Choice Hotels International Reports 2019 First Quarter Results

ROCKVILLE, Md., May 9, 2019 /PRNewswire/ -- Choice Hotels International, Inc. (NYSE: CHH), one of the world's largest hotel companies, today reported its results for the three months ended March 31, 2019. Highlights include:

• Net income was $30.1 million for the first quarter 2019, representing diluted earnings per share (EPS) of $0.54.
  
  
• Adjusted net income, excluding certain items described in Exhibit 6, increased 23% to $47.2 million from the 2018 first quarter.
  
  
• Adjusted EPS were $0.84, a 25% increase from the 2018 first quarter.
  
  
• Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first quarter were $72.4 million, an increase of 8% from the same period of 2018.
  
  
• The company exceeded the top end of its first quarter 2019 adjusted EPS guidance by $0.08 per share and raised its full year adjusted EPS guidance to a range of $4.06 to $4.18.
  
  
• The company repurchased 0.4 million shares of common stock for an aggregate cost of $32 million for the three months ended March 31, 2019.
  
  
• Effective income tax rate for the first quarter was 17.5% compared to 17.6% for the same period of 2018 and guidance of 22%.

Additionally, during the first quarter of 2019, the company:

• Achieved 12% growth in the number of domestic rooms in its upscale brands, Cambria and Ascend, as of March 31, 2019, from March 31, 2018.
  
  
• Further strengthened its midscale presence by awarding six domestic franchise agreements for the newly launched Clarion Pointe brand, bringing the number of Clarion Pointe hotels expected to open to 27 hotels. The company also achieved 7% and 5% net domestic unit growth in the Clarion and Quality brands, respectively.
  
  
• Opened the 250^th WoodSpring Suites hotel in Portland, Oregon, the first WoodSpring hotel in the state of Oregon.
  
  
• Continued the $2.5 billion transformation of its flagship Comfort brand, which now has nearly 50% of the system certified as meeting the elevated brand standards in guest rooms and common areas.

"Choice Hotel's proven business model continues to deliver strong financial performance to our franchisees and shareholders," said Patrick Pacious, president and chief executive officer, Choice Hotels. "Our brands continue to appeal to a wide range of guests for both leisure and business travel. In addition, our strategic investments in our midscale, upscale and extended-stay brands position us to continue to strengthen our appeal to leisure travelers and accelerate our growth in the business travel segment."   

Additional details from the company's 2019 first quarter results are as follows:

Revenues

• Total revenues for the three months ended March 31, 2019, were $218.3 million, an increase of 4% from total revenues reported for the same period of 2018.
  
  
• Total revenues, excluding marketing and reservation system fees, for the first quarter increased 6% over the prior year to $108.3 million.
  
  
• Domestic royalty fees for the first quarter totaled $75.6 million, a 5% increase from the first quarter of 2018.
  
  
• Effective domestic royalty rate increased 12 basis points for the first quarter, compared to the same period of the prior year.
  
  
• Domestic systemwide revenue per available room (RevPAR) declined 0.7% for the first quarter, compared to the same period of the prior year, primarily due to the Comfort transformation, which is progressing ahead of schedule and saw more hotels under renovation during the quarter than forecasted; the government shutdown; and tougher comparable results due to prior year hurricane activity. Excluding one-time impacts, first quarter RevPAR increased by approximately 1%, compared to the same period of the prior year.
  
  
• Comfort hotels that have completed renovations are experiencing overall RevPAR growth of nearly 1 percent and had their business travel revenue growth double within one quarter of completing their renovations.
  
  
• Procurement services revenues increased 20% in the first quarter to $11.9 million, compared to the same period of the prior year.

Development

• The number of domestic franchised hotels and rooms, as of March 31, 2019, increased 2.1% and 1.8%, respectively, from March 31, 2018.
  
  
• International franchised hotels and rooms as of March 31, 2019, increased 3.0% and 5.2%, respectively, from March 31, 2018.
  
  
• The company opened two new Cambria hotels in Nebraska and New Jersey, both of which represent the first Cambria hotel in their respective states, and broke ground on an adaptive-reuse Cambria project in downtown Los Angeles, bringing the total number of active-construction projects for the brand to 23.
  
  
• The company's extended stay domestic franchised hotels, as of March 31, 2019, increased 5% from March 31, 2018.
  
  
• The company's total domestic pipeline of hotels awaiting conversion, under construction, or approved for development, as of March 31, 2019, increased 7% to 976 hotels from March 31, 2018.
  
  
• The new-construction domestic pipeline totaled 749 hotels at March 31, 2019, a 10% increase from March 31, 2018.
  
  
• The company's total international pipeline of hotels awaiting conversion, under construction, or approved for development, as of March 31, 2019, increased from 42 hotels at March 31, 2018, to 128 hotels.
  
  
• New executed domestic franchise agreements totaled 79 in the first quarter of 2019, including 32 new construction franchise agreements.

Use of Cash Flows

Dividends
During the three months ended March 31, 2019, the company paid cash dividends totaling approximately $12 million. Based on the current quarterly dividend rate of $0.215 per share of common stock, the company expects to pay dividends totaling approximately $48 million during 2019.

Stock Repurchases
During the three months ended March 31, 2019, the company repurchased approximately 0.4 million shares of common stock for approximately $32 million under its stock repurchase program, as well as through repurchases from employees in connection with tax withholding and option exercises relating to awards under the company's equity incentive plans. At March 31, 2019, the company had authorization to purchase up to 1.8 million additional shares of common stock under its share repurchase program. 

Hotel Development & Financing
Pursuant to its program to encourage acceleration of the growth of the upscale Cambria Hotels brand, the company advanced approximately $47 million in support of the brand's development during the three months ended March 31, 2019. The company also recycled approximately $20 million of prior investments in Cambria Hotels development projects, resulting in net advances of $27 million for the three months ended March 31, 2019. Advances under this program are primarily in the form of joint-venture investments, forgivable key-money loans, senior mortgage loans, development loans, and mezzanine lending, as well as through the operation of a land-banking program. As of March 31, 2019, the company had approximately $366 million reflected in its consolidated balance sheet pursuant to these financial support activities. With respect to lending and joint-venture investments, the company generally expects to recycle these loans and investments within a five-year period.

Impairment of Long-Lived Assets

During the three months ended March 31, 2019, the company recognized a $10.4 million impairment of goodwill and long-lived assets related to its reporting unit that provides software as a service ("SaaS") technology solutions to vacation rental management companies primarily in Europe. The company purchased the reporting unit in 2015 to support its vacation rentals initiative but has determined that the technology and services are no longer required to support the company's growth plans. As a result, the company is exploring strategic alternatives including a possible sale of the reporting unit.

Outlook

The adjusted numbers in the company's outlook below exclude the net surplus or deficit generated from the company's marketing and reservation system activities, impairment and disposal costs as well as other items. See Exhibit 7 for the calculation of adjusted forecasted results and the reconciliation to the comparable GAAP measures.

• Net income for full-year 2019 is expected to range between $186 million and $196 million, or $3.31 to $3.49 per diluted share.
  
  
• Adjusted diluted EPS for full-year 2019 is expected to range between $4.06 to $4.18. The company expects full-year 2019 adjusted net income to range between $228 million and $235 million.
  
  
• Second quarter 2019 adjusted diluted EPS is expected to range between $1.11 to $1.15.
  
  
• Adjusted EBITDA for full-year 2019 is expected to range between $354 million and $363 million.
  
  
• Net domestic unit growth for 2019 is expected to range between 2% and 3%.
  
  
• Domestic RevPAR for the second quarter of 2019 is expected to range between a 1% decline and a 1% increase from the same period of the prior year.  Domestic RevPAR is expected to increase between 0% and 1% for full year 2019.
  
  
• The domestic effective royalty rate is expected to increase between 8 and 12 basis points for full-year 2019 as compared to full-year 2018.
  
  
• The effective tax rate is expected to be approximately 23% for second quarter and 22% for full-year 2019, respectively.
  
  
• Adjusted diluted EPS estimates are based on the current number of shares of common stock outstanding and, therefore, do not reflect any subsequent changes that may occur due to new equity grants or further repurchases of common stock under the company's stock repurchase program.

Conference Call

Choice Hotels International will conduct a conference call on Thursday, May 9, 2019, at 10:00 a.m. Eastern Time to discuss the company's 2019 first quarter results. The dial-in number to listen to the call domestically is 888-349-0087 and the number for international participants is 1-412-902-6767. A live webcast will also be available on the company's investor relations website, http://investor.choicehotels.com/, and can be accessed via the Events and Presentations tab.  

About Choice Hotels 
Choice Hotels International, Inc. (NYSE: CHH) is one of the largest and most successful lodging franchisors in the world. With more than 7,000 hotels, representing nearly 570,000 rooms, in over 40 countries and territories as of March 31, 2019, the Choice^® family of hotel brands provide business and leisure travelers with a range of high-quality lodging options from limited service to full-service hotels in the upscale, midscale, extended-stay and economy segments. The award-winning Choice Privileges^® loyalty program offers members benefits ranging from everyday rewards to exceptional experiences. For more information, visit www.choicehotels.com.

Forward-Looking Statements
Certain matters discussed in this press release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, our use of words such as "expect," "estimate," "believe," "anticipate," "should," "will," "forecast," "plan," "project," "assume," or similar words of futurity identify such forward-looking statements. These forward-looking statements are based on management's current beliefs, assumptions, and expectations regarding future events, which, in turn, are based on information currently available to management. Such statements may relate to projections of the company's revenue, earnings, and other financial and operational measures, company debt levels, ability to repay outstanding indebtedness, payment of dividends, repurchases of common stock, future operations, and expected benefits from the Tax Cuts and Jobs Act, among other matters. We caution you not to place undue reliance on any such forward-looking statements. Forward-looking statements do not guarantee future performance and involve known and unknown risks, uncertainties, and other factors.

Several factors could cause actual results, performance, or achievements of the company to differ materially from those expressed in or contemplated by the forward-looking statements. Such risks include, but are not limited to, changes to general, domestic, and foreign economic conditions; foreign currency fluctuations; operating risks common in the lodging and franchising industries; impairments or losses relating to acquired businesses, changes to the desirability of our brands as viewed by hotel operators and customers; changes to the terms or termination of our contracts with franchisees; our ability to keep pace with improvements in technology utilized for marketing and reservations systems and other operating systems; our ability to grow our franchise system; exposure to risks related to our hotel-development and financing activities; fluctuations in the supply and demand for hotels rooms; our ability to realize anticipated benefits from acquired businesses; the level of acceptance of alternative growth strategies we may implement; operating risks associated with our international operations; the outcome of litigation; and our ability to manage our indebtedness. These and other risk factors are discussed in detail in the company's filings with the Securities and Exchange Commission, including our annual report on Form 10-K and our quarterly reports filed on Form 10-Q. Except as may be required by law, we undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

Non-GAAP Financial Measurements
The company evaluates its operations utilizing the performance metrics of adjusted EBITDA, revenues excluding marketing and reservation system activities, adjusted SG&A, adjusted hotel margins excluding marketing and reservation system activities, adjusted net income, and adjusted diluted EPS, which are all non-GAAP financial measurements. These measures, which are reconciled to the comparable GAAP measures in Exhibit 6, should not be considered as an alternative to any measure of performance or liquidity as promulgated under or authorized by GAAP, such as net income, EPS, total revenues, and operating margins. The company's calculation of these measurements may be different from the calculations used by other companies and comparability may therefore be limited. 

We discuss management's reasons for reporting these non-GAAP measures and how each non-GAAP measure is calculated below.

In addition to the specific adjustments noted below with respect to each measure, the non-GAAP measures presented herein also exclude acquisition-related transition and transaction costs and impairment of goodwill and long lived assets related to the company's operations that provide Software as a Service ("SaaS") technology solutions to vacation-rental management companies to allow for period-over-period comparison of ongoing core operations before the impact of these discrete and infrequent charges.

Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization: Adjusted EBITDA reflects net income excluding the impact of interest expense, interest income, provision for income taxes, depreciation and amortization, franchise-agreement acquisition cost amortization, other (gains) and losses, equity in net income (loss) of unconsolidated affiliates, mark-to-market adjustments on non-qualified retirement plan investments, and surplus or deficits generated by marketing and reservation-system activities. We consider adjusted EBITDA to be an indicator of operating performance because it measures our ability to service debt, fund capital expenditures, and expand our business. We also use adjusted EBITDA, as do analysts, lenders, investors, and others, to evaluate companies because it excludes certain items that can vary widely across industries or among companies within the same industry. For example, interest expense can be dependent on a company's capital structure, debt levels, and credit ratings. Accordingly, the impact of interest expense on earnings can vary significantly among companies. The tax positions of companies can also vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provision for income taxes can vary considerably among companies. Adjusted EBITDA also excludes depreciation and amortization because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets or amortizing franchise-agreement acquisition costs. These differences can result in considerable variability in the relative asset costs and estimated lives and, therefore, the depreciation and amortization expense among companies. Mark-to-market adjustments on non-qualified retirement-plan investments recorded in SG&A are excluded from EBITDA, as the company accounts for these investments in accordance with accounting for deferred-compensation arrangements when investments are held in a rabbi trust and invested.  Changes in the fair value of the investments are recognized as both compensation expense in SG&A and other gains and losses. As a result, the changes in the fair value of the investments do not have a material impact on the company's net income. Surpluses and deficits generated from marketing and reservation activities are excluded, as the company's franchise agreements require the marketing and reservation-system revenues to be used exclusively for expenses associated with providing franchise services, such as central reservation and property-management systems, reservation delivery, and national marketing and media advertising. Franchisees are required to reimburse the company for any deficits generated from these marketing and reservation-system activities and the company is required to spend any surpluses generated in future periods. Since these activities will be managed to break-even over time, quarterly or annual surpluses and deficits have been excluded from the measurements utilized to assess the company's operating performance.

Adjusted Net Income and Adjusted Diluted Earnings Per Share: Adjusted net income and diluted EPS exclude the impact of surpluses or deficits generated from marketing and reservation-system activities. Surpluses and deficits generated from marketing and reservation activities are excluded, as the company's franchise agreements require the marketing and reservation system revenues to be used exclusively for expenses associated with providing franchise services, such as central reservation and property-management systems, reservation delivery, and national marketing and media advertising. Franchisees are required to reimburse the company for any deficits generated from these marketing and reservation-system activities and the company is required to spend any surpluses generated in future periods. Since these activities will be managed to break-even over time, quarterly or annual surpluses and deficits have been excluded from the measurements utilized to assess the company's operating performance. We consider adjusted net income and adjusted diluted EPS to be indicators of operating performance because excluding these items allow for period-over-period comparisons of our ongoing operations.

Revenues and Adjusted Operating Margins, Excluding Marketing and Reservation System Activities: The company reports revenues and adjusted operating margins, excluding marketing and reservation-system activities. Previously, the company reported certain non-GAAP measures that excluded the marketing and reservation-system activities, as well as revenues derived from other, non-hotel franchising aspects of the company's operations.  The company is no longer excluding the other non-hotel franchising revenues from these measures because their impact is insignificant on the company's overall results.  These non-GAAP measures we present are commonly used measures of performance in our industry and facilitate comparisons between the company and its competitors. Marketing and reservation-system activities are excluded, as the company's franchise agreements require the marketing and reservation-system revenues to be used exclusively for expenses associated with providing franchise services, such as central reservation and property-management systems, reservation delivery, and national marketing and media advertising. Franchisees are required to reimburse the company for any deficits generated from these marketing and reservation-system activities and the company is required to spend any surpluses generated in future periods. Since these activities will be managed to break-even over time, quarterly or annual surpluses and deficits have been excluded from the measurements utilized to assess the company's operating performance.

© 2019 Choice Hotels International, Inc. All rights reserved.