Choice Hotels International, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless stated otherwise. Choice is primarily a hotel franchisor, with five owned Cambria hotels. Its system comprised 7,138 open hotels and 603,767 rooms, plus 1,001 hotels and 84,450 rooms in the development pipeline.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Total revenue | $182.9 | $218.2 | Down 16.2% |
| Revenue excluding marketing and reservation system activities | $91.4 | $107.8 | Down 15.2% |
| Operating income | $44.0 | $46.8 | Down 6.0%; reported operating margin was 24.0% versus 21.4%, though marketing-system activity affects comparability |
| Income before taxes | $28.7 | $30.4 | Down 5.6% |
| Net income | $22.3 | $55.5 | Down 59.7%; prior-year result included a $30.6 tax benefit from an international reorganization |
| Diluted EPS | $0.40 | $0.99 | Down 59.6% |
| Operating cash flow | $0.1 | $5.8 | Lower by $5.7, mainly due to operating performance and working-capital timing |
| Capital expenditures | $9.4 | $6.2 | Higher, primarily supporting Cambria growth |
| Cash and cash equivalents | $223.0 at March 31 | $234.8 at December 31, 2020 | Quarter-end cash declined by $11.8 |
| Long-term debt | $1,059.2 at March 31 | $1,058.7 at December 31, 2020 | Substantially unchanged |
| Current assets / current liabilities | $445.1 / $243.8 | $432.9 / $255.8 at December 31 | Quarter-end current ratio was approximately 1.83 |
The company reported approximately $823 million of cash and available borrowing capacity combined at March 31, 2021. Its $600 million revolving credit facility was undrawn; management said the company was in compliance with its financial covenants, with a reported total leverage ratio of 3.94x.
Changes and operating drivers
- Domestic RevPAR fell 4.4% year over year, as a 6.4% decrease in average daily rate was partly offset by occupancy up 100 basis points. Domestic royalty fees decreased 5.0% to $63.0 million. The effective royalty rate rose to 5.02% from 4.95%, and domestic franchised rooms increased 1.9%.
- International royalty fees decreased $1.0 million; the international system had 48 fewer hotels year over year. Less than 1% of domestic hotels and approximately 4% of international hotels were temporarily suspended at March 31.
- Franchise and relicensing fees declined to $5.4 million from $7.3 million, although the company awarded 89 domestic franchise agreements versus 58 in Q1 2020. The domestic pipeline was 943 hotels, down from 1,000 a year earlier.
- Marketing and reservation system expenses exceeded related revenue by $6.7 million, versus revenue exceeding expense by $20.1 million in Q1 2020. These activities are contractually funded by franchisees, and the company expects expenditures to exceed fees for the rest of 2021.
- Equity in net losses of affiliates increased to $6.0 million from $2.0 million, including a $4.8 million impairment of an equity-method investment and increased operating losses at joint ventures.
Outlook, risks, and unusual items
- Management expects the pandemic to continue affecting 2021 results. Recovery timing remains uncertain, depending on vaccination progress, variants, travel demand, and government and public-health actions. Industry recovery to 2019 performance was expected to take multiple years. The filing provides no specific earnings or revenue guidance.
- Management cited the company’s franchise-focused model, drive-to and leisure-oriented locations, and relative brand performance as potential advantages in recovery. It also stated that roughly 90% of domestic hotels are in suburban, small-town, or interstate locations.
- To support franchisees, the company continued fee deferrals, reduced certain fees, extended brand deadlines, and limited discretionary investment. It stated that liquidity and financing capacity should be adequate for expected needs.
- On May 7, 2021, after quarter-end, the board declared a $0.225-per-share quarterly dividend and approved resumption of share repurchases. The company estimated approximately $25 million of 2021 dividends at the current rate, subject to board declarations.
- Contingent commitments included up to $291.2 million of additional franchise agreement acquisition payments if franchisees meet conditions, $8.4 million of potential Cambria joint-venture contributions, and approximately $1.0 million of conditional franchisee financing. Outstanding financial support activities were approximately $537.5 million; the company expected these activities not to exceed $725 million over three to five years.
- Limited payment guarantees had maximum principal exposure of $5.7 million plus related amounts; management considered performance remote. The company also reported $50.7 million of notes receivable on non-accrual status, up from $28.9 million at year-end, and $17.4 million past due more than 90 days.
- Management and counsel did not expect ordinary-course litigation to have a material adverse effect. No material changes to previously disclosed risk factors were reported. The filing identifies pandemic-related demand, franchisee financial health, hotel development and financing, debt, and international operations among risks.
Important facts for investors to verify
- How domestic and international RevPAR, occupancy, and room rates evolve, and whether hotel-system growth and the franchise pipeline convert into open hotels and royalty revenue.
- Whether operating cash generation recovers, given Q1 operating cash flow of only $0.1 million and the expected marketing-system spending deficit.
- The credit quality and recoverability of franchisee notes, especially non-accrual and past-due balances, and the exposure from franchisee support commitments and guarantees.
- Debt covenant headroom, leverage, and the company’s ability to fund dividends, resumed repurchases, and planned brand investments amid continued uncertainty.
- The effect of the $4.8 million investment impairment and the unusual prior-year $30.6 million tax benefit when assessing underlying earnings trends.