future undeclared dividends for at least the remainder of 2020 and paused share repurchases, with no timetable to resume either.
- Management anticipated lower franchise signings, fewer qualified-vendor purchases and marketing-system deficits for the remainder of 2020. Domestic franchise agreements awarded in the first nine months fell to 232 from 377 a year earlier. The development pipeline may not convert to open hotels.
- Key risks include prolonged or renewed pandemic effects, franchisee liquidity and payment difficulties, lower hotel demand and fee collections, reduced development, increased credit losses, and debt-market or covenant pressures. The company had $290 million of conditional commitments for franchisee incentives and $8.8 million of potential joint-venture contributions. Maximum principal exposure under specified VIE guarantees was $5.7 million; management considered performance remote.
- Unusual items also included a $4.3 million non-cash impairment of a commercial office building after its tenant declined lease extensions, and a $1.2 million charge for a discontinued self-development project during the nine-month period.
Important facts for investors to verify
- Whether occupancy, RevPAR and franchise royalty trends continued to improve or worsened after September 30, particularly amid subsequent pandemic developments.
- Whether the $792 million stated liquidity figure remains available, and how debt maturities, interest costs and covenant headroom compare with operating cash needs.
- Whether franchisees are paying deferred fees and receivables, and whether credit-loss allowances and non-accrual loans adequately reflect collection risks.
- Whether the $290 million franchisee incentive commitments and planned Cambria investments lead to cash outflows, and how quickly the hotel pipeline opens.
- Whether suspended dividends and repurchases resumed, and what conditions management set for restarting shareholder returns.