Choice Hotels releases Q3 2014 Earnings

ROCKVILLE, MD. (hospitalitybusinessnews.com) October 24, 2014  – Choice Hotels International, Inc. today reported the following highlights for the third quarter of 20141:

1 See the discussion under “Items Impacting Comparability” for information about how the recently announced accounting change and restatement of certain 2013 interim periods impacts the comparative discussion of our results of operations contained herein.

 _Franchising revenues for the three months ended September 30, 2014 totaled $99.4 million, an increase of 8 percent from the same period of 2013.

 _Earnings before interest, taxes, depreciation and amortization (“EBITDA”) from franchising activities for the three months ended September 30, 2014 totaled $74 million, an increase of 8 percent from the same period of 2013.

 _Franchising margins for the three months ended September 30, 2014 were 72.3 percent, an increase of 40 basis points from the same period of 2013.

 _Diluted earnings per share (“EPS”) from continuing operations for the three months ended September 30, 2014 totaled $0.67 compared to $0.65 for the same period of 2013.

 _Domestic royalty fees for the three months ended September 30, 2014 totaled $79.5 million, an increase of 9 percent from the same period of 2013.

 _Domestic unit and room growth increased 1.6 percent and 0.9 percent from September 30, 2013, respectively.

 _Domestic system-wide revenue per available room (“RevPAR”) increased 8.8 percent in the third quarter of 2014 as occupancy and average daily rates increased 320 basis points and 3.4 percent, respectively from the same period of 2013.

 _New construction domestic hotel executed franchise agreements totaled 31 for the three months ended September 30, 2014, an increase of 55 percent from the same period of the prior year.

 _The company executed 85 relicensing and renewal hotel franchise agreements for the three months ended September 30, 2014, an increase of 18 percent compared to the same period of 2013.

 _The company’s domestic pipeline of hotels under construction, awaiting conversion or approved for development increased 14 percent from September 30, 2013.

 _The company purchased 0.4 million shares of common stock under its share repurchase program during the three months ended September 30, 2014 at a total cost of approximately $18.4 million.

“Our efforts and initiatives to improve business delivery, hotel revenue yield and our innovative brand programs are leading to strong results for our franchisees, while simultaneously improving our value proposition which drives franchise development results,” said Stephen P. Joyce, president and chief executive officer. “Our strong brands and innovative marketing and reservation programs, supported by a favorable lodging environment, resulted in average daily rate and occupancy gains driving domestic RevPAR growth of approximately 9% over the same period of the prior year. We are optimistic that strong RevPAR performance should continue in the fourth quarter and into 2015, supporting future growth.”

Discontinued Operations

In the first quarter of 2014, the company entered into a plan to sell its three owned hotels operated under the MainStay Suites brand. The company determined that the disposal of these hotels met the definition of a discontinued operation since the operations and cash flows of these components will be eliminated from the on-going operations of the company and the company will not have significant continuing involvement in the operations of the hotels after the disposal transaction.

At September 30, 2014, the company had disposed of all three of the owned MainStay Suites hotels and the new owners of each of those hotels had executed new franchise agreements with the company.

The company’s consolidated statement of income for the three and nine months ended September 30, 2014 reflect these three company-owned hotels as discontinued operations. In addition, the company’s statement of income for the three and nine months ended September 30, 2013 has been recast to account for these operations as discontinued. Summarized financial information related to these discontinued operations is presented in Exhibit 9 of this press release.

Outlook

The company’s consolidated 2014 outlook reflects continued growth of the company’s core hotel franchising business, continued investment in the SkyTouch division and the sale of the three company-owned Mainstay Suites hotels described below as well as the following assumptions:

 _All figures assume no additional repurchases of common stock under the company’s share repurchase program; and

 _The effective tax rate for continuing operations is expected to be 30.7% and 30.3% for the fourth quarter and full- year 2014, respectively.

Franchising

 _EBITDA from franchising activities for full-year 2014 are expected to range between $234 million and $237 million;

 _Net domestic unit growth for 2014 is expected to range between 1% and 2%;

 _RevPAR is expected to increase approximately 9% for the fourth quarter and range between 8% and 8.5% for full-year 2014;

 _The effective royalty rate is expected to decline 5 basis points for full-year 2014 as compared to full-year 2013.

SkyTouch

 _Reductions in EBITDA relating to our investment in the SkyTouch division for full-year 2014 are expected to be approximately $18 million;

 _Execution of third-party contracts results in annualized revenue ranging between $4 million and $6 million with realized revenues for the year ended December 31, 2014 totaling approximately $1 million; and

 _SG&A expenses are forecasted to be approximately $19 million related to investment in business development, sales and marketing and non-capitalizable product development expenditures related to the division’s cloud-based hotel operating system’s technology related products and services.

Discontinued Operations

 _Company EBITDA projections exclude the three company-owned Mainstay Suites hotels which generated EBITDA of approximately $1.1 million in 2013; and

 _Diluted EPS projections for the full-year 2014 include a gain on sale of the three company-owned Mainstay Suites hotels totaling $0.03 per share

Consolidated Outlook

The company’s fourth quarter 2014 diluted EPS is expected to be $0.34. The company expects full-year 2014 diluted EPS to range between $1.99 and $2.02. EBITDA for full-year 2014 are expected to range between $216 million and $219 million.

Items Impacting Comparability

We reported on August 5, 2014, that the company changed its accounting for royalty and certain marketing and reservation system fees to restate these fees in order to comply with generally accepted accounting principles in the United States (“GAAP”) by reporting these fees in the same period that the underlying gross room revenues are earned by our franchisees rather than one month in arrears (our historical practice).

The financial results and supplemental operating information as of and for the periods ended September 30, 2014 have been prepared in accordance with the new accounting practice.

As a result of this change, the income statement and cash flow statement included herein for the periods ended September 30, 2013 have been preliminarily restated based on currently available information to reflect our new accounting practice for these fees. The company plans to file the restated quarterly financial statements through amended Form 10-Q filings to be filed prior to the filing of our Form 10-Q for the periods ended September 30, 2014. Until the restatement is complete, additional information may become available which could cause the company’s current estimates to change.

Due to the seasonality of the company’s business, the impact of the new revenue recognition practice will generally be positive for the first two quarters of the year and negative in the final two quarters of the year. However, this change is expected to result in minor, non-material positive revisions to total revenues, operating income and earnings per share for the full years ended December 31, 2013, 2012 and 2011. The company plans to file the revised annual financial statements through an amended Form10-K to be filed prior to our Form 10-Q for the periods ended September 30, 2014. The December 31, 2013 balance sheet included in Exhibit 2 has been preliminarily revised to reflect this change.

 _2014 Choice Hotels International, Inc. All rights reserved. Choice Hotels International, Inc. Exhibit 1
Consolidated Statements of Income
(Unaudited)
Nine Months Ended September 30, Three Months Ended September 30,
Restated Restated Variance Variance
2014 2013 $ % 2014 2013 $ %
(In thousands, except per share amounts)
REVENUES:
Royalty fees 86,091$ 79,460$ 6,631$ 8% 222,301$ 208,206$ 14,095$ 7%
Initial franchise and relicensing fees 4,299 4,650 (351) (8%) 12,761 12,843 (82) (1%)
Procurement services 5,495 4,708 787 17% 18,293 16,204 2,089 13%
Marketing and reservation 115,653 124,809 (9,156) (7%) 309,025 311,204 (2,179) (1%)
Other 3,630 3,091 539 17% 10,188 7,362 2,826 38%
Total revenues 215,168 216,718 (1,550) (1%) 572,568 555,819 16,749 3%
OPERATING EXPENSES:
Selling, general and administrative 30,236 26,409 3,827 14% 88,329 82,808 5,521 7%
Depreciation and amortization 2,293 2,272 21 1% 6,903 6,701 202 3%
Marketing and reservation 115,653 124,809 (9,156) (7%) 309,025 311,204 (2,179) (1%)
Total operating expenses 148,182 153,490 (5,308) (3%) 404,257 400,713 3,544 1%
Operating income 66,986 63,228 3,758 6% 168,311 155,106 13,205 9%
OTHER INCOME AND EXPENSES, NET:
Interest expense 10,495 10,757 (262) (2%) 31,376 32,334 (958) (3%)
Interest income (355) (676) 321 (47%) (1,205) (1,979) 774 (39%)
Other (gains) and losses 375 (703) 1,078 (153%) (158) (1,266) 1,108 (88%)
Equity in net (income) loss of affiliates 513 (421) 934 (222%) 578 (340) 918 (270%)
Total other income and expenses, net 11,028 8,957 2,071 23% 30,591 28,749 1,842 6%
Income from continuing operations before income taxes 55,958 54,271 1,687 3% 137,720 126,357 11,363 9%
Income taxes 16,542 15,698 844 5% 41,556 36,384 5,172 14%
Income from continuing operations, net of income taxes 39,416 38,573 843 2% 96,164 89,973 6,191 7%
Income (loss) from discontinued operations, net of income taxes (51) 143 (194) (136%) 1,711 293 1,418 484%
Net income 39,365$ 38,716$ 649$ 2% 97,875$ 90,266$ 7,609$ 8%
Basic earnings per share
Continuing operations 0.67$ 0.66$ 0.01$ 2% 1.65$ 1.54$ 0.11$ 7%
Discontinued operations NM 0.03 0.03 NM
0.67$ 0.66$ 0.01$ 2% 1.68$ 1.54$ 0.14$ 9%
Diluted earnings per share
Continuing operations 0.67$ 0.65$ 0.02$ 3% 1.63$ 1.53$ 0.10$ 7%
Discontinued operations 0.01 (0.01) (100%) 0.03 0.03 NM
0.67$ 0.66$ 0.01$ 2% 1.66$ 1.53$ 0.13$ 8%

 

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