Choice Hotels International, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparative periods ended September 30, 2021. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Choice is primarily a hotel franchisor. At quarter-end, its system comprised 7,458 open hotels with 627,183 rooms and 970 hotels in development, conversion or awaiting opening. On August 11, 2022, Choice acquired Radisson Hotels Americas, adding approximately 67,000 rooms and brands in upscale and upper-upscale segments and international markets. The acquisition’s results are included from the closing date.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $414.3 million | $323.4 million | $1,040.0 million | $784.7 million |
| Operating income | $145.0 million | $159.1 million | $401.8 million | $322.1 million |
| Income before taxes | $136.8 million | $151.6 million | $366.6 million | $292.2 million |
| Net income | $103.1 million | $116.7 million | $276.6 million | $224.9 million |
| Diluted EPS | $1.85 | $2.08 | $4.93 | $4.01 |
| Operating cash flow | Not separately presented for quarter | Not separately presented for quarter | $265.2 million | $245.2 million |
Q3 total revenue included $197.4 million of other revenue from franchised and managed properties, largely reimbursable program and property costs. Management’s non-GAAP revenue measure, excluding reimbursable revenue and the $22.6 million WoodSpring termination fees, was $201.0 million versus $166.5 million. This measure is not GAAP.
Q3 revenue growth did not translate into higher operating income or net income. SG&A rose $35.1 million, including $24.9 million of Radisson transaction, transition and severance costs; the surplus from franchised and managed property activities also declined. For the nine months, higher royalty revenue and other operating contributions drove increased operating income and net income, partly offset by higher SG&A and other losses.
Legacy Choice domestic RevPAR increased 3.4% year over year in Q3 as average daily rate rose 5.8%, partly offset by occupancy declining 150 basis points. For the first nine months, domestic RevPAR increased 14.2%, with both rates and occupancy higher.
Cash, debt and capital allocation
- Cash and cash equivalents were $52.5 million at September 30, 2022, compared with $511.6 million at year-end 2021. Management reported $337.5 million of liquidity, including available revolver capacity.
- Total debt was $1.158 billion, including $313.1 million drawn on the $600 million revolving credit facility. The 2012 senior notes’ $216.6 million principal was repaid at maturity in July. The company reported a 2.16x total leverage ratio and compliance with its credit covenants.
- Nine-month investing cash outflow was $483.7 million, primarily reflecting the Radisson acquisition, partly offset by $140.6 million in proceeds from asset and business sales. Financing cash outflow was $239.5 million, including $246.5 million of treasury-stock purchases and $39.7 million of dividends paid.
- The company repurchased 2.07 million shares for $241.2 million during the first nine months and increased its share authorization by five million shares. Quarterly dividends declared were $0.2375 per share.
Outlook, risks and unusual items
- Management said cash, available borrowing capacity and operating cash flows should be sufficient for expected operating, investing and financing needs for at least the next 12 months. It cited the franchise-heavy, asset-light model and leisure and drive-to-market exposure as supportive, while noting uncertainty in travel demand.
- Management identified COVID-19 resurgence, economic and consumer-demand changes, inflation, foreign exchange, franchisee closures, and hotel-development and financing conditions as risks. It also highlighted uncertainty around integrating Radisson, realizing expected synergies, additional integration costs and potential acquired or contingent liabilities.
- Radisson’s preliminary purchase price allocation included $447.4 million of intangible assets and $68.5 million of goodwill; final acquisition accounting could change. Radisson contributed $40.2 million of revenue and a $1.4 million net loss during the 51 days included in the quarter.
- Other notable items included $22.6 million of termination-fee revenue from 110 WoodSpring units exiting the system, a $13.4 million net gain on business and asset sales in Q3, and a $2.2 million impairment on an owned hotel classified as held for sale. The hotel was sold in October 2022.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. The filing also disclosed $302.5 million of conditional franchise incentive commitments and a management-agreement guarantee capped at $22 million; no liability was recorded for that guarantee.
Investor verification priorities
- Assess recurring franchise performance separately from reimbursable program revenue, termination fees, asset-sale gains and acquisition-related costs.
- Track Radisson integration spending, franchise and room retention, expected synergies, and completion of the preliminary purchase-price allocation.
- Monitor room growth and pipeline conversion, particularly the 110 WoodSpring exits and legacy Choice system room declines.
- Reconcile liquidity and debt after acquisition funding, the revolver draw, share repurchases, and the maturity repayment; verify covenant headroom and variable-rate exposure.
- Evaluate whether RevPAR growth, rate increases and occupancy trends persist amid pandemic, inflation and broader travel-demand uncertainty.