Second Quarter Domestic RevPAR Increases 4.3%
ROCKVILLE, Md., Aug. 2, 2016 — Choice Hotels International, Inc. (NYSE: CHH) today reported the following highlights for the second quarter 2016:
- Net income and diluted earnings per share ("EPS") for the three months ended June 30, 2016, totaled $38.8 million and $0.68 per share, respectively. Adjusted net income and adjusted diluted EPS for the three months ended June 30, 2016, which exclude certain special items as described below, increased 12 percent and 15 percent, respectively, over the prior year period.
- Adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") from hotel franchising activities, excluding special items, for the three months ended June 30, 2016 totaled $75.1 million, an increase of 7 percent over the prior year period.
- Revenues for the three months ended June 30, 2016 totaled $241.8 million, an increase of 4 percent from the same period of 2015.
- Franchising revenues for the three months ended June 30, 2016 totaled $105.9 million, an increase of 7 percent from the same period of 2015.
- Domestic royalty fees for the three months ended June 30, 2016, totaled $81.1 million, an increase of 7 percent from the same period of 2015.
- Domestic system-wide revenue per available room ("RevPAR") increased 4.3 percent in the second quarter of 2016, as occupancy and average daily rates increased 80 basis points and 3 percent, respectively from the same period of 2015.
- Domestic RevPAR performance for the second quarter of 2016 exceeded total industry results by 80 basis points and also exceeded growth reported by Smith Travel Research for the primary chain scale segments in which the company competes.
- Effective domestic royalty rate for the three months ended June 30, 2016 was 4.40 percent, an increase of 12 basis points from the same period of 2015.
- Domestic hotel executed franchise agreements totaled 147 for the three months ended June 30, 2016, an increase of 6 percent from the same period of 2015.
- Executed 9 new domestic franchise agreements during the three months ended June 30, 2016 for the Cambria hotels & suites brand including projects in Boston, MA, Los Angeles, CA and Seattle, WA.
- Domestic relicensing and contract renewal transactions totaled 107 for the three months ended June 30, 2016, an increase of 26 percent from the same period of 2015.
- The company's domestic pipeline of hotels awaiting conversion, under construction or approved for development as of June 30, 2016 increased 14 percent from June 30, 2015. The domestic pipeline for the company's Cambria brand as of June 30, 2016 totaled 53 hotels, a 112 percent increase from June 30, 2015.
- The company purchased 0.4 million shares of common stock under its share repurchase program during the three months ended June 30, 2016 at a total cost of approximately $19.4 million.
"We are pleased with our results for the second quarter, which were highlighted by a 15 percent increase in adjusted diluted earnings per share," said Stephen P. Joyce, chief executive officer, Choice Hotels. "In addition, we delivered strong RevPAR gains to our domestic franchise system which continue to exceed the growth levels experienced by the overall industry and primary chain scale segments in which we compete. Demand for our brands remains strong and we will continue to invest in programs designed to drive more reservations through our central channels, improve guest loyalty and improve the value of our brands in an effort to drive incremental business to our franchisees."
Special Item
During the three and six months ended June 30, 2016, the company recorded an executive termination benefit charge of approximately $2.2 million. This special item impacted diluted EPS by $0.03 and $0.02 per share for the three and six months ended June 30, 2016, respectively. The company evaluates certain non-GAAP measures that exclude executive termination benefits because those non-GAAP measures allow for period-over-period comparison of on-going core operations before the impact of these charges. These non-GAAP measures, which are reconciled to the comparable GAAP measures in Exhibit 8, include adjusted net income, adjusted diluted EPS, adjusted hotel franchising selling, general and administrative expenses, adjusted EBITDA and adjusted hotel franchising margins.
Adoption of New Accounting Standard
On April 1, 2016, the company adopted Accounting Standards Update ("ASU") Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU No. 2016-09"), which requires that excess tax benefits and deficiencies related to stock compensation be recognized as income tax expense or benefit in the company's income statement. Adoption of the standard required that the company retrospectively apply the requirement to the beginning of the year of adoption, January 1, 2016. As a result, the company has reduced is previously reported income tax expense for the first quarter of 2016 by $1.6 million.
Use of Cash Flows
Dividends
During the six months ended June 30, 2016, the company paid cash dividends totaling approximately $23 million. Based on the current quarterly dividend rate of $0.205 per common share, the company expects to pay dividends of approximately $46 million during 2016.
Share Repurchases
The company repurchased 0.5 million shares of common stock under its share repurchase program during the six months ended June 30, 2016, at a total cost of approximately $23 million. The company currently has authorization to purchase up to 1.1 million additional shares under this program.
Hotel Development & Financing
Pursuant to its program to encourage acceleration of the growth of our upscale select-service Cambria hotels & suites brand, the company advanced approximately $67 million in support of the Cambria brand during the six months ended June 30, 2016. The company also recycled approximately $18 million of investments in support of Cambria resulting in net advances of $49 million for the current year. These advances are primarily in the form of joint venture investments, forgivable key money loans, senior and mezzanine lending and site acquisitions. At June 30, 2016, the company had approximately $176 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.
Outlook
The company's consolidated 2016 outlook reflects the following assumptions:
Hotel Franchising
- Adjusted EBITDA from franchising activities for full-year 2016 are expected to range between $270 million and $274 million;
- Net domestic unit growth for 2016 is expected to be between 2% and 3%;
- RevPAR is expected to increase between 3.5% and 4.0% for third quarter and range between 3.5% and 4.0% for full-year 2016; and
- The effective royalty rate is expected to increase between 7 and 9 basis points for full-year 2016 as compared to full-year 2015.
Non-Hotel Franchising Activities
- Net reductions in full-year 2016 EBITDA relating to our non-hotel franchising operations, which primarily relate to SkyTouch and vacation rental activities are expected to range between approximately $16 million and $19 million.
Other Items
- The effective tax rate is expected to be approximately 32.5% and 31.7% for the third quarter and full-year 2016.
- Adjusted EBITDA and adjusted EPS estimates exclude executive termination benefits incurred in the second quarter of 2016 as discussed above under Special Item.
- Diluted EPS estimates are based on the current number of shares outstanding and thus do not factor in any changes that may occur due to new equity grants or any further repurchases of common stock under the company's share repurchase program.
Consolidated Outlook
The company's third quarter 2016 diluted EPS is expected to be at least $0.78. The company expects full-year 2016 adjusted diluted EPS to range between $2.38 and $2.43 and full year 2016 adjusted EBITDA to range between $252 million and $256 million. The adjusted EPS and adjusted consolidated EBITDA estimates assume that we incur net reductions in EBITDA related to non-hotel franchising activities at the midpoint of the range for these investments.
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