Choice Hotels International, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Figures are unaudited. Choice is primarily a hotel franchisor; its results include Radisson Hotels Americas from its August 2022 acquisition, so comparisons with 2022 exclude Radisson’s results and are not fully like-for-like.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $427.4 million | $368.0 million | $760.2 million | $625.7 million |
| Operating income | $124.4 million | $157.3 million | $202.2 million | $256.7 million |
| Net income | $84.7 million | $106.2 million | $137.5 million | $173.6 million |
| Diluted EPS | $1.65 | $1.89 | $2.66 | $3.08 |
| Operating cash flow | Not separately reported | Not separately reported | $125.7 million | $159.3 million |
Q2 GAAP operating and net margins were approximately 29.1% and 19.8%, compared with 42.8% and 28.9% a year earlier. First-half margins were approximately 26.6% and 18.1%, versus 41.0% and 27.7%. Revenue includes substantial franchised-property and managed-property reimbursements; excluding reimbursable revenue, the company’s non-GAAP revenue measure was $227.8 million in Q2, up from $178.6 million, and $402.8 million for the first half, up from $309.7 million.
Domestic RevPAR increased 0.5% in Q2 and 2.8% for the first half year over year; domestic room supply grew 8.8%. At June 30, the global system had 7,472 open hotels and a 960-hotel pipeline. Radisson contributed $73.1 million revenue and $7.7 million net income in Q2, and $135.5 million revenue and $11.0 million net income in the first half.
Balance sheet, liquidity, and capital returns
- Cash was $36.2 million at June 30, down from $41.6 million at year-end. Total debt was $1.389 billion, up from $1.204 billion; the revolving facility had $542.8 million drawn at a 6.27% effective rate.
- Current assets were $348.1 million and current liabilities $406.7 million. The company reported $341.2 million of cash plus available revolving-credit capacity and said it expected operating cash flow and borrowing capacity to meet anticipated needs. It was in compliance with debt covenants; reported total leverage was 2.36x.
- First-half operating cash flow fell to $125.7 million from $159.3 million. Investing used $59.2 million; financing used $72.1 million, including $234.5 million of treasury-stock purchases and $27.5 million of dividends paid. Cash ended the period at $36.2 million.
- The quarterly dividend rose 21% to $0.2875 per share. Management projected 2023 dividends of $1.15 per share, or about $56.6 million in total, subject to board approval. About 2.8 million shares remained under the repurchase authorization.
Material changes and management commentary
- Revenue grew, supported by expanded franchise-room count, higher effective royalty rates, partnership and procurement fees, and the Radisson acquisition. Domestic Q2 RevPAR growth was modest, with higher average daily rates partly offset by lower occupancy.
- Operating income and net income declined despite revenue growth. Management attributed the operating-income decline chiefly to a smaller surplus from franchised and managed-property activities, restructuring and Radisson integration costs, higher deferred-compensation-related expenses, and acquisition-related depreciation and amortization. Interest expense also rose with higher borrowing and rates.
- First-half net cash from operations also decreased, reflecting lower franchised-property activity surplus, increased franchise-acquisition payments, integration and restructuring costs, borrowing costs, and working-capital timing.
- No specific earnings or revenue guidance is provided in the filing. Management stated that liquidity was sufficient for expected needs. Its outlook depends on hotel demand, franchise growth, integration and realization of Radisson benefits, and market conditions; the pipeline may not convert to open hotels due to financing, construction, labor, or permitting constraints.
Risks, contingencies, and unusual items
- Franchise agreement acquisition-payment commitments totaled $336.0 million, payable only if franchisee conditions are met. The company also had $15.7 million of expected affiliate capital contributions and about $414.0 million invested or otherwise reflected on the balance sheet in support of Cambria and Everhome development.
- Potential exposures include a $22 million maximum guarantee related to eight managed hotels, for which no liability was recorded, and $4.1 million of maximum principal exposure under limited payment guarantees for unconsolidated affiliates; management considered performance under the latter guarantees remote.
- Notes receivable totaled $111.4 million before an $8.5 million allowance; $44.8 million was past due at June 30, including $28.9 million over 90 days. The filing reported $16.6 million of notes receivable on non-accrual status.
- Variable-rate debt was approximately $545 million; a hypothetical 10% change in the effective rate would change annual interest expense by $3.4 million. The company reported no derivative financial instruments.
- Management and legal counsel did not expect ongoing ordinary-course litigation to have a material adverse effect. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- How much of revenue growth and hotel-system expansion reflects Radisson acquisition effects versus organic growth.
- Whether franchise-property operating trends, especially occupancy and economy/extended-stay RevPAR, improve or weaken.
- Whether integration, restructuring, and acquisition-related costs subside, and how recurring corporate expenses evolve.
- Debt levels, borrowing costs, revolver availability, covenant compliance, and the company’s ability to fund buybacks, dividends, and development commitments.
- Collection and credit quality of overdue or non-accrual franchisee notes, and conversion of the development pipeline and conditional commitments into open hotels.