CHOICE HOTELS INTERNATIONAL, INC.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand the
consolidated financial condition and results of operations of Choice Hotels
International, Inc. and its subsidiaries (together the "Company") contained in
this report. MD&A is provided as a supplement to-and should be read in
conjunction with-our consolidated financial statements and accompanying notes.
Overview
We are primarily a hotel franchisor with franchise agreements and owned hotels representing 7,153 hotels open comprising 590,897 rooms and 1,135 hotels under construction, awaiting conversion or approved for development comprising 100,868 rooms as ofDecember 31, 2019 , located in 50 states, theDistrict of Columbia and more than 40 countries and territories outsidethe United States . The Choice brands includeComfort Inn , Comfort Suites, Quality, Clarion,Clarion Pointe ,Sleep Inn ,Econo Lodge ,Rodeway Inn , MainStay Suites,Suburban Extended Stay Hotel , WoodSpring Suites, Everhome Suites,Cambria Hotels , andAscend Hotel Collection . OnFebruary 1, 2018 , the Company acquired all of the issued and outstanding equity interests of the previous franchisor of the WoodSpring Suites brand and at acquisition had 239 hotels comprising 28,680 rooms operating in the economy extended stay segment in 35 states inthe United States . The acquisition allowed the Company to accelerate its growth in the economy extended stay segment. The transaction was accounted for as a business combination and the results from the acquisition have been consolidated within the Company's hotel franchising segment sinceFebruary 1, 2018 . OnJanuary 27, 2020 , we announced the launch of Everhome Suites, a new-construction midscale extended-stay brand offering. We expect to open the first Everhome Suites hotel in 2021. The Company's domestic operations are conducted through direct franchising relationships and the ownership of five Cambria hotels, while its international franchise operations are conducted through a combination of direct franchising and master franchising relationships. Master franchising relationships are governed by master franchising agreements which generally provide the master franchisee with the right to use our brands and sub-license the use of our brands in a specific geographic region, usually for a fee. Our business strategy is to conduct direct franchising in those international markets where both franchising is an accepted business model and we believe our brands can achieve significant scale. We typically elect to enter into master franchise agreements in those markets where direct franchising is currently not a prevalent or viable business model. When entering into master franchising relationships, we strive to select partners that have professional hotel and asset management capabilities together with the financial capacity to invest in building the Choice brands in their respective markets. Master franchising relationships typically provide lower revenues to the Company as the master franchisees are responsible for managing certain necessary services (such as training, quality assurance, reservations and marketing) to support the franchised hotels in the master franchise area and therefore, retain a larger percentage of the hotel franchise fees to cover their expenses. In certain circumstances, the Company has and may continue to make equity investments in our master franchisees. As a result of master 37
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franchise relationships and international market conditions, our revenues are primarily concentrated inthe United States . Therefore, our description of our business is primarily focused on the domestic operations, which encompassesthe United States andCaribbean countries and territories. Our Company generates revenues, income and cash flows primarily from our franchising operations and the initial, relicensing and continuing royalty fees attributable to our franchise agreements. Revenues are also generated from five owned hotels, partnerships with qualified vendors and travel partners that provide value-added solutions to our platform of guests and over 7,000 hotels and other sources. The hotel industry is seasonal in nature. For most hotels, demand is lower in November through February than during the remainder of the year. Our principal source of revenues is franchise fees based on the gross room revenues or number of rooms of our franchised properties. The Company's franchise fee revenues, as well as its owned hotels, reflect the industry's seasonality and historically have been lower in the first and fourth quarters than in the second and third quarters. With a primary focus on hotel franchising, we benefit from the economies of scale inherent in the franchising business. The fee and cost structure of our franchising business provides opportunities to improve operating results by increasing the number of franchised hotel rooms and effective royalty rates of our franchise contracts resulting in increased initial and relicensing fee revenue; ongoing royalty fees and procurement services revenues. In addition, our operating results can also be improved through our company-wide efforts related to improving property level performance and expanding the number of partnerships with travel related companies. The Company currently estimates, based on its current domestic portfolio of hotels under franchise, that a 1% change in revenue per available room ("RevPAR") or rooms under franchise would increase or decrease royalty revenues by approximately$3.7 million and a 1 basis point change in the Company's effective royalty rate would increase or decrease annual domestic royalties by approximately$0.8 million . In addition to these revenues, we also collect marketing and reservation system fees to support centralized marketing and reservation activities for the franchise system. The principal factors that affect the Company's results are: the number and relative mix of hotel rooms in the various hotel lodging price categories; growth in the number of hotel rooms owned and under franchise; occupancy and room rates achieved by the hotels in our system; the effective royalty rate achieved on our franchise agreements; the level of franchise sales and relicensing activity; the number of qualified vendor arrangements and travel related partnerships and the level of engagement with these partners by our franchisees and guests; and our ability to manage costs. The number of rooms in our hotel system and the occupancy and room rates at those properties significantly affect the Company's results because our fees are based upon room revenues or the number of rooms at owned and franchised hotels. The key industry standard for measuring hotel-operating performance is RevPAR, which is calculated by multiplying the percentage of occupied rooms by the average daily room rate realized. Our variable overhead costs associated with franchise system growth of our established brands have historically been less than incremental royalty fees generated from new franchises. Accordingly, continued growth of our franchise business should enable us to realize benefits from the operating leverage in place and improve operating results. We are required by our franchise agreements to use the marketing and reservation system fees we collect for system-wide marketing and reservation activities. These expenditures, which include advertising costs and costs to maintain our central reservations and property management systems, enhance awareness and consumer preference for our brands and deliver guests to our franchisees. Greater awareness and preference promotes long-term growth in business delivery to our franchisees and increases the desirability of our brands to hotel owners and developers, which ultimately increases franchise fees earned by the Company. Our Company articulates its mission as a commitment to our franchisees' profitability by providing our franchisees with hotel franchises that strive to generate the highest return on investment of any hotel franchise. We have developed an operating system dedicated to our franchisees' success that focuses on delivering guests to hotels and reducing hotel operating costs. We believe that executing our strategic priorities creates value for our shareholders. Our Company focuses on two key goals: Profitable Growth. Our success is dependent on improving the performance of our hotels, increasing our system size by selling additional hotel franchises, improving our effective royalty rate, expanding our qualified vendor programs and travel related partnerships and maintaining a disciplined cost structure. We attempt to improve our revenues and overall profitability by providing a variety of products and services designed to increase business delivery to and/or reduce operating and development costs. These products and services include national marketing campaigns, maintaining a guest loyalty program, a central reservation system, property and yield management programs and systems, revenue management services, quality assurance standards, qualified vendor relationships and expanding our partnerships with other travel related companies that provide services to our franchisees and guests. We believe that healthy brands, which deliver a compelling return on investment, will enable us to sell additional hotel franchises and raise royalty rates. We have multiple brands that meet the needs of many types of guests, and can be developed at various price points and applied to both new and existing hotels. This ensures that we have brands suitable for creating growth in a variety of market conditions. Improving the performance of the hotels in our system, 38
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growing the system through additional franchise sales and improving franchise agreement pricing while maintaining a disciplined cost structure are the keys to profitable growth. Maximizing Financial Returns and Creating Value for Shareholders. Our capital allocation decisions, including capital structure and uses of capital, are intended to maximize our return on invested capital and create value for our shareholders. We believe our strong and predictable cash flows create a strong financial position that provides us a competitive advantage. We maintain a capital structure that generates high financial returns and use our excess cash flow to provide returns to our shareholders primarily through share repurchases, dividends, or investing in growth opportunities. Historically, we have returned value to our shareholders through share repurchases and dividends. In 1998, we instituted a share repurchase program which has generated substantial value for our shareholders. During the year endedDecember 31, 2019 , the Company purchased 0.6 million shares of common stock under the share repurchase program at a total cost of$44.1 million . Since the program's inception throughDecember 31, 2019 , we have repurchased 51.1 million shares (including 33.0 million prior to the two-for-one stock split effected inOctober 2005 ) of common stock at a total cost of$1.4 billion . Considering the effect of the two-for-one stock split, the Company has repurchased 84.1 million shares at an average price of$17.15 per share. During the third quarter of 2019, our board of directors approved an increase to the number of shares authorized under the Company's share repurchase program by approximately 2.3 million shares to 4.0 million shares. AtDecember 31, 2019 , we had approximately 3.9 million shares remaining under the current share repurchase authorization. We currently believe that our cash flows from operations will support our ability to complete the current repurchase authorization. Upon completion of the current authorization, our board of directors will evaluate the advisability of additional share repurchases. The Company commenced paying quarterly dividends in 2004 and in 2012 the Company elected to pay a special cash dividend totaling approximately$600 million . The Company currently maintains the payment of a quarterly dividend on its common shares outstanding, however the declaration of future dividends is subject to the discretion of the board of directors. During the fourth quarter of 2019, the Company's board of directors announced a 5% increase to the quarterly dividend rate to$0.225 per share from$0.215 per share, beginning with the dividend payable in the first quarter of 2020. During the year endedDecember 31, 2019 , we paid cash dividends totaling approximately$48.1 million . We expect to continue to pay dividends in the future, subject to declaration by our board of directors as well as future business performance, economic conditions, changes in income tax regulations and other factors, including limitations in the Company's unsecured credit facility. Based on the present outstanding share count and annual dividend rate of$0.90 per common share outstanding, we expect that aggregate annual regular dividends for 2020 would be approximately$50.1 million . The Company also allocates capital to financing, investment and guaranty support to incent franchise development for certain brands in strategic markets; hotel ownership; and exploring growth opportunities in business areas that are adjacent or complementary to our core hotel franchising business, which leverage our core competencies and are additive to our franchising business model. The timing and amount of these investments are subject to market and other conditions. Notwithstanding investments in these alternative growth strategies, the Company expects to continue to return value to its shareholders over time through a combination of share repurchases and dividends. We believe our growth investments and strategic priorities, when properly implemented, will enhance our profitability, maximize our financial returns and continue to generate value for our shareholders. The ultimate measure of our success will be reflected in the items below. Results of Operations: Royalty fees, operating income, net income and diluted earnings per share ("EPS") represent key measurements of our financial performance. These measurements are primarily driven by the operations of our hotel franchise system and therefore, our analysis of the Company's operations is primarily focused on the size, performance and potential growth of the hotel franchise system, as well as our variable overhead costs. Our discussion of results excludes the Company's marketing and reservation system revenues and expenses. The Company's franchise agreements require the payment of marketing and reservation system fees to be used exclusively by the Company for expenses associated with providing franchise services such as central reservation systems, national marketing and media advertising. The Company is obligated to expend the marketing and reservation system fees it collects from franchisees in accordance with the franchise agreements. Furthermore, franchisees are required to reimburse the Company for any deficits generated by these marketing and reservation system activities. Over time, the Company expects cumulative revenues and expenses to break even and therefore, no income or loss will be generated from marketing and reservation system activities. As a result, the Company generally excludes the financial impacts of this program from the analysis of its operations. Due to the seasonal nature of the Company's hotel franchising business or multi-year investments that are required to support franchise operations, quarterly or annual deficits and surpluses may be generated. During the year endedDecember 31, 2019 , 39
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marketing and reservation system expenses exceeded revenues by$1.7 million . During the years endedDecember 31, 2018 and 2017, marketing and reservation system revenues exceeded expenses by$9.4 million and$20.2 million , respectively. Refer to MD&A heading "Operations Review" for additional analysis of our results. Liquidity and Capital Resources: Historically, the Company has generated significant cash flows from operations. Since our business has not historically required significant reinvestment of capital, we typically utilize cash in ways that management believes provide the greatest returns to our shareholders which include share repurchases and dividends. However, we may decide to utilize cash for acquisitions and other investments in the future. We believe the Company's cash flow from operations and available financing capacity is sufficient to meet the expected future operating, investing and financing needs of the business. Refer to MD&A heading "Liquidity and Capital Resources" for additional analysis. Inflation: Inflation has been moderate in recent years and has not had a significant impact on our business. Non-GAAP Financial Statement Measurements The Company utilizes certain measures which do not conform to generally accepted accounting principles accepted inthe United States ("GAAP") when analyzing and discussing its results with the investment community. This information should not be considered as an alternative to any measure of performance as promulgated under GAAP. The Company's calculation of these measurements may be different from the calculations used by other companies and therefore, comparability may be limited. We have included a reconciliation of these measures to the comparable GAAP measurement below as well as our reasons for reporting these non-GAAP measures. Revenues, excluding marketing and reservation system activities: The Company utilizes revenues, excluding marketing and reservation system activities, rather than total revenues when analyzing the performance of the business. Marketing and reservation activities are excluded since the Company is contractually required by its franchise agreements to utilize the fees collected specifically for system-wide marketing and reservation activities. This non-GAAP measure is a commonly used measure of performance in our industry and facilitates comparisons between the Company and its competitors. Calculation of revenues, excluding marketing and reservation system activities Year Ended December 31, (in thousands) 2019 2018 2017 Total Revenues$ 1,114,820 $ 1,041,304 $ 941,297 Adjustments: Marketing and reservation system revenues (577,426 ) (543,677 ) (499,625 ) Revenues, excluding marketing and reservations system activities$ 537,394 $ 497,627 $ 441,672 40
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Operations Review Comparison of 2019 and 2018 Operating Results Summarized financial results for the years endedDecember 31, 2019 and 2018 are as follows: December 31, 2019 2018 (in thousands) REVENUES: Royalty fees$ 388,151 $ 376,676 Initial franchise and relicensing fees 27,489 26,072 Procurement services 61,429 52,088 Marketing and reservation system 577,426 543,677 Owned hotels 20,282 - Other 40,043 42,791 Total revenues 1,114,820 1,041,304
OPERATING EXPENSES:
Selling, general and administrative 168,833 170,027
Depreciation and amortization 18,828 14,330
Marketing and reservation system 579,139 534,266
Owned hotels 14,448 - Total operating expenses 781,248 718,623 Impairment of goodwill (3,097 ) (4,289 ) Impairment of long-lived assets (7,259 ) - Loss on sale of business (4,674 ) - Gain on sale of assets, net 100 82 Operating income 318,642 318,474
OTHER INCOME AND EXPENSES, NET:
Interest expense 46,807 45,908 Interest income (9,996 ) (7,452 ) Loss on extinguishment of debt 7,188 - Other (gain) loss (4,862 ) 1,437 Equity in net loss of affiliates 9,576 5,323 Total other income and expenses, net 48,713 45,216 Income before income taxes 269,929 273,258 Income taxes 47,051 56,903 Net income$ 222,878 $ 216,355 41
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Results of Operations The Company recorded income before income taxes of$269.9 million for the year endedDecember 31, 2019 , a$3.3 million or 1% decrease from the same period of the prior year. The decrease in income before income taxes primarily reflects a$7.2 million loss on the extinguishment of debt, a$4.3 million increase in equity in loss of affiliates, a$0.9 million increase in interest expense, offset by a$6.3 million increase in other (gain) loss, a$2.6 million increase in interest income, and a$0.2 million increase in operating income. Operating income was positively impacted by an$11.5 million or 3% increase in royalty revenues, a$9.3 million increase in procurement services revenues, and a$1.4 million increase in initial franchise and relicensing fees, as the Company's core franchising operations continue to expand and selling, general and administrative ("SG&A") expenses were controlled. In addition, operating income was further improved by the operation of 5 wholly owned hotels which were either purchased or opened in 2019 and generated$0.9 million in revenues in excess of operating expenses and depreciation. Operating income was negatively impacted by the recognition of a$15.0 million loss on sale and impairment of long-lived assets and goodwill related to the Company's software as a service ("SaaS") for vacation rentals reporting unit which was disposed of onJune 3, 2019 . In addition, the net deficit generated from marketing and reservation system activities was$1.7 million for the year endedDecember 31, 2019 compared to a net surplus of$9.4 million generated in the prior year. The primary reasons for these fluctuations are described in more detail below. Royalty Fees Domestic royalty fees for the year endedDecember 31, 2019 increased$11.9 million to$366.6 million from$354.7 million for the year endedDecember 31, 2018 , an increase of 3%. The increase in domestic royalties reflect a 2.9% increase in the number of domestic franchised hotel rooms and an increase in the effective royalty rate, partially offset by a 0.9% decrease in domestic RevPAR. System-wide RevPAR decreased due to a 0.3% decrease in average daily rates and a 40 basis point decrease in occupancy rates. The Company's effective royalty rate for the domestic hotel system increased 11 basis points from 4.75% for the year endedDecember 31, 2018 to 4.86% for the year endedDecember 31, 2019 . Additionally, domestic royalties increased$1.5 million for the year endedDecember 31, 2019 as compared to the prior year resulting from the inclusion of an additional month of WoodSpring revenue in operations based on the Company's acquisition date ofFebruary 1, 2018 . A summary of the Company's domestic franchised hotels operating information for the years endingDecember 31, 2019 and 2018 is as follows: 2019 2018 Change Average Average Average Daily Rate Occupancy RevPAR Daily Rate Occupancy RevPAR Daily Rate Occupancy RevPAR
Comfort1
66.7 %
84.19 64.5 % 54.34 84.71 65.2 % 55.20 (0.6 )% (70 ) bps (1.6 )% Quality
79.51 59.8 % 47.57 80.15 60.1 % 48.20 (0.8 )% (30 ) bps (1.3 )% Clarion2
84.64 57.2 % 48.40 84.45
57.9 % 48.90 0.2 % (70 ) bps (1.0 )%
63.44 54.7 % 34.68 (0.6 )% 10 bps (0.4 )%
Rodeway 63.28 55.5 % 35.15 64.26 56.4 % 36.21 (1.5 )% (90 ) bps (2.9 )% WoodSpring3 47.10 79.0 % 37.19
45.92 80.1 % 36.77 2.6 % (110 ) bps 1.1 %
MainStay 84.11 68.4 % 57.53 83.08 69.7 % 57.89 1.2 % (130 ) bps (0.6 )%
Suburban 56.61 73.3 % 41.51 55.81 75.5 % 42.16 1.4 % (220 ) bps (1.5 )%
Cambria
Hotels 144.25 71.6 % 103.30 146.71 71.5 % 104.84 (1.7 )% 10 bps (1.5 )%
Ascend
Hotel
Collection 126.54 57.5 % 72.69 126.86 58.0 % 73.62 (0.3 )% (50 ) bps (1.3 )%
Total3 $ 81.42 62.9 % $ 51.19 $ 81.64 63.3 % $ 51.65 (0.3 )% (40 ) bps (0.9 )%
1 Includes Comfort family of brand extensions including Comfort and Comfort
Suites.
2 Includes Clarion family of brand extensions including Clarion and Clarion
Pointe .
3 WoodSpring was acquired on February 1, 2018 ; however Average Daily Rate,
Occupancy, and RevPAR reflect operating performance for the year ended December
31, 2018 , as if the brand had been acquired on January 1, 2018 .
The number of total domestic rooms on-line increased by 2.9% to 462,973 rooms as
of December 31, 2019 from 450,028 as of December 31, 2018 . The total number of
domestic hotels on-line increased by 1.6% to 5,955 as of December 31, 2019 from
5,863 as of December 31, 2018 . Excluding the Company's economy branded hotels,
Econo Lodge and Rodeway, total domestic units and rooms increased 3.1% and 4.3%,
respectively, which reflects the Company's focus on growing the brands in
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its upscale, midscale and extended stay chain scale categories, which are more revenue intensive due to higher average RevPAR and number of rooms per hotel. A summary of domestic hotels and rooms on-line atDecember 31, 2019 and 2018 by brand is as follows: December 31, 2019 December 31, 2018 Variance Hotels Rooms Hotels Rooms Hotels % Rooms % Comfort1 1,616 127,000 1,627 127,282 (11) (0.7 )% (282) (0.2 )% Sleep 402 28,361 393 27,962 9 2.3 % 399 1.4 % Quality 1,688 129,232 1,636 126,533 52 3.2 % 2,699 2.1 % Clarion2 178 22,498 174 22,179 4 2.3 % 319 1.4 % Econo Lodge 807 48,538 839 50,692 (32 ) (3.8 )% (2,154) (4.2 )% Rodeway 600 34,727 612 35,124 (12 ) (2.0 )% (397) (1.1 )% WoodSpring 270 32,479 249 29,911 21 8.4 % 2,568 8.6 % MainStay 73 4,636 63 4,268 10 15.9 % 368 8.6 % Suburban 60 6,082 54 5,699 6 11.1 % 383 6.7 % Cambria Hotels 50 7,277 40 5,685 10 25.0 % 1,592 28.0 % Ascend Hotel Collection 211 22,143 176 14,693 35 19.9 % 7,450 50.7 % Total Domestic Franchises 5,955 462,973 5,863 450,028 92 1.6 % 12,945 2.9 % 1 Includes Comfort family of brand extensions including Comfort and Comfort Suites. 2 Includes Clarion family of brand extensions including Clarion andClarion Pointe . International royalty fees for the year endedDecember 31, 2019 decreased$0.4 million to$21.6 million , a decrease of 1.8% compared to the year endedDecember 31, 2018 . International rooms on-line increased by 8,844 from 119,080 as ofDecember 31, 2018 to 127,924 as ofDecember 31, 2019 . International hotels on-line increased by 40 from 1,158 as ofDecember 31, 2018 to 1,198 as ofDecember 31, 2019 . International rooms grew at a faster pace than the number of hotels due to a focus on new entrants with higher per unit room counts than currently in the Company's international franchised hotel portfolio, as well as a recent strategic partnership that added 12 luxury, all-inclusive resorts inDecember 2019 to ourAscend Hotel Collection portfolio representing over 5,000 rooms. Despite the increase in international hotels and rooms, international royalty fees declined slightly due to RevPAR performance and foreign currency exchange rate fluctuations in the various countries where we operate. Initial Franchise and Relicensing Fees Initial franchise fees are fees paid to the Company when a franchisee executes a franchise agreement; relicensing fees include fees charged to new owners of a franchised property whenever an ownership change occurs and the property remains in the franchise system, as well as fees required to renew existing franchise agreements. During the year endedDecember 31, 2019 , the Company awarded 684 franchise agreements representing 59,641 rooms compared to 756 franchise agreements representing 60,161 rooms for the year endedDecember 31, 2018 . Domestic franchise agreements awarded for new construction hotels totaled 269 representing 22,814 rooms during the year endedDecember 31, 2019 compared to 322 contracts representing 26,694 rooms for the year endedDecember 31, 2018 . The 2018 acquisition of WoodSpring Suites resulted in 74 new construction franchise agreements, including 19 with WoodSpring's largest franchisee concurrent with the acquisition, compared to 66 new construction franchise agreements in 2019. Conversion hotel awarded franchise agreements totaled 415 representing 36,827 rooms for the year endedDecember 31, 2019 compared to 434 agreements representing 33,467 rooms for the year endedDecember 31, 2018 . The Company awarded 403 domestic relicensing contracts during the year endedDecember 31, 2019 compared to 426 executed during the year endedDecember 31, 2018 . The Company awarded 42 domestic renewal agreements during the year endedDecember 31, 2019 compared to 31 during the year endedDecember 31, 2018 . Initial franchise and relicensing fees are generally collected at the time the franchise agreement is awarded. However, the recognition of revenue is deferred until the hotel is open or the franchise agreement is terminated. Upon hotel opening, revenue is recognized ratably as services are provided over the enforceable period of the franchise license agreement. Upon the termination of a franchise agreement, previously deferred initial and relicensing fees are recognized immediately in the period 43
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the agreement is terminated. Initial franchise and relicensing fee revenue increased$1.4 million or 5% from$26.1 million to$27.5 million during the years endedDecember 31, 2018 and 2019, respectively. As ofDecember 31, 2019 , the Company had 1,052 franchised hotels with 84,950 rooms under construction, awaiting conversion or approved for development in its domestic system as compared to 1,026 hotels and 81,662 rooms atDecember 31, 2018 . The number of new construction franchised hotels in the Company's domestic pipeline increased 3% to 794 atDecember 31, 2019 from 773 atDecember 31, 2018 . The growth in the number of new construction hotels in the domestic pipeline reflects the increase in new construction franchise agreements executed over the last several years. New construction hotels typically average 18 to 36 months to open after the franchise agreement is executed. The number of conversion franchised hotels in the Company's domestic pipeline increased by 5 hotels or 2% fromDecember 31, 2018 to 258 hotels atDecember 31, 2019 , primarily due to the timing of hotel openings and the timing of signing new conversion franchise agreements. Conversion hotels typically open three to six months after the execution of a franchise agreement. The Company had an additional 83 franchised hotels with 15,918 rooms under construction, awaiting conversion or approved for development in its international system as ofDecember 31, 2019 compared to 56 hotels and 5,399 rooms atDecember 31, 2018 . While the Company's hotel pipeline provides a strong platform for growth, a hotel in the pipeline does not always result in an open and operating hotel due to various factors. Procurement Services: Revenues increased$9.3 million or 18% from$52.1 million for the year endedDecember 31, 2018 to$61.4 million for the year endedDecember 31, 2019 . The increase in revenues primarily reflects the implementation of new brand programs, as well as an increase in the volume of business transacted with existing and new qualified vendors and strategic alliance partners.Owned Hotels : The Company acquired four operating hotels in the third quarter of 2019. A fifth hotel previously under development by the Company also opened in the third quarter of 2019. Revenues of$20.3 million and expenses of$14.4 million represent fees earned from and costs incurred for the hotel operations. Refer to Note 25 of our consolidated financial statements. Other Revenue: Revenue decreased$2.7 million from the year endedDecember 31, 2018 to$40.0 million for the year endedDecember 31, 2019 . The decrease in other revenue reflects a$4.7 million decline in revenue from the SaaS for vacation rental reporting unit which was sold onJune 3, 2019 and a$4.0 million decrease in revenues from the early termination of franchise agreements and the sale of chip-enabled credit card readers to our franchisees which was substantially completed in 2018; offset by a$6.0 million increase in non-compliance fees and other franchising revenues. Selling, General and Administrative Expenses: The cost to operate the business is reflected in SG&A on the consolidated statements of income. SG&A expenses were$168.8 million for the year endedDecember 31, 2019 , a decrease of$1.2 million fromDecember 31, 2018 . SG&A expenses for the years endDecember 31, 2019 and 2018 include approximately$9.9 million and$19.8 million , respectively, related to the Company's alternative growth initiatives and expenses related to the operations of an office building leased to a third party. The$9.9 million decrease in SG&A expenses is primarily due to decreased investment in vacation rental activities and decreased SG&A expenses due to the sale of the SaaS for vacation rentals reporting unit onJune 3, 2019 . In addition, SG&A for the year endedDecember 31, 2018 included$6.9 million of transaction and transition costs incurred in conjunction with the acquisition of the WoodSpring brand onFebruary 1, 2018 and the establishment of a$2.8 million valuation allowance related to restructured terms of a note receivable from a franchisee. Excluding the SG&A for alternative growth initiatives, office building operations, and the prior year one-time charges noted above, SG&A for the year endDecember 31, 2019 increased$18.3 million from$140.6 million in the prior year to$158.9 million in the current year primarily due to a$6.1 million net increase in mark to market expenses due to our non-qualified retirement plan investments,$1.5 million in operational restructuring charges, and a 7.5% increase in cost to support the hotel franchising business. Depreciation and Amortization: Depreciation and amortization expense for the year endedDecember 31, 2019 increased$4.5 million to$18.8 million for the same period of the prior year primarily due to an additional$4.9 million in depreciation related to the Company's owned hotels acquired and opened during the third quarter of 2019, offset by$1.0 million in reduced deprecation related to the SaaS for vacation rental reporting unit, which was sold in the second quarter of 2019. Impairment ofGoodwill and Long-lived Assets and Loss on Sale of Business: During the first quarter of 2019, the Company recorded$3.1 million goodwill impairment and a$7.3 million long-lived assets impairment related to the SaaS for vacation 44
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rentals reporting unit, in comparison to a$4.3 million goodwill impairment recorded in the fourth quarter of 2018. During the second quarter of 2019, the Company recorded a$4.7 million loss on sale of the SaaS for vacation rentals reporting unit. Refer to Item 7. Critical Accounting Policies and Note 6 to our consolidated financial statements for additional information. Interest Income: Interest income increased$2.6 million to$10.0 million in the current year primarily due to the issuance of additional notes receivable related to the Company's program to incent development of its Cambria Hotel brand in new markets. Loss on Extinguishment of Debt: The Company recorded a loss on extinguishment of debt of$7.2 million for the early redemption of the Company's unsecured senior notes in the principal amount of$250 million which were due inAugust 2020 . The loss on extinguishment represents a$6.3 million make-whole premium to redeem the notes prior to maturity and the acceleration of unamortized deferred financing fees and underwriting discounts. Refer to Item 7. Liquidity and Capital Resources and Note 13 to our consolidated financial statements for additional information. Other (Gain) Loss: Other (gain) loss increased from a loss of$1.4 million for the year endedDecember 31, 2018 to a gain of$4.9 million for the year endedDecember 31, 2019 due to fluctuations in the fair value of investments held in the Company's non-qualified employee benefit plans. Equity in Net Loss of Affiliates: The Company recorded net losses of$9.6 million from its unconsolidated joint ventures during the year endedDecember 31, 2019 compared to net losses of$5.3 million for the year endedDecember 31, 2018 . These investments relate to the Company's program to offer equity support to qualified franchisees to develop and operateCambria Hotels in strategic markets. The fluctuation is primarily attributable to the sale of an unconsolidated joint venture resulting in a loss of$6.0 million in the third quarter of 2019. Refer to Note 25 to our consolidated financial statements for additional information. Income Tax Expense: The Company's effective income tax rates were 17.4% and 20.8%, for the years endedDecember 31, 2019 and 2018, respectively. The effective income tax rate for the year endedDecember 31, 2019 was lower than theU.S. federal income tax rate of 21.0% due to tax credits recognized during the year of$11.6 million , excess tax benefits from share-based compensation, and the impact of foreign operations, partially offset by the impact of state income taxes. The effective income tax rate for the year endedDecember 31, 2018 was lower than theU.S. federal income tax rate of 21% due to excess tax benefits from share-based compensation and the impact of foreign operations, partially offset by the impact of state income taxes. Refer toChoice Hotels International, Inc. 2018 10-K Annual Report "Comparison 2018 and 2017 Operating Results" under Item 7. Management's Discussion and Analysis for details regarding changes between 2018 and 2017. Liquidity and Capital Resources Operating Activities Net cash flows provided by operating activities were$270.6 million for the year endedDecember 31, 2019 compared to$242.9 million for the same period of 2018, an increase of$27.7 million . Operating cash flows increased primarily due to an increase in operating income, excluding certain non-cash charges, and a decrease in cash outflows related to franchise agreement acquisition costs partially offset by a decrease in the timing of working capital items. In conjunction with brand and development programs, we make certain payments to franchisees as an incentive to enter into new franchise agreements or perform designated improvements to properties under existing franchise agreements. We recognize such payments as an adjustment to transaction price and capitalize as an intangible asset. These intangibles are amortized on a straight-line basis over the estimated benefit period of the arrangement as an offset to revenues. If the franchisee remains in the system in good standing over the term specified in the incentive agreement, the Company forgives the incentive ratably. If the franchisee exits our franchise system or is not operating their franchise in accordance with our quality or credit standards, the franchisee must repay the unamortized incentive payment plus interest. During the years endedDecember 31, 2019 , 2018 and 2017, the Company's net advances for these purposes totaled$38.9 million ,$52.9 million , and$30.6 million , respectively. The timing and amount of these cash flows are dependent on various factors including the implementation of various development and brand incentive programs, the level of franchise sales and the timing of hotel openings. AtDecember 31, 2019 , the Company had commitments to extend an additional$300.4 million for these purposes provided certain conditions are met by its franchisees. The Company's franchise agreements require the payment of marketing and reservation system fees. In accordance with the terms of our franchise agreements, the Company is obligated to use these marketing and reservation system fees to provide 45
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marketing and reservation services such as advertising, providing a centralized reservation and property management system, providing reservation and revenue management services, and performing certain franchise services to support the operation of the overall franchise system. Marketing and reservation system expenses are those expenses incurred to facilitate the delivery of marketing and reservation system services, including direct expenses and an allocation of costs for certain administrative activities required to carry out marketing and reservation services. Marketing and reservation system expenses are recognized as services are incurred or goods are received, and as such may not equal marketing and reservation system revenues in a specific period but are expected to equal revenues earned from franchisees over time. To the extent revenues collected exceed expenditures incurred, the Company has a commitment to the franchisee system to make expenditures in future years. Conversely, to the extent expenditures incurred exceed revenues collected, the Company has the contractual enforceable right to recover such advances in future periods through additional fee assessments or reduced spending. During the year ended 2019, marketing and reservation system expenses exceeded revenues by$1.7 million . During the years ended 2018 and 2017, marketing and reservation system revenues exceeded expenses by$9.4 million and$20.2 million , respectively. Investing Activities Cash utilized in investing activities totaled$251.2 million ,$321.3 million and$90.1 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. The increase in cash utilized for investing activities from 2018 to 2019 primarily reflects the following items: During the year endedDecember 31, 2018 , the Company completed the acquisition of the brand and franchise business of WoodSpring. The acquisition closed onFebruary 1, 2018 and added 239 new extended-stay hotels in 35 states to the Company's portfolio. The acquisition was funded with cash on hand and available borrowings. The total cash consideration was$231.3 million , which consisted of cash paid, net of cash acquired. Prior toJuly 23, 2019 , the Company held a 40% ownership interest of a joint venture that owned five Cambria hotels recorded as an investment in unconsolidated entities of$40.0 million . OnJuly 23, 2019 , the Company redeemed the remaining 60% ownership interest in four of the hotels for approximately$169.0 million , net of cash acquired, and sold its 40% ownership interest in the fifth hotel for approximately$8.9 million . The transaction was funded with cash and borrowings under the Company's revolving credit facility and accounted for as an asset acquisition. During the third quarter of 2018, a partner in a variable interest entity ("VIE") previously accounted for under the equity method of accounting exercised a put option to the Company for its membership interest. As a result, the Company paid$3.2 million for the remaining interest and the purchase was accounted for as an asset acquisition. The financial results of the 100% owned entity have been consolidated in the Company's financial statements sinceAugust 9, 2018 . There were no asset acquisitions during the year endedDecember 31, 2017 . During the year endedDecember 31, 2019 , the Company realized proceeds of$10.6 million from the sale of one parcel of land and an office building. During the years endedDecember 31, 2018 andDecember 31, 2017 the Company realized proceeds of$3.1 million and$1.0 million , respectively, from the sale of one parcel of land in each period. During the year endedDecember 31, 2019 , the Company sold the SaaS for vacation rentals reporting unit and made payments, net of sales proceeds, of$10.8 million for net costs incurred to complete the disposition. There were no business dispositions in 2018 and 2017. During the year endedDecember 31, 2019 , 2018 and 2017, the Company invested$27.8 million ,$9.6 million , and$50.6 million in joint ventures accounted for under the equity method of accounting. In addition, the Company received distributions from these joint ventures totaling$10.2 million ,$1.4 million , and$4.6 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. The Company's investment in these joint ventures primarily relate to ventures that support the Company's efforts to promote growth of our Cambria Hotels brand. The Company expects to make additional capital contributions totaling$10.1 million to existing unconsolidated and consolidated joint ventures supporting these efforts. During the years endedDecember 31, 2019 , 2018 and 2017, capital expenditures in property and equipment totaled$57.3 million ,$47.7 million , and$23.4 million , respectively. The increase in capital expenditures during 2019 primarily reflects the Company's investment in improvements to an office building that was converted to a Cambria hotel, which opened in the third quarter of 2019. During the year endedDecember 31, 2018 , capital expenditures primarily reflects the Company's acquisition of an aircraft, including avionics and interior upgrades, as well as improvements to an office building that is converting to a Cambria Hotel. The Company provides financing to franchisees for hotel development efforts and other purposes in the form of notes receivable. These loans bear interest and are expected to be repaid in accordance with the terms of the loan agreements. During 46
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the years endedDecember 31, 2019 , 2018 and 2017, the Company advanced$20.7 million ,$36.0 million , and$19.7 million for these purposes, respectively. In addition, the Company received repayments totaling$14.2 million ,$5.0 million , and$0.7 million for these purposes, respectively. AtDecember 31, 2019 , the Company had commitments to extend an additional$16.8 million for these purposes provided certain conditions are met by its franchisees. From time to time, our board of directors authorizes specific transactions and general programs which permit us to provide financing, investment and guaranties and similar credit support to qualified franchisees, as well as to acquire, develop, own and resell real estate to incent franchise development. Since 2006, we have engaged in these financial support activities to encourage acceleration of the growth of our Cambria Hotels brand, primarily in strategic markets and locations. Over the next three to five years, depending on market and other conditions, we expect to continue to deploy capital in support of this brand and expect our investment to total approximately$725 million over that time period. The annual pace of future financial support activities will depend upon market and other conditions including among others, our franchise sales results, the environment for new construction hotel development and the hotel lending environment. Our support of theCambria Hotels brand's growth is expected to be primarily in the form of joint venture investments, hotel ownership, franchise agreement acquisition costs, senior mortgage loans, development loans, mezzanine lending, and through the operation of a land-banking program. With respect to our lending, hotel ownership and joint venture investments, we generally expect to recycle these loans and investments within a five year period. AtDecember 31, 2019 , the Company had approximately$582.1 million outstanding pursuant to these financial support activities. Financing Activities Financing cash flows relate primarily to the Company's borrowings, open market treasury stock repurchases, acquisitions of shares in connection with the exercise or vesting of equity awards and dividends. Debt Senior Unsecured Notes Due 2029 OnNovember 27, 2019 , the Company issued unsecured senior notes in the principal amount of$400.0 million (the "2019 Senior Notes") at a discount of$2.4 million , bearing a coupon of 3.70% with an effective rate of 3.88%. The 2019 Senior Notes will mature onDecember 1, 2029 , with interest to be paid semi-annually onDecember 1st andJune 1st . The Company used the net proceeds of this offering, after deducting underwriting discounts, commissions and other offering expenses, to repay the 2010 Senior Notes (referenced below) and for working capital and other general corporate purposes. Bond discounts and debt issuance costs incurred in connection with the 2019 Senior Notes are amortized on a straight-line basis, which is not materially different than the effective interest method, through maturity. Amortization of these costs is included in interest expense in the consolidated statements of income. The Company may redeem the 2019 Senior Notes, in whole or in part, at its option at the applicable redemption price before maturity. If the Company redeems the 2019 Senior Notes prior toSeptember 1, 2029 (three months prior to the maturity date) (the "Par Call Date"), the redemption price will be equal to the greater of (a) 100% of the principal amount of the notes to be redeemed, or (b) the sum of the present values of the remaining scheduled principal and interest payments that would have been payable had the 2019 Senior Notes matured on the Par Call Date, discounted to the redemption date on a semi-annual basis at the applicable Treasury Rate plus 30 basis points, plus accrued and unpaid interest. If the Company redeems the 2019 Senior Notes on or after the Par Call Date, the redemption price will equal 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest. Senior Unsecured Notes due 2022 OnJune 27, 2012 the Company issued unsecured senior notes in the principal amount of$400 million (the "2012 Senior Notes") at par, bearing a coupon of 5.75% with an effective rate of 6.0%. The 2012 Senior Notes will mature onJuly 1, 2022 , with interest to be paid semi-annually onJanuary 1st andJuly 1st . The Company utilized the net proceeds of this offering, after deducting underwriting discounts and commissions and other offering expenses, together with borrowings under the Company's senior credit facility, to pay a special cash dividend totaling approximately$600.7 million paid to stockholders onAugust 23, 2012 . The Company may redeem the 2012 Senior Notes at its option at a redemption price equal to the greater of (a) 100% of the principal amount of the notes to be redeemed and (b) the sum of the present values of the remaining scheduled principal and interest payments from the redemption date to the date of maturity discounted to the redemption date on a semi-annual basis at theTreasury rate, plus 50 basis points. 47
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Senior Unsecured Notes due 2020 OnAugust 25, 2010 , the Company issued unsecured senior notes in the principal amount of$250 million (the "2010 Senior Notes") at a discount of$0.6 million , bearing a coupon of 5.70% with an effective rate of 6.19%. The 2010 Senior Notes were scheduled to mature onAugust 28, 2020 , with interest on the 2010 Senior Notes to be paid semi-annually onFebruary 28th andAugust 28th . The Company used the net proceeds from the offering, after deducting underwriting discounts and other offering expenses, to repay outstanding borrowings and other general corporate purposes. OnDecember 16, 2019 , with the net proceeds from the issuance of the 2019 Senior Notes, the Company redeemed the 2010 Senior Notes prior to the maturity date ofAugust 28, 2020 . The early redemption provisions of the 2010 Senior Notes required the Company to redeem the notes at a price equal to the sum of the present values of the remaining scheduled principal and interest payments from the redemption date to the date of maturity discounted to the redemption date on a semi-annual basis at theTreasury rate, plus 45 basis points. The Company paid$256.3 million to redeem the notes and recorded a loss on extinguishment of debt in the amount of$7.2 million , which included the make-whole premium of$6.3 million and the write-off of previously unamortized deferred financing fees and discounts. Restated Senior Unsecured Credit Facility OnAugust 20, 2018 , the Company entered into the Amended and Restated Senior Unsecured Credit Agreement (the "Restated Credit Agreement"), which amended and restated the Company's existing senior unsecured revolving credit agreement, datedJuly 21, 2015 . The Restated Credit Agreement increased the commitments under the credit facility to$600 million and extended the final maturity date toAugust 20, 2023 , subject to optional one-year extensions that can be requested by the Company prior to each of the first, second and third anniversaries of the closing date of the Restated Credit Agreement. The effectiveness of such extensions are subject to the consent of the lenders under the Restated Credit Agreement and certain customary conditions. OnJuly 2, 2019 , the Company exercised the first one-year extension option on the Restated Credit Agreement, extending the maturity date fromAugust 20, 2023 toAugust 20, 2024 . The Restated Credit Agreement also provides that up to$35 million of borrowings may be used for alternative currency loans and up to$25 million of borrowings may be used for swingline loans. The Company may from time to time designate one or more wholly owned subsidiaries of the Company as additional borrowers under the Restated Credit Agreement, subject to the consent of the lenders and certain customary conditions. There are no subsidiary guarantors under the Restated Credit Agreement. Previously, if certain subsidiaries of the Company subsequently incur certain recourse debt or become obligors in respect of certain recourse debt of the Company or certain of its other subsidiaries, the Restated Credit Agreement required such obligated subsidiaries to guarantee the Company's obligations under the Restated Credit Agreement (the "springing guarantee"). In the event that the springing guarantee was triggered under the Restated Credit Agreement, the same subsidiary guarantees would be required under the Company's 2012 and 2019 Senior Notes and certain hedging and bank product arrangements, if any, with lenders that are parties to the Restated Credit Agreement. However, onFebruary 18, 2020 , the Company amended the Restated Credit Agreement to, among other things, remove the springing guarantee and other provisions and references in the Restated Credit Agreement related to the potential existence of subsidiary guarantors. The Company may at any time prior to the final maturity date increase the amount of the Restated Credit Agreement or add one or more term loan facilities under the Restated Credit Agreement by up to an additional$250 million in the aggregate to the extent that any one or more lenders commit to being a lender for the additional amount of such term loan facility and certain other customary conditions are met. The Restated Credit Agreement provides that the Company may elect to have borrowings bear interest at a rate equal to (i) LIBOR plus a margin ranging from 90 to 150 basis points or (ii) a base rate plus a margin ranging from 0 to 50 basis points, in each case, with the margin determined according to the Company's senior unsecured long-term debt rating or under circumstances as set forth in the Restated Credit Agreement, the Company's total leverage ratio in the event that such total leverage ratio is less than 2.5 to 1.0. The Restated Credit Agreement requires the Company to pay a fee on the total commitments, calculated on the basis of the actual daily amount of the commitments (regardless of usage) times a percentage per annum ranging from 0.075% to 0.25% (depending on the Company's senior unsecured long-term debt rating or under circumstances as set forth in the Restated Credit Agreement, the Company's total leverage ratio in the event that such total leverage ratio is less than 2.5 to 1.0). The Restated Credit Agreement requires that the Company and its restricted subsidiaries comply with various covenants, including with respect to restrictions on liens, incurring indebtedness, making investments and effecting mergers and/or asset 48
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sales. With respect to dividends, the Company may not declare or make any payment if there is an existing event of default or if the payment would create an event of default. The Restated Credit Agreement imposes financial maintenance covenants requiring the Company to maintain a consolidated fixed charge coverage ratio of at least 2.5 to 1.0 and a total leverage ratio of not more than 4.5 to 1.0 or, on up to two nonconsecutive occasions, 5.5 to 1.0 for up to three consecutive quarters following a material acquisition commencing with the fiscal quarter in which such material acquisition occurred. The Company currently maintains an Investment Grade Rating, as defined in the Restated Credit Agreement, and therefore is not currently required to comply with the consolidated fixed charge coverage ratio covenant. The Restated Credit Agreement includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Company under the Restated Credit Agreement to be immediately due and payable. AtDecember 31, 2019 , the Company maintained a total leverage ratio of 2.00x and was in compliance with all financial covenants under the Restated Credit Agreement. The proceeds of the Restated Credit Agreement are expected to be used for general corporate purposes, including working capital, debt repayment, stock repurchases, dividends, investments and other permitted uses set forth in the Restated Credit Agreement. Fixed Rate Collateralized Mortgage OnDecember 30, 2014 , a court awarded the Company title to an office building as settlement for a portion of an outstanding loan receivable for which the building was pledged as collateral. In conjunction with the court award, the Company also assumed the$9.5 million mortgage on the property with a fixed interest rate of 7.26%. The mortgage, which is collateralized by the office building, requires monthly payments of principal and interest and matures inDecember 2020 with a balloon payment due of$6.9 million . At the time of acquisition, the Company determined that the fixed interest rate of 7.26% exceeded market interest rates and therefore the Company increased the carrying value of the debt by$1.2 million to record the debt at fair value. The fair value adjustment will be amortized over the remaining term of the mortgage utilizing the effective interest method.
Economic Development Loans
The Company entered into economic development agreements with various governmental entities in conjunction with the relocation of its corporate headquarters inApril 2013 . In accordance with these agreements, the governmental entities agreed to advance approximately$4.4 million to the Company to offset a portion of the corporate headquarters relocation and tenant improvement costs in consideration of the employment of permanent, full-time employees within the jurisdictions. AtDecember 31, 2019 , the Company had been fully advanced the amounts due pursuant to these agreements. These advances bear interest at a rate of 3% per annum. Repayment of the advances is contingent upon the Company achieving certain performance conditions. Performance conditions are measured annually onDecember 31st and primarily relate to maintaining certain levels of employment within the various jurisdictions. If the Company fails to meet an annual performance condition, the Company may be required to repay a portion or all of the advances including accrued interest byApril 30th following the measurement date. Any outstanding advances at the expiration of the Company's ten year corporate headquarters lease in 2023 will be forgiven in full. The advances will be included in long-term debt in Company's consolidated balance sheets until the Company determines that the future performance conditions will be met over the entire term of the agreement and the Company will not be required to repay the advances. The Company accrues interest on the portion of the advances that it expects to repay. The Company was in compliance with all current performance conditions as ofDecember 31, 2019 .
Construction Loan
InMarch 2018 , the Company entered into a construction loan agreement for the rehabilitation and development of a former office building into a hotel through a consolidating joint venture with a commercial lender, which is secured by the building. The construction loan can be drawn up to$34.9 million , bears an interest rate at LIBOR plus a margin of 435 basis points and has a maturity date ofMarch 28, 2022 with two one-year extension options. The Company has a carve-out guaranty and the unaffiliated joint venture partner has a completion guaranty in relation to the loan, in which both parties are required to meet certain financial covenants relating to liquidity and net worth. The rehabilitation of the building is considered a qualified asset that requires a significant amount of time to prepare for its intended use. Therefore, any interest costs incurred during the development period of the building is considered an element of the historical cost of the qualifying asset. AtDecember 31 , 49
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2019, the Company has drawn on
Transfer of Interest In a prior year, the Company transferred$24.4 million of a$50.1 million outstanding note receivable with a maturity date ofNovember 30, 2019 to a third party. Under the agreement, the counter party had the right to require the Company to purchase the outstanding interest in the note in certain circumstances, including if the Company declares a default against the borrower and enters into foreclosure proceedings. InFebruary 2019 , in connection with the Company's restructuring negotiations with the borrower, the Company mutually agreed with the counter party to repurchase the$24.4 million previously transferred prior to the maturity date. The Company retains the full loan balance as recorded in Notes receivable, net of allowances as ofDecember 31, 2019 . Regular Quarterly Dividends The Company currently maintains the payment of a quarterly dividend on its common shares outstanding, however, the declaration of future dividends are subject to the discretion of our board of directors. During the year endedDecember 31, 2019 , 2018 and 2017, the Company paid cash dividends at a quarterly rate of$0.215 , per share. InDecember 2019 , the Company's board of directors increased the quarterly dividend rate to$0.225 per share, beginning with the first dividend payable in 2020, representing a 5% increase from the previous quarterly declarations. During the year endedDecember 31, 2019 , 2018 and 2017, the Company paid regular quarterly cash dividends totaling$48.1 million ,$48.7 million , and$48.7 million , respectively. We expect that cash dividends will continue to be paid in the future, subject to declaration by our board of directors, future business performance, economic conditions, changes in tax regulations and other matters. Based on our present dividend rate and outstanding share count, aggregate annual regular dividends for 2020 are estimated to be approximately$50.1 million . Share Repurchases During the year endedDecember 31, 2019 , the Company repurchased 0.6 million shares of its common stock under the repurchase program at a total cost of$44.1 million . ThroughDecember 31, 2019 , the Company repurchased 51.1 million shares of its common stock (including 33.0 million prior to the two-for-one stock split effected inOctober 2005 ) under the share repurchase program at a total cost of$1.4 billion . During the third quarter of 2019, the Company's board of directors approved an increase to the number of shares authorized under the share repurchase program by approximately 2.3 million shares to a total of 4.0 million shares. As ofDecember 31, 2019 , the Company had 3.9 million shares remaining under the current share repurchase authorization. We currently believe that our cash flows from operations will support our ability to complete the current board of directors repurchase authorization and upon completion of the current authorization, our board of directors will evaluate the advisability of additional share repurchases. During 2019, the Company redeemed 79,603 shares of common stock at a total cost of$6.5 million from employees to satisfy the option price and minimum tax-withholding requirements related to the exercising of options and vesting of performance vested restricted stock units and restricted stock grants. During 2018 and 2017, the Company redeemed 92,366 and 154,950 shares of common stock at a total cost of$7.4 million and$9.6 million , respectively. These redemptions were outside the share repurchase program initiated inJune 1998 . 50
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The following table summarizes our contractual obligations as ofDecember 31, 2019 : Payment due by period Less than More than Contractual Obligations: Total 1 year 1-3 years 3-5 years 5 years (in millions) Long-term debt(1)$ 1,086.8 $ 48.2 $ 511.7 $ 52.9 $ 474.0 Purchase obligations(2) 380.8 97.0 184.4 41.4 58.0 Operating lease obligations 33.2 11.0 18.9 3.3 - Other long-term liabilities(3) 30.0 - 4.1 3.7 22.2 Total contractual obligations$ 1,530.8 $ 156.2 $ 719.1 $ 101.3 $ 554.2
(1) Long-term debt includes principal as well as interest payments. Assumes
forward estimates of LIBOR rates as of
interest rate debt.
(2) Purchase obligations also include commitments to provide loan and joint
venture financing under various Company programs.
(3) Other long-term liabilities primarily consist of deferred compensation
plan liabilities.
The total amount of unrecognized tax positions and the related interest and
penalties totaled $8.1 million at December 31, 2019 . Due to the uncertainty with
respect to the timing of payments in individual years in connection with these
tax liabilities, we are unable to make reasonably reliable estimates of the
period of cash settlement with the respective taxing authorities. Therefore, we
have not included these amounts in the contractual obligations table above.
Refer to Note 16 to our consolidated financial statements.
The Company believes that cash flows from operations and available financing
capacity are adequate to meet the expected future operating, investing and
financing needs of the business.
Off Balance Sheet Arrangements
The Company has entered into various limited payment guaranties with regards to
the Company's VIEs supporting the VIE's efforts to develop and own hotels
franchised under the Company's brands. Under these limited payment guaranties,
the Company has agreed to guaranty a portion of the outstanding debt until
certain conditions are met, such as (a) the loan matures, (b) certain debt
covenants are achieved, (c) the maximum amount guaranteed by the Company is paid
in full or (d) the Company, through its affiliates, ceases to be a member of the
VIE. The maximum exposure of principal incidental to these limited payment
guaranties is $7.5 million , plus unpaid expenses and accrued unpaid interest.
The Company believes the likelihood of having to perform under the
aforementioned limited payment guaranties was remote as of December 31, 2019 and
December 31, 2018 . In the event of performance, the Company has recourse for two
of the transactions in the form of a membership interest pledge as collateral
for our guaranty. Refer to Note 24 to our consolidated financial statements for
further discussion of our off-balance sheet arrangements.
Critical Accounting Policies
Our accounting policies comply with principles generally accepted in the United
States . We have described below those policies that we believe are critical and
require the use of complex judgment or significant estimates in their
application. Additional discussion of these policies is included in Note 1 to
our consolidated financial statements.
Revenue Recognition
Revenues are primarily derived from franchise agreements with third-party hotel
owners. Franchise fees include the following:
• Royalty fees. Royalty fees are earned in exchange for a license to brand
intellectual property typically based on a percentage of gross room
revenues. These fees are billed and collected monthly and revenues arerecognized in the same period that the underlying gross room revenues are
earned by the Company's franchisees.
• Initial franchise and relicensing fees. Initial and relicensing fees are
charged when (i) new hotels enter the franchise system; (ii) there is a
change of ownership; or (iii) existing franchise agreements are extended.
These revenues are recognized as revenue ratably as services are provided
over the enforceable period of the franchise agreement. The enforceable
period is the period from hotel opening to the first point the franchisee
or the Company can terminate the franchise agreement without incurring a
significant penalty. Deferred revenues from initial and relicensing fees
will typically be recognized over a five to ten-year period, unless thefranchise agreement is terminated and the hotel exits the franchise system
whereby remaining deferred amounts will be recognized to revenue in the
period of termination.
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• Other revenue. Other revenue is a combination of miscellaneous
non-marketing and reservation system fees, inclusive of quality assurance
non-compliance and franchisee training fees, and is recognized in the
period the designated transaction or event has occurred.
• Marketing and reservation system revenues. The Company's franchiseagreements require the payment of marketing and reservation system fees.
The Company is obligated to use these marketing and reservation system
fees to provide marketing and reservation services such as advertising,
providing a centralized reservation and property management system,
providing reservation and revenue management services, and performing
certain franchise services to support the operation of the overall
franchise system. These services are comprised of multiple fees including
the following:
? Fees based on a percentage of gross room revenues arerecognized in
the period the gross room revenue was earned, based on the
underlying hotel's sales or usage.
? Fees based on the occurrence of a designated transaction or event
are recognized in the period the transaction or event occurred.
? System implementation fees charged to franchisees are deferred and
recognized as revenue over the term of the franchise agreement.
? Marketing and reservation system activities also include revenues
generated from the Company's guest loyalty program. The revenue
recognition of this program is discussed in Choice Privileges
Loyalty Program below.
Marketing and reservation system expenses are those expenses incurred to
facilitate the delivery of marketing and reservation system services, including
direct expenses and an allocation of costs for certain administrative activities
required to carry out marketing and reservation services. Marketing and
reservation system expenses are recognized as services are incurred or goods are
received, and as such may not equal marketing and reservation system revenues in
a specific period but are expected to equal revenues earned from franchisees
over time. The Company's franchise agreements provide the Company the right to
advance monies to the franchise system when the needs of the system surpass the
balances currently available and recover such advances in future periods through
additional fee assessments or reduced spending.
We make certain payments to customers as an incentive to enter into new
franchise agreements ("Franchise agreement acquisition cost"). We capitalize
such payments as intangible assets. These intangibles are amortized on a
straight-line basis over the estimated benefit period of the arrangement as an
offset to royalty fees and marketing and reservation system fees. Impairments
from hotel terminations are recorded within the SG&A expenses and marketing and
reservation system expenses.
The Company also earns revenues on contracts incidental to the support of operations for franchised hotels, including purchasing operations:
• Procurement services revenues. The Company generates procurement services
revenues from qualified vendors. Procurement services revenues are
generally based on marketing services provided by the Company on behalf of
the qualified vendors to hotel owners and guests. The Company provides
these services in exchange for either fixed consideration or a percentage
of revenues earned by the qualified vendor pertaining to purchases by the
Company's franchisees or guests. Fixed consideration is allocated and
recognized ratably to each period over the term of the agreement. Variable
consideration is recognized in the period when sales to franchisees or
guests from vendors are known or cash payment has been remitted. Qualified
vendor revenues are recognized within Procurement services revenue.
• Other revenues. The Company is party to other non-hotel franchising
agreements that generate revenue primarily through SaaS arrangements. SaaS
agreements typically include fixed consideration for installment and other
initiation fees paid at contract onset, and variable consideration for
recurring subscription revenue paid monthly. Fixed consideration is
allocated and recognized ratably to each period over the term of the
agreement. Variable consideration is determined at the conclusion of each
period, and recognized in the current period.
Owned Hotels The Company owned five hotels atDecember 31, 2019 , from which the Company derives revenues. As a hotel owner, the Company has performance obligations to provide accommodations to hotel guests; and, in return, the Company earns a nightly fee for an agreed upon period that is generally payable at the time the hotel guest checks out of the hotel. The Company 52
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typically satisfies the performance obligations over the length of the stay and
recognizes the revenue on a daily basis, as the hotel rooms are occupied and
services are rendered.
Other ancillary goods and services at owned hotels are purchased independently
of the hotel stay at standalone selling prices and are considered separate
performance obligations, which are satisfied at the point in time when the
related good or service is provided to the guest. These primarily consist of
food and beverage, incidentals and parking fees.
Choice Privileges Loyalty Program
Choice Privileges is the Company's frequent guest loyalty program, which enables
members to earn points based on their spending levels with the Company's
franchises. The points, which the Company accumulates and tracks on the members'
behalf, may be redeemed for free accommodations or other benefits (e.g., gift
cards to participating retailers). The Company collects from franchisees a
percentage of loyalty program members' gross room revenue from completed stays
to operate the program. At such time points are redeemed for free accommodations
or other benefits, the Company reimburses franchisees or third parties based on
a rate derived in accordance with the franchise or vendor agreement.
Loyalty point revenues are recognized at the point in time when the loyalty
points are redeemed by members for benefits. The transaction price is variable
and determined in the period when the loyalty points are earned and the
underlying gross room revenues are known. No loyalty program revenues are
recognized at the time the loyalty points are issued.
The Company is an agent in coordinating delivery of the services between the
loyalty program member and franchisee or third party, and as a result, revenues
are recognized net of the cost of redemptions. The estimated fair value of
future redemptions is reflected in current and non-current Liability for guest
loyalty program in our consolidated balance sheets. The liability for guest
loyalty program is developed based on an estimate of the eventual redemption
rates and point values using various actuarial methods. These significant
judgments determine the required point liability attributable to outstanding
points, which is relieved as redemption costs are processed. The amount of the
loyalty program fees in excess of the point liability, represents current and
non-current Deferred revenue, which is recognized to revenue as points are
redeemed including an estimate of future forfeitures ("breakage"). The
anticipated redemption pattern of the points is the basis for current and
non-current designation of each liability. Loyalty program point redemption
revenues are recognized within marketing and reservation system revenue in the
consolidated statements of income. Changes in the estimates used in developing
the breakage rate or other expected future program operations could result in
material changes to the liability for guest loyalty program and deferred
revenues.
The Company maintains various agreements with third-party partners, including
the co-branding of the Choice Privileges credit card. The agreements typically
provide for use of the Company's marks, limited access to the Company's
distribution channels, and sale of Choice Privileges points, in exchange for
fees primarily comprising variable consideration paid each month. Choice
Privileges members can earn points through participation in the partner's
program. Partner agreements include multiple performance obligations. The
primary performance obligations are brand intellectual property and material
rights for free or discounted goods or services to hotel guests. Allocation of
fixed and variable consideration to the performance obligations is based on
standalone selling price as estimated based on market and income methods, which
represent significant judgments. The amounts allocated to brand intellectual
property are recognized on a gross basis over time using the output measure of
time elapsed, primarily within Procurement services revenue. The amounts
allocated to material rights for free or discounted goods or services to hotel
guests are recognized to revenue as points are redeemed including an estimate of
breakage, primarily within Marketing and reservation system revenue.
Valuation of Long-Lived Assets, Intangibles, and Goodwill
The Company evaluates the potential impairment of property and equipment and
other long-lived assets, including franchise rights and other definite-lived
intangibles, annually or earlier upon the occurrence of an event or other
circumstances that indicates that the Company may not be able to recover the
carrying value of the asset. When indicators of impairment are present,
recoverability is assessed based on net, undiscounted expected cash flows. If
the net, undiscounted expected cash flows are less than the carrying amount of
the assets, an impairment charge is recorded for the excess of the carrying
value over the fair value of the asset. We estimate the fair value of
intangibles and long lived assets primarily using undiscounted cash flow
analysis. Significant management judgment is involved in evaluating indicators
of impairment and developing any required projections to test for recoverability
or estimate the fair value of an asset. Furthermore, if management uses
different projections or if different conditions occur in future periods,
future-operating results could be materially impacted.
Goodwill is allocated to the Company's reporting units, which are determined by
the availability of discrete financial information relied upon by segment
management. Goodwill has been allocated to two reporting units: (1) Hotel
Franchising and (2) SaaS for vacation rentals (see note below). Goodwill and
indefinite lived intangibles are evaluated for impairment annually as of
December 31 or earlier upon the occurrence of substantive unfavorable changes in
economic conditions, industry
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trends, costs, cash flows, or ongoing declines in market capitalization that indicate that the Company may not be able to recover the carrying amount of the asset. The impairment test requires judgment, including the identification of reporting units, the assignment of assets, liabilities and goodwill to reporting units, and the determination of fair value of each reporting unit if a quantitative test is performed. In evaluating these assets for impairment, the Company may elect to first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit or the indefinite lived intangible asset is less than its carrying amount. If the Company believes that, as a result of its qualitative assessment, it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, a quantitative impairment test is not required. However, the Company may elect to forgo the qualitative assessment and move directly to the quantitative impairment test for goodwill and the fair value determination for indefinite-lived intangibles. If the Company forgoes the qualitative test, only step one of quantitative test is required, which requires a comparison of reporting unit fair value to carrying value. The Company determines the fair value of its reporting units and indefinite-lived intangibles using income and market methods. OnJanuary 29, 2019 , the Company became aware that a key customer of the SaaS for vacation rentals reporting unit provided the unit's management team with a letter purporting to terminate the customer's contract. The unit's management team asserted, and the Company believed, that the purported termination notice was not valid. The customer was contemplated in the SaaS for vacation rentals reporting unit's projected revenues, and the Company determined that the unit's receipt of the purported termination notice, even though the validity of the notice was being actively contested by the unit, represented a triggering event which required an interim reevaluation of the reporting unit's long-lived assets group and goodwill in the first quarter of 2019. The long-lived assets of the SaaS for vacation rentals reporting unit were comprised of$4.3 million of intangible assets,$1.7 million of operating lease right-of-use assets, and$1.3 million of property and equipment. The long-lived asset group was determined to be at the SaaS for vacation rentals reporting unit level. Recoverability of the long-lived asset group was assessed based on net, undiscounted expected cash flows of the asset group, which were less than the carrying amount of the asset group. An impairment charge was recorded for the excess of the carrying value over the fair value of the asset group. To estimate the fair value of the long-lived asset group, the Company utilized a combination of income and market approach valuation methods via performance of a discounted cash flow analysis and quoted market prices. In the first quarter of 2019, the Company recognized a non-cash pre-tax long-lived asset group impairment charge for the full amount of SaaS for vacation rentals long-lived assets of$7.3 million , as well as an additional$3.1 million reduction in the reporting unit's goodwill. In performing the quantitative tests in the first quarter of 2019, the Company determined the fair value of the SaaS for vacation rentals reporting unit utilizing a combination of market and income approach valuation methods via performance of a discounted cash flow ("DCF") analysis and quoted market prices. There were significant judgments and assumptions used in the DCF and market-based models including the amount and timing of expected future cash flows, long-term growth rates, discount rate, and our selection of guideline company revenue multiples. The cash flows employed in the DCF analysis for the SaaS for vacation rentals reporting unit reflect expectations based upon recent operating performance and projected future performance. Discount rate assumptions were based on an assessment of the risk inherent in the future cash flows of the respective reporting unit and market conditions. Given the inherent uncertainty in determining the assumptions underlying a DCF analysis, actual results may differ from those used in our valuations. OnJune 3, 2019 , the SaaS for vacation rentals reporting unit was sold. As a result of costs incurred in completing the disposition and the de-recognition of net assets of the reporting unit, including the remaining goodwill balance, the Company recognized a loss on sale of$4.7 million . Valuation of Investments in Equity Method InvestmentsThe Company evaluates an investment in an equity method investment for impairment when circumstances indicate that the carrying value may not be recoverable, for example due to loan defaults, significant under performance relative to historical or projected operating performance, and significant negative industry or economic trends. When there is indication that a loss in value has occurred, the Company evaluates the carrying value compared to the estimated fair value of the investment. Fair value is based upon internally developed discounted cash flow models, third-party appraisals, and if appropriate, current estimated net sales proceeds from pending offers. If the estimated fair value is less than carrying value, management uses its judgment to determine if the decline in value is other-than-temporary. In determining this, the Company considers factors including, but not limited to, the length of time and extent of the decline, loss of values as a percentage of the cost, financial condition and near-term financial projections, the Company's intent and ability to recover the lost value and current economic conditions. For declines in value that are deemed other-than-temporary, impairments are charged to earnings. 54
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Notes Receivable and Loan Loss ReservesThe Company has provided financing to franchisees in support of the development of properties in strategic markets. The Company expects the owners to repay the loans in accordance with the loan agreements, or earlier as the hotels mature and capital markets permit. The Company estimates the collectibility and records an allowance for loss on its notes receivable when recording the receivables in the Company's financial statements. These estimates are updated quarterly based on available information. The Company utilizes the level of security it has in the notes receivable as its primary credit quality indicator (i.e., senior, subordinated or unsecured) when determining the appropriate allowances for uncollectible loans. The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. The Company measures loan impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate or the estimated fair value of the collateral. For impaired or restructured loans that are provided a concession, the Company establishes a specific impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows or the estimated fair value of the collateral. The Company applies its loan impairment policy individually to all notes receivable in the portfolio and does not aggregate loans for the purpose of applying such policy. For impaired loans, the Company recognizes interest income on a cash basis. For restructured loans that are provided a concession, the Company recognizes interest as earned as long as the borrower is in compliance with the restructured loan terms. The Company assesses the adequacy of its loan reserves on a quarterly basis. If it is likely that a loan will not be collected based on financial or other business indicators, it is the Company's policy to establish a valuation allowance with a corresponding charge to SG&A expenses in the accompanying consolidated statements of income in the quarter when it is deemed uncollectible. Recoveries of impaired loans are recorded as a reduction of SG&A expenses in the quarter received. The Company assesses the collectibility of its senior notes receivable by comparing the market value of the underlying assets to the carrying value of the outstanding notes. In addition, the Company evaluates the property's operating performance, the borrower's compliance with the terms of the loan and franchise agreements, and all related personal guaranties that have been provided by the borrower. For subordinated or unsecured receivables, the Company assesses the property's operating performance, the subordinated equity available to the Company, the borrower's compliance with the terms of the loan and franchise agreements, and the related personal guaranties that have been provided by the borrower. The Company considers loans to be past due and in default when payments are not made when due. Although the Company considers loans to be in default if payments are not received on the due date, the Company does not suspend the accrual of interest until those payments are more than 30 days past due. The Company applies payments received for loans on non-accrual status first to interest and then principal. The Company does not resume interest accrual until all delinquent payments are received. The Company classifies notes receivable due within one year as current assets. Stock Compensation The Company's policy is to recognize compensation cost related to share-based payment transactions in the financial statements based on the fair value of the equity or liability instruments issued. Compensation expense related to the fair value of share-based awards is recognized over the requisite service period based on an estimate of those awards that will ultimately vest. The Company estimates the share-based compensation expense for awards that will ultimately vest upon inception of the grant and adjusts the estimate of share-based compensation for those awards with performance and/or service requirements that will not be satisfied so that compensation cost is recognized only for awards that ultimately vest. Income Taxes Income taxes are recorded using the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not such assets will be unrealized. Historically, deferredUnited States income taxes have not been recorded for temporary differences related to investments in certain foreign subsidiaries and corporate affiliates. The temporary differences consisted primarily of undistributed earnings that are considered permanently reinvested in operations outsidethe United States . Due to the changes resulting from the 2017 Tax Cuts and Jobs Act, the Company has implemented a new foreign dividend policy effective during the quarter endedSeptember 30, 2018 . As a result of the new policy, the Company intends to limit any future foreign distributions to income which has been previously subject to US taxation, for which relevant taxes have been recorded. Nonetheless, the Company will continue to assert that any other outside basis difference of the foreign 55
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subsidiaries will be permanently (or indefinitely) reinvested outside of theU.S. Consequently, the Company will not record any additional deferred taxes for this item in 2019. With respect to uncertain income tax positions, a tax liability is recorded in full when management determines that the position does not meet the more likely than not threshold of being sustained on examination. A tax liability may also be recognized for a position that meets the more likely than not threshold, based upon management's assessment of the position's probable settlement value. The Company records interest and penalties on unrecognized tax benefits in the provision for income taxes. Additional information regarding the Company's unrecognized tax benefits is provided in Note 16 to Consolidated Financial Statements. New Accounting Standards See Recently Adopted Accounting Standards section of Note 1 and Note 27 to our consolidated financial statements for information related to our adoption of new accounting standards in 2019 and anticipated adoption of recently issued accounting standards.
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