Choice Hotels International, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Amounts are U.S. dollars.
Business context and reporting period
Choice is primarily a hotel franchisor, with approximately 97% of revenue tied to franchising. At year-end, its system had 7,153 open hotels and 590,897 rooms across the U.S. and more than 40 other countries and territories; another 1,135 hotels and 100,868 rooms were in the development pipeline. The company also owned five Cambria hotels. Marketing and reservation system fees are contractually used to support franchise services, so total revenue includes substantial pass-through activity.
Financial and operating performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $1,114.8 million | $1,041.3 million | +7.1% |
| Revenue excluding marketing and reservation system activity | $537.4 million | $497.6 million | +8.0% |
| Operating income | $318.6 million | $318.5 million | Essentially flat |
| Net income | $222.9 million | $216.4 million | +3.0% |
| Diluted EPS | $3.98 | $3.80 | +4.7% |
| Operating cash flow | $270.6 million | $242.9 million | +$27.7 million |
| Capital expenditures | $57.3 million | $47.7 million | +$9.6 million |
GAAP operating margin was approximately 28.6%, compared with 30.6% in 2018; total revenue includes marketing and reservation fees with corresponding expenses. Operating cash flow less capital expenditures was approximately $213.2 million, a simple calculation rather than a company-defined free-cash-flow measure.
Royalty fees rose 3.0% to $388.2 million. Domestic royalty fees increased 3%, supported by 2.9% room growth and an 11-basis-point increase in the effective royalty rate to 4.86%; domestic RevPAR declined 0.9%. Domestic occupancy fell 40 basis points and ADR declined 0.3%. Procurement services revenue rose 18% to $61.4 million.
Fourth-quarter revenue was $268.1 million, operating income $68.6 million, net income $42.2 million and diluted EPS $0.75, versus $245.0 million, $52.0 million, $31.5 million and $0.56, respectively, in Q4 2018.
Balance sheet, liquidity and capital allocation
Cash and cash equivalents were $33.8 million at December 31, 2019. Total debt was $851.6 million, including $844.1 million of long-term debt; the company reported a 2.00x total leverage ratio and compliance with applicable credit-facility covenants. Its $600 million revolving facility had $15.5 million outstanding, and its maturity was extended to August 2024. Management stated operating cash flow and available financing capacity were adequate for expected needs. Current liabilities exceeded current assets by approximately $89.3 million.
Operating cash flow increased year over year, while investing activities used $251.2 million, including the $169.0 million purchase of remaining interests in four Cambria hotels. The company issued $400 million of 3.70% senior notes due 2029 and redeemed $250 million of notes due 2020, recording a $7.2 million extinguishment loss. It repurchased $44.1 million of shares under its program and paid $48.1 million in dividends. The quarterly dividend was raised 5% to $0.225 per share beginning in 2020.
Material changes, outlook and risks
- Hotel franchising remained the growth engine: domestic rooms increased 2.9%, and the company reported 684 franchise awards representing 59,641 rooms, down from 756 awards in 2018. International rooms grew to 127,924, but international royalty fees declined 1.8%, partly due to RevPAR and currency effects.
- Operating income was affected by $15.0 million of goodwill and long-lived asset impairment and loss-on-sale charges related to the SaaS vacation-rentals business, which was sold in June 2019. The company also recorded $9.6 million of equity-method losses, including a $6.0 million loss on a joint-venture sale.
- Choice acquired four operating Cambria hotels in 2019 and opened a fifth. Management expects to continue investing in Cambria development support, with approximately $725 million of planned investment over three to five years, subject to market conditions. The new Everhome Suites brand was announced in January 2020; the first opening was expected in 2021.
- No quantitative earnings or revenue guidance is provided in the supplied filing text. Management emphasizes profitable franchise growth, improved hotel performance and royalty rates, vendor partnerships, and shareholder returns through dividends and repurchases.
- Risks include lodging demand and RevPAR declines, excess room supply, franchisee financial health, competition and online travel intermediaries, technology and cybersecurity disruptions, privacy regulation, international and currency exposure, debt service, and potential losses on hotel investments, loans and guarantees. The filing specifically noted coronavirus-related travel restrictions and business declines at its seven China hotels; the impact was not then material, but management described substantial uncertainty.
- Commitments include up to $300.4 million in conditional franchisee incentives and $10.1 million of additional joint-venture contributions. Limited payment guarantees had maximum principal exposure of $7.5 million, plus expenses and interest; management considered performance unlikely. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether domestic RevPAR weakness persists and whether room growth and the higher royalty rate continue to offset it.
- Franchise pipeline conversion, award trends, hotel openings, and the performance and capital requirements of Cambria and other newer brands.
- Returns and credit quality of hotel investments, joint ventures, notes receivable and the substantial conditional franchisee-support commitments.
- Debt maturities, variable-rate exposure, covenant headroom, and the effect of capital returns on liquidity.
- The subsequent impact of coronavirus and other travel-demand shocks, which was uncertain at the filing date.