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", "we", "us", or
"our") contained in this report. MD&A is provided as a supplement to - and
should be read in conjunction with - our consolidated financial statements and
the accompanying notes.
Recent Developments
Impact of the COVID-19 Pandemic
The COVID-19 pandemic continues to cause disruptions to the global economy and the hospitality industry, including inthe United States , where more than 80% of our franchised hotels are located. Reduced travel as a result of COVID-19 adversely impacted the hospitality industry generally and the Company, however, the development and distribution of effective vaccines and other containment efforts have been significant positive developments that we believe have contributed to improved operating metrics since the second quarter of 2021. The extent to which the COVID-19 pandemic will impact the hospitality industry generally and our operations remains uncertain and will depend in part on future developments, including the severity and duration of resurgences or variants of the virus, the effectiveness of actions by government authorities and the public to continue to contain the pandemic, and the potential for adverse changes in consumer sentiment with respect to travel during the pandemic. Since the time the impacts of COVID-19 on the Company's business were first experienced inMarch 2020 , trends have improved steadily, with the second quarter 2022 domestic RevPAR experiencing an increase of approximately 14.3% and 13.0% relative to second quarter 2021 and second quarter 2019, respectively. As of bothJune 30, 2022 andJune 30, 2021 , less than 1% of Company's domestic hotel system had temporarily suspended operations due to governmental restriction or a franchisee's election. As the industry recovery continues, the Company believes it will continue to benefit from the faster rebound of leisure demand as a result of its higher share of leisure travel mix relative to competitors. The Company's properties are also well distributed in drive-to markets, which the Company believes will lead in the demand recovery and foreseeable future for the industry. We believe these points are illustrated by the Company's RevPAR results for 2021 and 2022, which reflect growth relative to comparable 2019 periods. While the ultimate impact and duration of COVID-19 is uncertain and will depend on future developments, which are difficult to predict, the Company believes that it will continue to benefit in the long-term from its primarily franchise-only business model, which has historically provided a relatively stable earnings stream and low capital expenditure requirements. Further, as ofJune 30, 2022 , the Company had approximately$1.2 billion in cash and additional borrowing capacity through its senior unsecured revolving credit facility. Based on our business model and information known at this time, 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, inclusive of the Radisson Hotels Americas transaction, described below. 16 -------------------------------------------------------------------------------- Table of Contents While the Company believes that the long-term fundamentals of the business remain strong, it will continue to adjust business contingency plans as the COVID-19 pandemic evolves. For additional information, refer to Risk Factors in Part II, and Part I, Item 1A of the 2021 Form 10-K.
Agreement to acquire Radisson Hotels Americas
OnJune 12, 2022 , the Company signed a definitive purchase agreement to acquire 100% of Radisson Hotels Americas for a purchase price of approximately$675 million . The transaction would add approximately 67,000 rooms to the Company's portfolio and is expected to close inAugust 2022 .
Overview
We are primarily a hotel franchisor with franchise agreements and owned hotels representing 6,970 hotels open comprising 574,888 rooms and 908 hotels under construction, awaiting conversion or approved for development comprising 82,629 rooms as ofJune 30, 2022 , located in 50 states, theDistrict of Columbia and nearly 40 countries and territories outsidethe United States . Our brand names include Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Clarion Pointe™, Ascend Hotel Collection®, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay Suites®, Suburban Studios™, WoodSpring Suites®, Everhome Suites®, and Cambria® Hotels (collectively, the "Choice brands"). The Company's primary segment is the hotel franchising business. The Company's domestic operations are conducted through direct franchising relationships and the ownership of six 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 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 hotel franchising operations and the initial, relicensing and continuing royalty fees attributable to our franchise agreements. Revenues are also generated from partnerships with qualified vendors and travel partners that provide value-added solutions to our platform of guests hotels, six owned hotels, and other sources. Historically, the hotel industry has been seasonal in nature. For most hotels, demand is ordinarily 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 fees, as well as its owned hotels revenues, normally 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 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. To varying degrees, all of these factors have been and may continue to be disrupted by the COVID-19 pandemic. The key industry standard for measuring hotel-operating 17 -------------------------------------------------------------------------------- Table of Contents 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, over the long-term, any continued growth of our franchise business should enable us to realize benefits from the operating leverage in place and improve operating results. The effects of the COVID-19 pandemic on our second quarter 2022 results and anticipated trends are discussed above under the heading "Impact of the COVID-19 Pandemic" and below under the heading "Operations Review". We are required by our franchise agreements to use the marketing and reservation system fees we collect for system-wide marketing and reservation system 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. The Company has taken and is continuing to take measures to combat the impact of the COVID-19 pandemic on our business and on our franchisees. We believe these measures support and complement our strategic priorities to create value for our shareholders over the long-term. These key long-term goals are as follows: Profitable Growth. Our success is dependent on improving the performance of our hotels, increasing our system size by selling additional hotel franchises with a focus on revenue-intense chain scales and markets, improving our effective royalty rate, expanding our qualified vendor programs and travel-related partnerships and maintaining a disciplined cost structure. We have introduced several temporary measures designed to assist franchisees during the COVID-19 pandemic. We attempt to improve our revenues and overall profitability by providing a variety of products and services designed to increase business delivery and/or reduce operating and development costs. These products and services include national marketing campaigns, 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 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, strategically growing the system through additional franchise sales, and improving franchise agreement pricing while maintaining a disciplined cost structure are the keys to profitable growth. Prior to the second quarter of 2021, the Company's hotels experienced declines in occupancy and RevPAR resulting from the impacts of the COVID-19 pandemic. The declines impacted the profitability of the Company and the negative impact to the Company could return if a resurgence of the COVID-19 pandemic significantly impacts travel. 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 historically strong and predictable cash flows create a strong financial position that provides us a competitive advantage. We maintain a capital structure intended to generate high financial returns and use our excess cash flow to provide returns to our shareholders primarily through share repurchases, dividends and investing in growth opportunities. InApril 2020 , in light of uncertainty resulting from the COVID-19 pandemic, we suspended future, undeclared dividends and activity under the Company's share repurchase program. Given our strong liquidity and credit profile, inMay 2021 , the Company resumed the payment of quarterly dividends, subject to future declarations by our board of directors, and activity under the share repurchase program. OnDecember 6, 2021 , the Company's board of directors approved a 6% increase in the quarterly cash dividend and declared a quarterly cash dividend of$0.2375 per share of common stock, which was paid inJanuary 2022 . OnFebruary 24, 2022 andMay 24, 2022 , the Company's board of directors declared a quarterly cash dividend of$0.2375 per share of common stock. In addition to our hotel franchising business, we have also developed or acquired six Cambria hotels. We intend to continue to strategically develop hotels to increase the presence of our brands inthe United States , drive greater guest satisfaction and brand preference, and ultimately increase the number of franchise agreements awarded. When developing hotels, we seek key markets with strong growth potential that will deliver strong operating performance and improve the recognition of our brands. Our hotel development and ownership efforts currently focus on theCambria Hotels and Everhome Suites brands. We believe our owned hotels provide us the opportunity to support and accelerate growth of our brands. We do not anticipate owning hotels on a permanent basis and expect to target dispositions to a franchisee in the future. 18 -------------------------------------------------------------------------------- Table of Contents The Company also allocates capital to financing, investment and guaranty support to incentivize franchise development for certain brands in strategic markets; and to explore 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. 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 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 and the multi-year investments required to support franchise operations, in addition to the Company's incremental spend to support franchisees and lower marketing and reservation system fees for certain periods most significantly impacted by the COVID-19 pandemic, quarterly and/or annual deficits may be generated. During the six months endedJune 30, 2022 , marketing and reservation system revenues exceeded expenses by$48.5 million . During the six months endedJune 30, 2021 , marketing and reservation system revenues exceeded expenses by$16.1 million .
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. The Company's declaration of quarterly dividends and activity under the share repurchase program were temporarily suspended at the height of the COVID-19 pandemic, as detailed above within the Maximizing Financial Returns and Creating Value for Shareholders section.
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, inclusive of the pending Radisson Hotels Americas acquisition. Refer to MD&A heading Liquidity and Capital Resources for additional analysis.
Inflation: We believe that moderate increases in the rate of inflation will generally result in comparable or greater increases in hotel room rates. We are monitoring future inflation trends and any resulting impacts on our business.
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Non-GAAP Financial Statement Measurements
The Company utilizes certain measures which do not conform to generally accepted
accounting principles accepted in the 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
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2022 2021 2022 2021
Total revenues $ 367,974 $ 278,344 $ 625,701 $ 461,291
Adjustments:Marketing and reservation system revenues (189,382) (135,988)
(316,019) (227,509)
Revenues excluding marketing and
reservation system activities $ 178,592 $
142,356
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Operations Review
Comparison of Operating Results for the Three-Month Periods Ended
Summarized financial results for the three months endedJune 30, 2022 and 2021 are as follows: (in thousands) 2022 2021 REVENUES Royalty fees$ 121,449 $ 106,242
Initial franchise and relicensing fees 6,222 7,328 Procurement services
21,803 12,092
Marketing and reservation system 189,382 135,988
Owned hotels 17,191 8,993
Other 11,927 7,701
Total revenues 367,974 278,344
OPERATING EXPENSES
Selling, general and administrative 43,888 34,470
Depreciation and amortization 5,479 6,232
Marketing and reservation system 153,846 113,285
Owned hotels 10,692 5,333
Total operating expenses 213,905 159,320
Gain on sale of business and assets, net 3,280 -
Operating income 157,349 119,024
OTHER INCOME AND EXPENSES, NET
Interest expense 11,252 11,691
Interest income (1,628) (1,234)
Other loss (gain) 5,559 (2,108)
Equity in net loss (gain) of affiliates 40 (1,179)
Total other income and expenses, net 15,223 7,170
Income before income taxes 142,126 111,854
Income tax expense 35,958 25,972
Net income $ 106,168 $ 85,882
Results of Operations
The Company recorded income before income taxes of $142.1 million for the
three-month period ended June 30, 2022 , a $30.2 million increase from the same
period of the prior year. The increase in income before income taxes primarily
reflects a $38.3 million increase in operating income partially offset by a $7.7
million decrease in other loss (gain) and $1.2 million decrease in equity in net
loss (gain) of affiliates from the three-month period ended June 30, 2021 .
Operating income increased
The primary reasons for these fluctuations, including the impact of the COVID-19 pandemic, are described in more detail below.
Royalty Fees
Domestic royalty fees for the three months endedJune 30, 2022 increased$13.9 million to$116.7 million from$102.8 million for the three months endedJune 30, 2021 , an increase of 13.5%. The increase in domestic royalties reflects a 14.3% increase in domestic RevPAR. System-wide RevPAR increased due to a 15.3% increase in average daily rates, partially offset by a 50 basis point decrease in occupancy. The increase in domestic royalties is also due to a 3 basis point increase in the effective royalty rate from 5.01% for the three months endedJune 30, 2021 to 5.04% for the three months endedJune 30, 2022 , partially offset by a 2.9% decrease in the number of domestic franchised hotel rooms in the comparative period. 21 -------------------------------------------------------------------------------- Table of Contents A summary of the Company's domestic franchised hotels operating information is as follows: Three Months Ended Three Months Ended June 30, 2022 June 30, 2021 Change Average Average Average Daily Daily Daily Rate Occupancy RevPAR Rate Occupancy RevPAR Rate Occupancy RevPAR Comfort$ 111.88 65.6 %$ 73.39 $ 96.67 65.3 %$ 63.11 15.7 % 30 bps 16.3 % Sleep 98.92 63.9 % 63.22 86.47 64.2 % 55.54 14.4 % (30) bps 13.8 % Quality 92.75 57.3 % 53.17 82.72 59.0 % 48.80 12.1 % (170) bps 9.0 %Clarion 97.66 48.8 % 47.71 85.75 46.2 % 39.62 13.9 % 260 bps 20.4 %Econo Lodge 73.36 52.8 % 38.73 67.47 54.9 % 37.04 8.7 % (210) bps 4.6 % Rodeway 73.46 53.5 % 39.29 67.15 55.4 % 37.18 9.4 % (190) bps 5.7 % WoodSpring 58.45 81.9 % 47.84 50.49 85.8 % 43.31 15.8 % (390) bps 10.5 % MainStay 89.80 64.7 % 58.11 79.01 67.6 % 53.38 13.7 % (290) bps 8.9 % Suburban 62.88 72.8 % 45.77 54.03 75.3 % 40.67 16.4 % (250) bps 12.5 %Cambria Hotels 167.44 68.1 % 114.03 127.76 58.6 % 74.82 31.1 % 950 bps 52.4 % Ascend Hotel Collection 155.20 59.4 % 92.18 133.07 56.9 % 75.68 16.6 % 250 bps 21.8 % Total$ 95.34 61.8 %$ 58.89 $ 82.72 62.3 %$ 51.54 15.3 % (50) bps 14.3 %
A summary of domestic hotels and rooms in our franchise system at
June 30, 2022 June 30, 2021 Variance
Hotels Rooms Hotels Rooms Hotels Rooms % %
Comfort 1,662 130,976 1,661 130,762 1 214 0.1 % 0.2 %
Sleep 418 29,419 411 29,027 7 392 1.7 % 1.4 %
Quality 1,630 121,149 1,681 126,603 (51) (5,454) (3.0) % (4.3) %
Clarion 188 21,100 180 21,702 8 (602) 4.4 % (2.8) %
Econo Lodge 718 43,161 747 45,096 (29) (1,935) (3.9) % (4.3) %
Rodeway 505 28,783 532 30,683 (27) (1,900) (5.1) % (6.2) %
WoodSpring 312 37,586 298 35,876 14 1,710 4.7 % 4.8 %
MainStay 107 7,549 93 6,559 14 990 15.1 % 15.1 %
Suburban 70 6,246 69 6,349 1 (103) 1.4 % (1.6) %
Cambria Hotels 60 8,303 58 8,166 2 137 3.4 % 1.7 %
Ascend Hotel Collection 200 21,169 225 28,258 (25) (7,089) (11.1) % (25.1) %
Total Domestic Franchises 5,870 455,441 5,955 469,081 (85) (13,640) (1.4) % (2.9) %
As of both June 30, 2022 and June 30, 2021 , less than 1% of the Company's
domestic hotel system had temporarily suspended operations due to governmental
restriction or a franchisee's election. These temporarily suspended hotels are
included in the summary table above of domestic hotels in our franchise system.
International royalty fees for the three months ended June 30, 2022 increased
$1.3 million to $4.8 million compared to the three months ended June 30, 2021 as
a result of improvements in RevPAR performance, despite reductions of the
international franchise system size by 56 hotels (from 1,156 as of June 30, 2021
to 1,100 as of June 30, 2022 ) and 12,717 rooms (from 132,164 as of June 30, 2021
to 119,447 as of June 30, 2022 ). As of June 30, 2022 and June 30, 2021 ,
approximately 1% and 2%, respectively, of the Company's international branded
hotels temporarily suspended operations due to governmental restriction or a
franchisee's election.
As a result of the acquisition of AMResorts®, the Company's relationship with
AMResorts® was terminated during the fourth quarter of 2021 and 17 domestic and
37 international open AMResorts®-branded hotels exited the Ascend Hotel
Collection portfolio.
We expect the uncertainty surrounding the potential duration of the pandemic,
including resurgences and new variants, as well as the rate, pace and
effectiveness of vaccinations around the world, to continue to have the
potential to impact the number of domestic and international hotels that remain
open and operating.
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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 second quarter of 2022, the Company awarded 122 domestic franchise
agreements representing 10,787 rooms compared to 111 franchising agreements
representing 8,888 rooms for the second quarter of 2021. Domestic franchise
agreements awarded for new construction hotels totaled 45 contracts representing
5,017 rooms during the three months ended June 30, 2022 , compared to 41
contracts representing 4,011 rooms for the three months ended June 30, 2021 .
Conversion hotel awarded franchise agreements totaled 77 representing 5,770
rooms for the three months ended June 30, 2022 , compared to 70 agreements
representing 4,877 rooms for the three months ended June 30, 2021 .
The Company awarded 110 domestic relicensing contracts during the three months
ended June 30, 2022 , compared to 128 executed during the three months ended June
30, 2021 . The Company awarded 5 domestic renewal agreements during the three
months ended June 30, 2022 , compared to 8 awarded during the three months ended
June 30, 2021 .
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 the agreement is terminated. Initial
franchise and relicensing fee revenue decreased $1.1 million from $7.3 million
to $6.2 million for the three months ended June 30, 2021 and June 30, 2022 ,
respectively.
At June 30, 2022 , the Company had 864 franchised hotels with 77,970 rooms under
construction, awaiting conversion or approved for development in its domestic
system as compared to 884 hotels and 72,312 rooms at June 30, 2021 . The number
of new construction franchised hotels in the Company's domestic pipeline
decreased from 663 at June 30, 2021 to 647 at June 30, 2022 . 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 decreased from 221 hotels at June 30, 2021 to 217 hotels at
June 30, 2022 . Conversion hotels typically open three to six months after the
execution of a franchise agreement. The Company had an additional 44 franchised
hotels with 4,659 rooms under construction, awaiting conversion or approved for
development in its international system as of June 30, 2022 , compared to 60
hotels and 8,108 rooms at June 30, 2021 . Fluctuations in the Company's pipeline
are primarily due to the timing of hotel openings and the timing of signing new
franchise agreements. 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. Given the uncertainty as to the
potential duration of the COVID-19 pandemic and its severity, there is
additional uncertainty with respect to the opening of new construction hotels,
which are reliant on, amongst other things, access to liquidity, availability of
construction labor and materials, and local governmental approvals and
entitlements, all of which may be constrained during the duration of the
pandemic. In addition, as noted above in Note 16 to our consolidated financial
statements, in July 2022 the Company received notice from an ownership group of
their intent to exit 111 WoodSpring properties from the Choice system in
September 2022 .
Procurement services: Revenues increased $9.7 million from $12.1 million for
three months ended June 30, 2021 to $21.8 million for the three months ended
June 30, 2022 . These results reflect an increase in fees generated from
travel-related partnerships and qualified vendors resulting from increased
occupancy during 2022 at our franchised hotels, and fees generated from the
Company's convention, which occurred in 2022 after a two-year hiatus as a result
of the COVID-19 pandemic.
Owned Hotels : The Company's revenues, net of expenses, from owned hotels
increased $2.8 million from $3.7 million for the three months ended June 30,
2021 to $6.5 million for the three months ended June 30, 2022 . These results
reflect improved operating performance at our owned hotels and the net addition
of one owned hotel during the comparative period.
Other Revenues: Other revenues increased $4.2 million from $7.7 million for the
three months ended June 30, 2021 to $11.9 million for the three months ended
June 30, 2022 driven by an increase in termination fees collected 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 $43.9 million and $34.5 million for the three months ended June 30, 2022 ,
and 2021, respectively. SG&A expenses experienced an increase resulting from
increases for general corporate purposes and lifting of certain cost mitigation
measures related to the COVID-19 pandemic, including compensation, benefits,
travel and conventions & meetings. These were partially offset by a $6.8 million
decrease in the Company's deferred compensation liabilities based on decreases
in the underlying investments.
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Gain on sale of business and assets, net: During the second quarter of 2022, the
Company recognized a $3.3 million gain primarily related to the sale of an owned
hotel asset, in addition to the sale and conversion of an international direct
franchising market to a master franchising market.
Other Loss (Gain): The Company recorded other net losses of $5.6 million for the
three months ended June 30, 2022 , compared to other net gains of $2.1 million
for the three months ended June 30, 2021 . The current period losses relate to
decreases in the Company's deferred compensation assets based on decreases in
the underlying investments and foreign currency transaction losses.
Equity in Net Loss (Gain) of Affiliates: The Company recorded net loss of $40
thousand from its unconsolidated affiliates for the three months ended June 30,
2022 , compared to net gain of $1.2 million for the three months ended June 30,
2021 . These investments in affiliates relate to the Company's program to offer
equity support to qualified franchisees to develop and operate Cambria Hotels in
strategic markets. The activity for the three months ended June 30, 2021 is
primarily attributable to the sale of the ownership interest of an affiliate
resulting in a gain of $2.6 million in the second quarter of 2021. Refer to Note
4 to our consolidated financial statements for additional information.
Income Tax Expense: The effective income tax rates were 25.3% and 23.2% for the
three months ended
The effective income tax rate for the three months endedJune 30, 2022 and 2021 was higher than theU.S. federal income tax rate of 21.0% primarily due to the impact of state income taxes, partially offset by excess tax benefits from share-based compensation.
Operations Review
Comparison of Operating Results for the Six-Month Periods Ended
Summarized financial results for the six months endedJune 30, 2022 and 2021 are as follows: (in thousands) 2022 2021 REVENUES Royalty fees$ 212,188 $ 172,289
Initial franchise and relicensing fees 14,624 12,755 Procurement services
33,486 23,283
Marketing and reservation system 316,019 227,509
Owned hotels 29,228 13,347
Other 20,156 12,108
Total revenues 625,701 461,291
OPERATING EXPENSES
Selling, general and administrative 74,212 64,737
Depreciation and amortization 11,710 12,594
Marketing and reservation system 267,496 211,458
Owned hotels 18,846 9,480
Total operating expenses 372,264 298,269
Gain on sale of business and assets, net 3,309 -
Operating income 256,746 163,022
OTHER INCOME AND EXPENSES, NET
Interest expense 22,722 23,468
Interest income (2,908) (2,515)
Other loss (gain) 7,275 (3,313)
Equity in net loss (gain) of affiliates (204) 4,818
Total other income and expenses, net 26,885 22,458
Income before income taxes 229,861 140,564
Income tax expense 56,302 32,345
Net income $ 173,559 $ 108,219
24-------------------------------------------------------------------------------- Table of Contents Results of Operations The Company recorded income before income taxes of$229.9 million for the six-month period endedJune 30, 2022 , a$89.3 million increase from the same period of the prior year. The increase in income before income taxes reflects a$93.7 million increase in operating income, a$5.0 million increase in equity in net loss (gain) of affiliates, partially offset by a$10.6 million increase in other loss (gain).
Operating income increased
The primary reasons for these fluctuations are described in more detail below.
Royalty Fees
Domestic royalty fees for the six months endedJune 30, 2022 increased$37.8 million to$203.6 million compared to the six months endedJune 30, 2021 . The increase in royalties reflect a 22.5% increase in RevPAR. System-wide RevPAR increased due to a 17.2% increase in average daily rates and a 250 basis point increase in occupancy. The increase in domestic royalties is also due to a 2.9% decrease in the number of domestic franchised hotel rooms and a 4 basis point increase in the effective royalty rate from 5.01% for the six months endedJune 30, 2021 to 5.05% for the six months endedJune 30, 2022 . A summary of the Company's domestic franchised hotels operating information is as follows: Six Months Ended Six Months Ended June 30, 2022 June 30, 2021 Change Average Average Average Daily Daily Daily Rate Occupancy RevPAR Rate Occupancy RevPAR Rate Occupancy RevPAR Comfort$ 105.96 60.6 %$ 64.26 $ 89.83 57.2 %$ 51.36 18.0 % 340 bps 25.1 % Sleep 93.49 59.4 % 55.52 80.68 56.0 % 45.20 15.9 % 340 bps 22.8 % Quality 88.23 52.5 % 46.35 77.41 50.7 % 39.21 14.0 % 180 bps 18.2 % Clarion 92.34 43.6 % 40.23 79.03 39.7 % 31.37 16.8 % 390 bps 28.2 % Econo Lodge 69.59 48.8 % 33.94 63.54 48.2 % 30.61 9.5 % 60 bps 10.9 % Rodeway 70.72 50.3 % 35.54 63.53 49.6 % 31.49 11.3 % 70 bps 12.9 % WoodSpring 57.38 79.4 % 45.56 49.03 80.1 % 39.26 17.0 % (70) bps 16.0 % MainStay 85.53 61.3 % 52.43 75.34 59.5 % 44.83 13.5 % 180 bps 17.0 % Suburban 62.43 69.7 % 43.52 51.97 70.5 % 36.62 20.1 % (80) bps 18.8 % Cambria Hotels 156.7 61.8 % 96.83 116.93 50.8 % 59.40 34.0 % 1,100 bps 63.0 % Ascend Hotel Collection 144.53 54.3 % 78.50 123.91 50.1 % 62.04 16.6 % 420 bps 26.5 % Total$ 90.32 57.3 %$ 51.73 $ 77.09 54.8 %$ 42.23 17.2 % 250 bps 22.5 % International royalty fees for the six months endedJune 30, 2022 increased$2.1 million to$8.6 million compared to the six months endedJune 30, 2021 as a result of increases in RevPAR performance, despite reductions of the international franchise system decreasing by 56 hotels (from 1,156 as ofJune 30, 2021 to 1,100 as ofJune 30, 2022 ) and 12,717 rooms (from 132,164 as ofJune 30, 2021 to 119,447 as ofJune 30, 2022 ). As ofJune 30, 2022 andJune 30, 2021 , approximately 1% and 2%, respectively, of the Company's international branded hotels temporarily suspended operations due to governmental restriction or a franchisee's election. We expect the uncertainty surrounding the pandemic, including an increase in the prevalence in variants as well as the rate and pace of vaccinations around the world, to continue to impact the number of domestic and international hotels that temporarily suspend operations.
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.
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During the six months ended June 30, 2022 , the Company awarded 215 domestic
franchise agreements representing 22,164 rooms compared to 200 franchise
agreements representing 20,668 rooms for the six months ended June 30, 2021 .
Domestic franchise agreements awarded for new construction hotels totaled 83
representing 8,734 rooms during the six months ended June 30, 2022 compared to
56 franchise agreements representing 5,293 rooms for the six months ended June
30, 2021 . Conversion hotel awarded franchise agreements totaled 132 representing
13,430 rooms for the six months ended June 30, 2022 compared to 144 franchise
agreements representing 15,375 rooms for the six months ended June 30, 2021 .
The Company awarded 248 domestic relicensing contracts during the six months
ended June 30, 2022 , compared to 180 executed during the six months ended June
30, 2021 . The Company awarded 12 domestic renewal agreements during both the six
months ended June 30, 2022 , compared to 20 executed during six months ended June
30, 2021 .
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 the agreement is terminated. Initial
franchise and relicensing fee revenue increased $1.8 million from $12.8 million
during the six months ended June 30, 2021 to $14.6 million during six months
ended June 30 , 2022.Given the uncertainty as to the potential duration of the
COVID-19 pandemic and its severity, there is additional uncertainty with respect
to the opening of new construction hotels, which are reliant on, amongst other
things, access to liquidity, availability of construction labor and materials,
and local governmental approvals and entitlements, all of which may be
constrained during the duration of the pandemic.
Procurement Services: Revenues increased $10.2 million from $23.3 million for
the six months ended June 30, 2021 to $33.5 million for the six months ended
June 30, 2022 . These results reflect a increase in fees generated from
travel-related partnerships and qualified vendors resulting from increased
occupancy during the first and second quarters of 2022 at our franchised hotels,
and fees generated from the Company's convention, which occurred in 2022 after a
two-year hiatus as a result of the COVID-19 pandemic.
Owned Hotels : The Company's revenues, net of expenses, from owned hotels
increased $6.5 million from $3.9 million for the six months ended June 30, 2021
to $10.4 million for the six months ended June 30, 2022 . These results reflect
improved operating performance at our owned hotels and the net addition of one
owned hotel during the comparative period.
Other Revenues: Other revenues increased
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$74.2 million for the six months endedJune 30, 2022 , a increase of$9.5 million from the six months endedJune 30, 2021 . SG&A expenses experienced an increase resulting from increases for general corporate purposes and lifting of certain cost mitigation measures related to the COVID-19 pandemic, including compensation, benefits, travel and conventions & meetings. These were partially offset by a$10.0 million decrease in the Company's deferred compensation liabilities based on decreases in the underlying investments. Gain on sale of business and assets, net: During the second quarter of 2022, the Company recognized a$3.3 million gain primarily related to the sale of an owned hotel asset, in addition to the sale and conversion of an international direct franchising market to a master franchising market. Other Loss (Gain): The Company recorded other net losses of$7.3 million for the six months endedJune 30, 2022 , compared to other net gains of$3.3 million , an decrease of$10.6 million for the six months endedJune 30, 2021 . The losses relate to decreases in the Company's deferred compensation assets based on decreases in the underlying investments and foreign currency transaction gains. Equity in Net Loss (Gain) of Affiliates: The Company recorded net gain of$0.2 million from its unconsolidated affiliates for the six months endedJune 30, 2022 compared to net losses of$4.8 million for the six months endedJune 30, 2021 . 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 sales of ownership interests of and distributions from affiliates resulting in gains of$2.6 million in the second quarter of 2021, partially offset by the impairment of an affiliate resulting in a loss of$4.8 million in the first quarter of 2021.
Income Tax Expense: The effective income tax rates were 24.5% and 23.0% for the
six months ended
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The effective income tax rate for the six months ended June 30, 2022 and 2021
was higher than the U.S. federal income tax rate of 21.0% primarily due to the
impact of state income taxes, partially offset by excess tax benefits from
share-based compensation.
Liquidity and Capital Resources
Our Company historically generates strong and predictable operating cash flows primarily from our hotel franchising operations and the initial, relicensing and continuing royalty fees attributable to our franchise agreements. 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, while maintaining a strong balance sheet and financial flexibility. The Company's short-term and long-term liquidity requirements primarily arise from working capital needs, debt obligations, income tax payments, dividend payments, share repurchases, capital expenditures and investments in growth opportunities.
The Company's 2012 Senior Notes matured on
InApril 2020 , in light of uncertainty resulting from the COVID-19 pandemic, we suspended future, undeclared dividends and activity under the Company's share repurchase program. Given our strong liquidity and credit profile, inMay 2021 , the Company resumed the payment of quarterly dividends, subject to future declarations by our board of directors, and activity under the share repurchase program. OnDecember 6, 2021 , the Company's board of directors approved a 6% increase in the quarterly cash dividend and declared a quarterly cash dividend of$0.2375 per share of common stock, which was paid inJanuary 2022 . OnFebruary 24, 2022 andMay 24, 2022 , the Company's board of directors declared a quarterly cash dividend of$0.2375 per share of common stock. Our board of directors authorized a program which permits us to offer financing, investment, and guaranty support to qualified franchisees, and allows us to acquire or develop and resell hotels to incentivize franchise development of our brands in strategic markets. We deploy capital pursuant to this program opportunistically to promote growth of our brands. With respect to our hotel development and ownership, affiliate investments, and lending, the Company had approximately$480.1 million in support of theCambria Hotels and Everhome Suites brands currently reflected on the balance sheet as ofJune 30, 2022 , which it generally targets to recycle within a five year period, and expects our outstanding investment to not exceed$975 million at any point in time based on current board of directors' authorization. The deployment and annual pace of future financial support activities will depend upon market and other conditions.
The Company also strategically deploys capital in the form of franchise
agreement acquisition payments across our brands to incentivize franchise
development. As of
The Company's primary sources of liquidity as ofJune 30, 2022 consisted of$1.2 billion in cash and available borrowing capacity through its senior unsecured revolving credit facility. As ofJune 30, 2022 , the Company was in compliance with the financial covenants of its credit agreements and expects to remain in such compliance. Based on our business model and information known at this time, the Company believes that cash, available borrowing capacity, and cash flows from operations will provide sufficient liquidity to meet the expected future operating, investing and financing needs of the business for at least the next 12 months, inclusive of the pending Radisson Hotels Americas transaction.
Operating Activities
During the six months endedJune 30, 2022 and 2021, net cash provided by operating activities totaled$159.3 million and$102.4 million , respectively. Operating cash flows increased$56.9 million primarily due to an increase in operating income, excluding certain non-cash charges, and timing of working capital items. In conjunction with brand and development programs, we strategically make certain payments to franchisees as an incentive to enter into new franchise agreements or perform designated improvements to properties under existing franchise agreements ("franchise agreement acquisition costs"). If the franchisee remains in the franchise 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 and is terminated, the franchisee must repay the unamortized incentive payment plus interest. During the six months endedJune 30, 2022 and 2021, the Company's net advances for these purposes totaled$27.0 million and$18.1 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 ability of our franchisees to complete construction or convert their hotels to one of the Company's brands. AtJune 30, 2022 , the Company had commitments to extend an additional$269.4 million for these purposes provided the conditions of the payment are met by its franchisees. 27 -------------------------------------------------------------------------------- Table of Contents 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 marketing and reservation services. 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 six months endedJune 30, 2022 and 2021, marketing and reservation system revenues exceeded expenses by$48.5 million and$16.0 million , respectively.
Investing Activities
Our board of directors authorized a program which permits us to offer financing, investment, and guaranty support to qualified franchisees, and allows us to acquire or develop and resell hotels to incentivize franchise development of our brands in strategic markets. We are currently engaged in these financial support activities to encourage acceleration of the growth of ourCambria Hotels and Everhome Suites brands, primarily in strategic markets and locations. With respect to our hotel development and ownership, affiliate investments, and lending, the Company had approximately$480.1 million outstanding in support of theCambria Hotels and Everhome Suites brands currently reflected on the balance sheet as ofJune 30, 2022 , which it generally targets to recycle within a five year period, and expects our outstanding investment to not exceed$975 million at any point of time based on current board of directors' authorization. We expect to continue to deploy capital in these manners in support of our brands. The deployment and 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, and our assessment of the ongoing impacts of the COVID-19 pandemic. Cash utilized for investing activities totaled$24.0 million and$33.0 million for the six months endedJune 30, 2022 and 2021, respectively. The change in cash utilized for investing activities for the six months endedJune 30, 2022 primarily reflects the following items: During the six months endedJune 30, 2022 and 2021, capital expenditures in property and equipment totaled$49.9 million and$23.4 million , respectively. The increase in capital expenditures primarily reflects increased costs incurred to support the continued growth of theCambria Hotels and Everhome Suites brands, including acquisition of land parcels in the first and second quarters of 2022 for hotel development. During the six months endedJune 30, 2022 , the Company realized net proceeds of$32.9 million from the sale of one Cambria hotel, one parcel of land, and a sale and conversion of an international direct franchising market to a master franchising market. The Company maintains equity method investments in affiliates related to the Company's program to offer equity support to qualified franchisees to develop and operateCambria Hotels in strategic markets. During the six months endedJune 30, 2022 and 2021, the Company invested$0.7 million and$1.1 million , respectively, and received no distributions from these affiliates. To the extent existing affiliates proceed to the hotel construction phase, the Company is committed to make additional capital contributions totaling$7.5 million to support these efforts. The Company has entered into various limited payment guaranties with regards to the Company's investments in affiliates. The maximum exposure of principal incidental to these limited payment guaranties is$5.7 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 ofJune 30, 2022 andJune 30, 2021 . In the event of performance, the Company has recourse for one of the transactions in the form of a membership interest pledge as collateral for our guaranty. Refer to Note 12 to our consolidated financial statements for further discussion. 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 arrangements. During the six months endedJune 30, 2022 , the Company advanced$2.0 million and received repayments totaling$0.1 million for these purposes. For the six months endedJune 30, 2021 , the Company advanced no amounts and received repayments totaling$0.1 million for these purposes, and acquired a senior note with collateral in an underlying operating hotel for$17.9 million . AtJune 30, 2022 , the Company had commitments to extend an additional$5.5 million for these purposes provided certain conditions are met by its franchisees.
Financing Activities
Financing cash flows relate primarily to the Company's borrowings, open market treasury stock repurchases, acquisition of shares in connection with the exercise or vesting of equity awards, and dividends.
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Debt
Restated Senior Unsecured Credit Facility
OnAugust 20, 2018 , the Company entered into the 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 provides for a$600 million unsecured credit facility with a maturity date ofAugust 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. The Restated Credit Agreement also provides that up to$35 million of borrowings under the Restated Credit Agreement may be used for alternative currency loans and up to$25 million of borrowings under the Restated Credit Agreement 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. OnJuly 2, 2019 , the Company exercised a one-year extension option on the Restated Credit Agreement, extending the maturity date fromAugust 20, 2023 toAugust 20, 2024 . OnAugust 12, 2020 , the Company exercised an additional one-year extension on the Restated Credit Agreement for$525 million of the$600 million total capacity in exchange for a fee of$0.3 million . The extended maturity date isAugust 20, 2025 . OnAugust 11, 2021 , the Company executed a one-year extension on the senior unsecured credit facility for$540 million of the$600 million total capacity in exchange for fees of$0.4 million . The extended maturity date isAugust 20, 2026 . OnMay 18, 2022 , the remainder$60 million of the$600 million total capacity was extended toAugust 20, 2026 in exchange for fees of$24 thousand . There are no subsidiary guarantors under the Restated Credit Agreement. However, 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 requires such obligated subsidiaries to guarantee the Company's obligations under the Restated Credit Agreement (the "springing guarantee"). In the event that these subsidiary guarantees are triggered under the Restated Credit Agreement, the same subsidiary guarantees would be required under the Company's$400 million senior unsecured notes due 2022 and certain hedging and bank product arrangements, if any, with lenders that are parties to the Restated Credit Agreement. OnFebruary 18, 2020 , the Company entered into the First Amendment to the Amended and Restated Senior Unsecured Credit Agreement (the "Amendment") among the Company, Deutsche Bank AG New York Branch, as administrative agent and the lenders party thereto. The Amendment, among other things, removes 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. OnAugust 11, 2021 , we amended the Restated Credit Agreement to provide customary provisions for the replacement of LIBOR with an alternative benchmark rate if it is publicly announced that the administrator of LIBOR has ceased or will cease to provide LIBOR, or if it is publicly announced by the applicable regulatory supervisor that LIBOR is no longer representative. 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 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. 29 -------------------------------------------------------------------------------- Table of Contents 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 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. AtJune 30, 2022 , the Company maintained a total leverage ratio of 2.09x and was in compliance with all financial covenants under the Restated Credit Agreement. The senior unsecured revolving credit facility was paid down in full during the third quarter of 2020 and remains undrawn as ofDecember 31, 2021 andJune 30, 2022 . We expect to draw on the facility for the pending Radisson Hotels Americas transaction. Debt issuance costs incurred in connection with the Restated Credit Agreement 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 proceeds of the Restated Credit Agreement are generally 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.
Senior Unsecured Notes Due 2031
OnJuly 23, 2020 , the Company issued unsecured senior notes in the principal amount of$450 million (the "2020 Senior Notes") bearing a coupon of 3.70%. The 2020 Senior Notes will mature onJanuary 15, 2031 , with interest to be paid semi-annually onJanuary 15th andJuly 15th beginningJanuary 15, 2021 . The Company used the net proceeds of the 2020 Senior Notes, after deducting underwriting discounts, commissions and other offering expenses, to repay in full the$250 million Term Loan entered inApril 2020 and fund the purchase price of the 2012 Senior Notes tendered and accepted by the Company for purchase pursuant to the tender offer (discussed below under "Senior Unsecured Notes due 2022"). Interest on the 2020 Senior Notes is payable semi-annually onJanuary 15th andJuly 15th of each year, commencing onJanuary 15, 2021 . The interest rate payable on the 2020 Senior Notes will be subject to adjustment based on certain rating events. The Company may redeem the 2020 Senior Notes, in whole or in part, at its option at the applicable redemption price before maturity. If the Company redeems the 2020 Senior Notes prior toOctober 15, 2030 (three months prior to the maturity date) (the "2020 Notes 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 2020 Senior Notes matured on the 2020 Notes Par Call Date, discounted to the redemption date on a semi-annual basis at the applicable Treasury Rate plus 50 basis points, plus accrued and unpaid interest. If the Company redeems the 2020 Senior Notes on or after the 2020 Notes Par Call Date, the redemption price will equal 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest. Additionally, at the option of the holders of the 2020 Senior Notes, the Company may be required to repurchase all or a portion of the 2020 Senior Notes of a holder upon the occurrence of a change of control event at a price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest, to the date of repurchase.
Senior Unsecured Notes Due 2029
OnNovember 27, 2019 , the Company issued unsecured senior notes in the principal amount of$400 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 previously outstanding senior notes in the principal amount of$250 million dueAugust 28, 2020 , and for working capital and other general corporate purposes. 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 "2019 Notes 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 2019 Notes 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 2019 Notes Par Call Date, the redemption price will equal 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest. Additionally, at the option of the holders of the 30 -------------------------------------------------------------------------------- Table of Contents 2019 Senior Notes, the Company may be required to repurchase all or a portion of the 2019 Senior Notes of a holder upon the occurrence of a change of control event at a price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest, to the date of repurchase.
Senior Unsecured Notes Due 2022
OnJune 27, 2012 , the Company issued unsecured senior notes with a principal amount of$400 million (the "2012 Senior Notes") at par, bearing a coupon of 5.75% with an effective rate of 6.00%. The Company utilized the net proceeds of this offering, after deducting underwriting discounts, commissions and other offering expenses, together with borrowings under the Company's senior unsecured senior credit facility, to pay a special cash dividend to stockholders totaling approximately$600.7 million paid onAugust 23, 2012 . OnJuly 9, 2020 , the Company commenced the tender offer (the "Tender Offer") to purchase up to$160.0 million aggregate principal amount of the 2012 Senior Notes subject to increase or decrease. The Tender Offer was subsequently upsized to$180.0 million aggregate principal amount of the 2012 Notes. OnJuly 23, 2020 , the Company amended the Tender Offer by increasing the aggregate principal maximum tender amount from$180.0 million to$183.4 million . The Tender Offer settled onJuly 24, 2020 for$197.8 million , including an early tender premium, settlement fees, and accrued interest paid. In combination with the early pay off of the Term Loan, the Company recorded a loss on extinguishment of debt of$16.0 million in the third quarter of 2020.
The 2012 Senior Notes matured on
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. AtJune 30, 2022 , 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 in 2023 of the Company's current ten-year corporate headquarters lease will be forgiven in full. The advances will be included in debt in the 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 applicable current performance conditions as ofJune 30, 2022 .
Dividends
InApril 2020 , in light of uncertainty resulting from the COVID-19 pandemic, we suspended future, undeclared dividends. Given our strong liquidity and credit profile, inMay 2021 , the Company resumed the payment of quarterly dividends, subject to future declarations by our board of directors. OnDecember 6, 2021 , the Company's board of directors approved a 6% increase in the quarterly cash dividend and declared a quarterly cash dividend of$0.2375 per share of common stock. OnFebruary 24, 2022 andMay 24, 2022 , the Company's board of directors declared a cash dividend of$0.2375 per share of common stock. During the six months endedJune 30, 2022 , the Company paid$26.5 million in cash dividends. 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 2022 are estimated to be approximately$53.8 million . The Company may not declare or make any payment if there is an existing event of default under the Restated Credit Agreement or if the payment would create an event of default. Share Repurchases
In 1998, we instituted a share repurchase program which has generated substantial value for our shareholders.
In
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During the six months ended June 30, 2022 , the Company repurchased 68,486 shares
of its common stock under the share repurchase program at a total cost of $9.9
million . Through June 30, 2022 , the Company repurchased 51.8 million shares of
its common stock (including 33.0 million prior to the two-for-one stock split
effected in October 2005 ) under the program at a total cost of $1.5 billion .
Considering the effect of the two-for-one stock split, the Company has
repurchased 84.8 million shares at an average price of $17.73 per share. As of
June 30, 2022 , the Company had 3.3 million shares remaining under the current
share repurchase authorization.
During the six months ended June 30, 2022 , the Company redeemed 34,848 shares of
common stock at a total cost of $5.2 million from employees to satisfy the
option exercise price and statutory minimum tax-withholding requirements related
to the exercising of stock options and vesting of PVRSUs and restricted stock
grants. These redemptions were outside the share repurchase program.
Critical Accounting Policies
Our accounting policies comply with principles generally accepted inthe United States . Discussion of these policies is included in Note 1 to our consolidated financial statements as of and for the year endedDecember 31, 2021 included in our Annual Report on Form 10-K, which incorporates description of our critical accounting policies that involve subjective and complex judgments that could potentially affect reported results.
New Accounting Standards
Refer to Note 1 for information related to our evaluation of new accounting standards.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this quarterly report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as "expect," "estimate," "believe," "anticipate," "should," "will," "forecast," "plan," "project," "assume" or similar words of futurity. All statements other than historical facts are forward-looking statements. These forward-looking statements are based on management's current beliefs, assumptions and expectations regarding future events, which in turn are based on information currently available to management. Such statements may relate to projections of the Company's revenue, expenses, Adjusted EBITDA, earnings, debt levels, ability to repay outstanding indebtedness, payment of dividends, repurchases of common stock, and other financial and operational measures, including occupancy and open hotels, RevPAR, our ability to benefit from any rebound in travel demand, our liquidity, and the impact of COVID-19 and economic conditions on our future operations, among other matters. We caution you not to place undue reliance on any such forward-looking statements. Forward-looking statements do not guarantee future performance and involve known and unknown risks, uncertainties and other factors. Several factors could cause our actual results, performance or achievements to differ materially from those expressed in or contemplated by the forward-looking statements. Such risks include, but are not limited to, the consummation of the acquisition of Radisson Hotels Americas, including the related incurrence of additional indebtedness; the company's ability to successfully integrate Radisson Hotels Americas' employees and operations; the ability to realize the anticipated benefits and synergies of the acquisition ofRadisson Hotels Americas as rapidly or to the extent anticipated; the continuation or resurgence of the COVID-19 pandemic, including with respect to new strains or variants; the rate, pace and effectiveness of vaccination in the broader population; changes in consumer demand and confidence, including the impact of the COVID-19 pandemic on unemployment rates, consumer discretionary spending and the demand for travel, transient and group business; the impact of COVID-19 on the global hospitality industry, particularly but not exclusively in theU.S. travel market; the success of our mitigation efforts in response to the COVID-19 pandemic; the performance of our brands and categories in any recovery from the COVID-19 pandemic disruption; the timing and amount of future dividends and share repurchases; changes to general, domestic and foreign economic conditions, including access to liquidity and capital as a result of COVID-19; future domestic or global outbreaks of epidemics, pandemics or contagious diseases or fear of such outbreaks; changes in law and regulation applicable to the travel, lodging or franchising industries; foreign currency fluctuations; impairments or declines in the value of our assets; operating risks common in the travel, lodging or franchising industries; changes to the desirability of our brands as viewed by hotel operators and customers; changes to the terms or termination of our contracts with franchisees and our relationships with our franchisees; our ability to keep pace with improvements in technology utilized for marketing and reservations systems and other operating systems; the commercial acceptance of our SaaS technology solutions division's products and services; our ability to grow our franchise system; exposure to risks related to our hotel development, financing, and ownership activities; exposures to risks associated with our investments in new businesses; fluctuations in the supply and demand for hotel rooms; our ability to realize anticipated benefits from acquired businesses; impairments or losses relating to acquired businesses; the level of acceptance of alternative growth strategies we may implement; cyber security and data breach risks; ownership and financing activities; hotel closures or financial difficulties of our franchisees; operating risks associated 32
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Table of Contents with our international operations, especially in areas currently most affected by COVID-19; the outcome of litigation; and our ability to effectively manage our indebtedness and secure our indebtedness. These and other risk factors are discussed in detail in the Risk Factors section of this quarterly report on Form 10-Q and of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onFebruary 24, 2022 . We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
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