Choice Hotels International, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 6, 2020. Choice is primarily a hotel franchisor, with five owned Cambria hotels. Its system included 7,118 open hotels and 597,018 rooms, plus 1,035 hotels in development or awaiting conversion.
Financial results
Amounts below are in millions, except per-share data. Q2 comparisons are year over year; first-half comparisons cover six months ended June 30.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $151.7 | $317.7 | $369.9 | $536.0 |
| Operating income | $7.9 | $102.5 | $54.2 | $147.6 |
| Net income (loss) | $(2.4) | $74.4 | $53.0 | $104.5 |
| Diluted EPS | $(0.04) | $1.33 | $0.95 | $1.87 |
| Operating cash flow | Not reported quarterly | $1.5 | $97.7 |
- Q2 revenue fell 52%; operating income declined 92%, and the company reported a net loss. First-half revenue fell 31%, operating income 63%, and net income 49%.
- Q2 operating margin was approximately 5.2% versus 32.3% a year earlier; net margin was approximately negative 1.6% versus 23.4%. First-half operating margin was approximately 14.7% versus 27.5%.
- Royalty fees fell 53% in Q2 and 36% in the first half. Domestic RevPAR declined 49.6% in Q2 and 34.5% in the first half. Q2 domestic occupancy was 39.1% and average daily rate was $67.21.
- Marketing and reservation system expenses exceeded related revenues by $9.6 million in Q2 and $29.7 million in the first half; those activities are contractually intended to break even over time. Revenue excluding these activities, a company-reported non-GAAP measure, was $72.1 million in Q2 and $179.8 million in the first half.
- First-half net income included a $30.6 million tax benefit from a reorganization of foreign legal entities. The resulting effective tax rate was negative 92.3%.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $314.1 million, compared with $33.8 million at year-end 2019. Total debt was $1.239 billion, up from $851.6 million; shareholders’ deficit was $42.8 million.
- First-half operating cash flow was $1.5 million, down from $97.7 million, primarily reflecting weaker operating results and working-capital timing. Investing cash use was $29.5 million; financing provided $308.9 million, including increased borrowings.
- The company drew an additional $170.3 million on its $600 million revolving facility and entered into a $250 million term loan in April to strengthen liquidity. Management reported approximately $725.6 million in cash and additional available borrowing capacity at June 30. The company was in compliance with its financial covenants; reported total leverage ratio was 3.69x.
- After quarter-end, Choice issued $450 million of 3.70% notes due 2031, used proceeds to repay the term loan and fund the tender of approximately $183.4 million principal of 5.75% notes due 2022. The tender and repayment were expected to generate an approximately $16 million extinguishment loss in Q3.
- First-half cash dividends paid were $25.2 million. Future, undeclared dividends were suspended for at least the remainder of 2020, and share repurchases were temporarily suspended. First-half repurchases under the program totaled $43.3 million.
Changes, outlook and risks
- COVID-19 sharply reduced travel demand and hotel performance. Domestic RevPAR fell 60.1% year over year in April and 49.6% for Q2. Weekly domestic occupancy exceeded 50% in the final week of June; July domestic RevPAR was down approximately 33.3% year over year. Less than 1% of domestic hotels were temporarily suspended at June 30, versus approximately 10% at March 31; about 7% of international hotels were suspended at June 30.
- Management expected material impacts on Q3 and full-year 2020 results, but expected Q3 impact to be less severe than Q2. The filing provides no quantified earnings or revenue guidance and emphasizes substantial uncertainty about the pandemic’s duration and effects.
- Management cited the company’s franchise-based model, suburban/small-town/interstate exposure and leisure-oriented, drive-to markets as potential recovery advantages. It also reported that its brands were performing ahead of upper-midscale, midscale and economy competitors, based on industry data.
- Mitigation actions included fee deferrals and relief for franchisees, workforce reductions, executive compensation cuts, a hiring freeze, suspension of the 401(k) match, reduced discretionary spending and paused investment activity. Management said operating cash flows and available financing were adequate for expected needs.
- Risks include renewed restrictions or outbreaks, sustained weakness in travel and consumer spending, franchisee liquidity problems or nonpayment, hotel closures, pipeline delays, higher debt and interest costs, and potential damage to brand or guest loyalty. Trade-receivable allowances were $36.3 million versus $18.5 million at year-end; notes-receivable allowances rose to $15.9 million from $4.6 million. Notes receivable on non-accrual status increased to $29.9 million from $1.7 million.
- Commitments included up to $288.2 million of conditional franchisee incentives, $9.3 million of future Cambria joint-venture contributions, and limited payment guaranties with maximum principal exposure of $5.7 million. Management considered payment under the guaranties remote. It reported no material litigation expected to adversely affect financial position, results or cash flows.
Investor facts to verify
- Whether hotel occupancy, RevPAR and franchisee fee collections continued to recover after the July 2020 trends disclosed in the filing.
- The aging and collectability of franchisee receivables and loans, including non-accrual balances and changes to credit-loss allowances.
- Cash flow, available revolver capacity, leverage and covenant headroom after the post-quarter debt issuance and tender offer.
- The sustainability of earnings excluding the $30.6 million one-time tax benefit and the expected Q3 debt-extinguishment charge.
- Whether and when dividends, repurchases, discretionary investment and franchise development activity resume.