Choice Hotels International, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018. Choice is primarily a hotel franchisor, with 7,005 hotels open and 1,104 hotels in its development pipeline across the United States and more than 40 countries and territories.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $218.3 million | $209.4 million |
| Revenue excluding marketing and reservation system activities | $108.3 million | $102.4 million |
| Operating income | $45.1 million | $46.2 million |
| Net income | $30.1 million | $25.1 million |
| Diluted EPS | $0.54 | $0.44 |
| Cash from operations | $17.9 million | $4.6 million |
- Total revenue rose 4.3%; revenue excluding marketing and reservation system activities rose 5.7%. Royalty fees increased 4.8%, while procurement services revenue grew 20%.
- Operating income declined 2.6%; reported operating margin was approximately 20.6%, versus 22.1%. Net income increased about 20%, benefiting from lower equity-method losses and higher interest income, among other items.
- Domestic royalty fees increased 5%, supported by 1.8% growth in domestic rooms and an increase in the effective royalty rate to 4.84% from 4.72%. Domestic RevPAR declined 0.7%. International royalty fees decreased $0.1 million despite growth in rooms.
- Cash and cash equivalents were $31.8 million at quarter-end. Current assets were $250.7 million and current liabilities $303.9 million. Cash used in investing activities was $4.3 million; cash used in financing activities was $8.6 million.
- Total debt was $805.8 million, up from $754.6 million at year-end 2018. The $600 million revolving facility had approximately $130 million drawn; the company reported a 2.04x total leverage ratio and compliance with applicable financial covenants.
- The company declared dividends of $0.215 per share and paid $12.2 million in dividends. It repurchased 354,646 shares for $27.3 million under its authorization.
Changes, outlook and notable items
- The $231.3 million WoodSpring Suites acquisition affected the prior-year comparison: Q1 2018 investing cash outflow included the acquisition. Q1 2019 operating cash flow improved, primarily because franchise agreement acquisition payments were lower.
- After a key SaaS vacation-rental customer purported to terminate its contract, Choice contested the notice and recorded non-cash impairment charges of $7.3 million for long-lived assets and $3.1 million for goodwill. Management warned further impairments or charges could occur.
- Q1 results included a $2.0 million gain on an office-building sale and leaseback and a $0.1 million net gain on asset sales. The company adopted lease accounting Topic 842, recording $28.0 million of right-of-use assets and $38.5 million of lease liabilities; adoption did not affect income.
- Management said operating cash flow and available financing capacity were adequate for expected operating, investing and financing needs. It expected to deploy approximately $725 million over three to five years to support Cambria development, subject to market and other conditions. The filing does not provide a specific earnings or revenue forecast.
- Risks and exposures include the disputed SaaS customer contract, hotel demand and RevPAR trends, franchise growth and retention, technology and cybersecurity, international operations, debt management and development-financing activities. Notes receivable included approximately $52.4 million of impaired loans; average loans on non-accrual status rose to approximately $27.1 million from $1.8 million in Q1 2018.
- Outstanding commitments included $252.7 million of potential franchisee incentives (subject to conditions), $11.0 million of joint-venture capital contributions, and approximately $40 million of potential franchisee financing. Maximum principal exposure under specified limited payment guarantees was $10.7 million; management considered performance remote. Management reported no material change in the risk factors disclosed in its 2018 Form 10-K.
Important facts for investors to verify
- Whether the SaaS customer dispute is resolved and whether additional impairment charges are required.
- Whether domestic room growth, effective royalty rates and development-pipeline conversions can offset weaker RevPAR or international performance.
- Debt levels, revolver availability, covenant compliance and the capacity to sustain dividends and share repurchases while funding development commitments.
- Credit quality and recoverability of impaired notes receivable, and the pace and returns of Cambria-related loans and investments.
- Cash-flow comparisons and operating margins, considering marketing and reservation system revenues and expenses are contractual pass-through activities.