Choice Hotels International Reports 2020 Third Quarter Results

ROCKVILLE, Md., Nov. 5, 2020 – Choice Hotels International, Inc. (NYSE: CHH), one of the world’s largest lodging franchisors, today reported its results for the three and nine months ended September 30, 2020.

“Choice Hotels’ proven portfolio of well-segmented brands, geographic footprint, and strength in leisure travel continued to drive results that outperformed the industry and position the company to benefit from the recent shifts in consumer behavior,” said Patrick Pacious, president and chief executive officer, Choice Hotels. “We believe that our strategy of growing our limited-service brands in the right segments and the right locations will allow us to continue to grow our share of travel demand over the long term.”

In the third quarter of 2020, Choice Hotels continued to provide a broad range of support to its franchisees, guests, and communities while improving its overall financial and liquidity position. Highlights of third quarter and year to date 2020 results include:

• Domestic systemwide revenue per available room (RevPAR) outperformed the total industry by nearly 20 percentage points, declining 28.8% for third quarter 2020 compared to the same period of the prior year, and exceeded the chain scale segments in which the company competes, as reported by STR.
• Fourth quarter domestic RevPAR through October 24, 2020 has continued the pattern of sequential quarterly improvement, and October 2020 RevPAR is expected to decline by approximately 25% from the same period of 2019 (see Exhibit 7 for weekly RevPAR trends).
• The company awarded 232 new domestic franchise agreements year to date through September 30, 2020, a 38% decrease compared to the same period of the prior year. Nearly 70% of the agreements awarded year to date through September 30, 2020 were for conversion hotels.
• Net income was $14.5 million for the third quarter, representing diluted earnings per share of $0.26.
• Third quarter adjusted net income, excluding certain items described in Exhibit 6, decreased 52% to $36.8 million from third quarter 2019.
• Adjusted diluted earnings per share for the third quarter were $0.66, a 52% decrease from third quarter 2019.
• Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the third quarter were $74.9 million, a 34% decrease from third quarter 2019.
• The company reported cash flow from operations of over $68 million in the third quarter 2020.

Performance Trends

• Domestic systemwide RevPAR decreased 28.8% for third quarter 2020 compared to the third quarter 2019, exceeding overall industry performance by nearly 20 percentage points. In the third quarter 2020, Choice Hotels outperformed the respective chain scales in which the company competes by more than 580 basis points.
• The company’s domestic systemwide occupancy rate has improved since the trough of 28% in early April, with average weekly occupancy consistently exceeding 50% since the week of June 21, 2020 through October 24. For the month of October, domestic systemwide occupancy is expected at 52%.
• The company’s upscale portfolio achieved material domestic systemwide RevPAR share gains versus its local competitors for third quarter 2020, compared to the same period of the prior year, with the Ascend Hotel Collection achieving gains of nearly 19 percentage points. In addition, the company’s upscale brands’ year-over-year change in domestic systemwide RevPAR outperformed the upscale segment by 14 percentage points.
• The company’s extended-stay portfolio continued to outperform the industry throughout the third quarter, with average domestic systemwide occupancy rates of 74%. The portfolio achieved average weekly occupancy rates of 70% since the onset of the pandemic in mid-March through October 24, 2020 — exceeding the industry average by 29 percentage points. Specifically, the WoodSpring Suites brand experienced occupancy levels of 77% in the third quarter, outperforming the industry by nearly 29 percentage points, and the brand’s monthly occupancy levels have remained above 75% since the last week of June. In addition, the Suburban brand’s occupancy rates increased by 60 basis points in the third quarter compared to the same period of 2019.
• All select-service midscale brands achieved domestic systemwide RevPAR share gains versus their local competitors for third quarter 2020 compared to the same period of the prior year. The Comfort brand family’s domestic systemwide year-over-year RevPAR change outperformed the upper-midscale chain scale by 840 basis points.
• In the third quarter, the company outperformed the industry on the year-over-year domestic RevPAR change and achieved RevPAR share gains versus its local competitors across all location types, as reported by STR.

Additional details for the company’s third quarter 2020 results are as follows:

Revenues

• Total revenues decreased 32% to $210.8 million for third quarter 2020, compared to the same period of 2019.
• Total revenues excluding marketing and reservation system fees decreased 33% to $103.6 million for third quarter 2020, compared to the same period of 2019.
• Third quarter 2020 domestic royalties decreased 29% to $76 million, compared to the same period of 2019.
• The company’s domestic effective royalty rate for third quarter 2020 increased 7 basis points over the prior year third quarter to 4.91%, and has increased 9 basis points year to date through September 30, 2020, compared to the same period of the prior year.

Development

• The company awarded 81 domestic franchise agreements in third quarter 2020, a 19% decrease compared to the same period of the prior year. Of the total domestic franchise agreements awarded in the quarter, nearly three-fourths were for conversion hotels and over 40% were executed in the month of September. In addition, the company signed the largest minority-owned multi-unit franchise agreement in the history of its emerging markets development program, increasing diversity among Choice Hotels’ owner base and across the industry.
• The company’s extended-stay portfolio continued to expand, reaching 421 domestic hotels as of September 30, 2020, a 6% increase since September 30, 2019, with the domestic extended-stay pipeline expanding to over 290 hotels awaiting conversion, under construction or approved for development. Since September 30, 2019, the WoodSpring Suites brand grew the number of open domestic hotels by 7% and its domestic pipeline by 15%.
• As of September 30, 2020, the number of domestic rooms in the company’s upscale portfolio expanded 33% since September 30, 2019, driven by an increase in room count of 14% for the Cambria Hotels brand and 42% for the Ascend Hotel Collection, the latter of which includes 17 properties associated with the company’s strategic partnership with AMResorts, an Apple Leisure Group brand.
• The number of domestic hotels and rooms, as of September 30, 2020, increased 0.7% and 1.9%, respectively, from September 30, 2019. The company’s domestic upscale, extended stay, and midscale segments reported a 2.1% aggregate increase in units and a 3.4% increase in rooms since September 30, 2019. The number of international hotels and rooms as of September 30, 2020, increased 0.9% and 10.7%, respectively, from the comparable period of 2019.
• The company’s total domestic pipeline of hotels awaiting conversion, under construction, or approved for development as of September 30, 2020, reached 945 hotels that represent over 76,000 rooms.

Balance Sheet and Liquidity

The company ended the third quarter of 2020 with a strong balance sheet and continues to benefit from its primarily franchise-only business model, which has historically provided a relatively stable earnings stream, low capital expenditure requirements, and significant free cash flow.

In July 2020, the company capitalized on favorable credit markets to issue $450 million in an aggregate principal amount of new 3.700% senior notes due 2031. The net proceeds from the offering were used to repay the 364-day, $250 million term loan obtained in April 2020, and to fund the early repurchase of a portion of the company’s 5.750% senior notes due 2022, reducing the company’s effective borrowing costs.

During the third quarter of 2020, the company’s net debt decreased approximately $50 million for total net debt of $886 million as of September 30, 2020, compared to $936 million as of June 30, 2020. The company reported cash flow from operations of $70 million for the nine months ended September 30, of which over $68 million was generated in the third quarter alone. As of September 30, 2020, the company’s total available liquidity consisting of cash and available borrowing capacity through the revolving credit facility was approximately $792 million.

Shareholder Returns

During the three months ended September 30, 2020, the company repurchased approximately 8,000 shares of common stock for approximately $0.7 million through repurchases from employees in connection with tax withholding and option exercises relating to awards under the company’s equity incentive plans. As of September 30, 2020, the company had 3.4 million shares remaining under the current share repurchase authorization. The company has temporarily suspended share repurchases under the stock repurchase program as previously disclosed on April 8, 2020 but may continue to repurchase stock from employees in conjunction with tax withholding and option exercises under the company’s equity incentive plans.

As previously disclosed, the company suspended the payout of future dividends for at least the remainder of 2020. As a result, total dividends paid during 2020 will be approximately $25 million.

The company continues to follow a prudent and disciplined capital allocation strategy, ensuring the level of investment activity is aligned with the current environment.

Outlook

On March 17, 2020, the company announced that it withdrew its previously issued outlook for 2020. The ultimate and precise impact of COVID-19 on full year 2020 is still unknown at this time and will depend on the level of resurgence in COVID-19 cases, duration and scope of mandated travel and other restrictions, confidence level of consumers to travel and the pace, and level of the broader macroeconomic recovery. As a result, the company is not providing formal guidance for 2020 at this time.

The company currently expects the impact of COVID-19 on its year-over-year RevPAR change will be less significant for the quarter ended December 31, 2020 than the quarter ended September 30, 2020 based on the continued resilience of leisure demand and Choice’s relative outperformance versus the industry.

The company will continue to evaluate the impact of COVID-19 across its business and will provide further updates in the next earnings report based on the best information then available.

Conference Call

Choice Hotels International will conduct a conference call on Thursday, November 5, 2020, at 10:00 a.m. Eastern Time to discuss the company’s third quarter 2020 earnings results. The dial-in number to listen to the call domestically is (888) 428-7458 and the number for international participants is (862) 298-0702. A live webcast will also be available on the company’s investor relations website, http://investor.choicehotels.com/, and can be accessed via the Financial Performance and Presentations tab.