Choice Hotels Reports Third Quarter 2012 Diluted EPS of $0.76 Per Share and Domestic RevPAR Growth of 5.6%
New Domestic Hotel Franchise Contracts Rise 13%
Choice Hotels International, Inc.,(NYSE: CHH) today reported the following highlights for the third quarter of 2012:
- Diluted earnings per share (“EPS”) for the third quarter of 2012 of$0.76compared to diluted EPS of$0.71for the third quarter of 2011, a 7% increase.
- Earnings before interest, taxes, depreciation and amortization (“EBITDA”) increased 4% to$67.3 millionfor the three months endedSeptember 30, 2012, compared to$64.5 millionfor the three months endedSeptember 30, 2011. Operating income increased 5% from$62.4 millionfor the three months endedSeptember 30, 2011to$65.3 millionfor the same period of 2012.
- Franchising revenues increased 4% to$90.1 millionfor the three months endedSeptember 30, 2012from$86.7 millionfor the same period of 2011.? Total revenues increased 9% to$210.4 millionfor the three months endedSeptember 30, 2012compared to the same period of 2011.
- Domestic royalty fees for the three months endedSeptember 30, 2012increased $4.1 million to $74.3 million from$70.2 millionin the three months endedSeptember 30, 2011, an increase of 6%.
- Franchising margins increased 50 basis points from 71.6% for the three months endedSeptember 30, 2011to 72.1% for the same period of the current year.
- The effective income tax rate for the three months endedSeptember 30, 2012was 20.3% compared to 25.7% for the same period of the prior year.
- Income tax expense for the three months endedSeptember 30, 2012includes discrete items and current tax benefits totaling$7.7 millionor$0.13EPS that were not contemplated in the company’s previous EPS guidance.
- Domestic unit and room growth increased 1.3 percent and 1.0 percent fromSeptember 30, 2011, respectively.
- Domestic system-wide revenue per available room (“RevPAR”) increased 5.6% for the three months endedSeptember 30, 2012compared to the same period of 2011 as occupancy and average daily rates increased 180 basis points and 2.7 percent, respectively.
- The company executed 89 new domestic hotel franchise contracts for the three months endedSeptember 30, 2012compared to 79 new domestic hotel franchise contracts in the same period of the prior year, a 13% increase.
- The number of worldwide hotels under construction, awaiting conversion or approved for development as ofSeptember 30, 2012was 435 hotels representing 36,150 rooms.
- A special cash dividend in the amount of$10.41per share or approximately$600.7 millionin the aggregate was paid onAugust 23, 2012. The special cash dividend was paid with the proceeds of the company’s recent offering of$400 million5.75% unsecured senior notes and its new$350 millionsenior credit facility entered into onJuly 25, 2012. As a result of these transactions, and as contemplated in the company’s previously provided EPS guidance, interest expense increased $6.9 million to $10.2 million for the three months endedSeptember 30, 2012compared to the same period of the prior year.
“The lodging industry continues to improve despite challenging global economic conditions and this is reflected in our third quarter results,” saidStephen P. Joyce, president and chief executive officer. “Our RevPAR increased by approximately 6%, driven by a further improvement of hotel occupancy levels and the pricing power of our brands.? We are also pleased by the continued improvement of the development environment. We will continue to invest in programs designed to drive more reservations through our central channels, improve guest loyalty and improve the value of our brands in an effort to drive incremental business to our franchisees.”
Use of Free Cash Flow
The company has historically used its free cash flow (cash flow from operations less capital expenditures) to return value to shareholders, primarily through share repurchases and dividends.
For the nine months endedSeptember 30, 2012, the company paid$632.8 millionof cash dividends to shareholders which included a special cash dividend in the amount of$10.41per share or approximately$600.7 millionpaid onAugust 23, 2012. The company’s current quarterly dividend rate per common share is$0.185, subject to declaration by our board of directors.
During the nine months endedSeptember 30, 2012, the company repurchased 0.5 million shares for a total cost of$19.9 millionand has authorization to purchase up to an additional 1.4 million shares under this program.? The company did not repurchase any shares of common stock under the share repurchase program during the three months endedSeptember 30, 2012. We expect to continue making repurchases under our share repurchase program in the open market and through privately negotiated transactions, subject to market and other conditions. No minimum number of share repurchases has been fixed. Since Choice announced its stock repurchase program onJune 25, 1998, the company has repurchased 45.3 million shares of its common stock for a total cost of$1.1 billionthroughJune 30, 2012. Considering the effect of a two-for-one stock split inOctober 2005, the company had repurchased 78.3 million shares throughSeptember 30, 2012under the share repurchase program at an average price of$13.89per share.
Our board of directors previously authorized us to enter into programs which permit us to offer financing, investment and guaranty support to qualified franchisees as well as to acquire and resell real estate to incent franchise development for certain brands in strategic markets.? Over the next several years, we expect to continue to opportunistically deploy capital pursuant to these programs to promote growth of our emerging brands.? The amount and timing of the investment in these programs will be dependent on market and other conditions.? Notwithstanding these programs, the company expects to continue to return value to its shareholders through a combination of share repurchases and dividends, subject to market and other conditions.
AtSeptember 30, 2012, the company had gross debt of$819.0 millionand cash and cash equivalents totaling$115.1 millionresulting in net debt of$703.9 million.
OnJune 27, 2012, the company issued unsecured senior notes in an aggregate principal amount of$400 million, in an underwritten, registered public offering. These notes will mature inJuly 2022and bear a coupon rate of interest of 5.75%. Considering bond issuance costs, the company’s effective interest costs related to these senior notes is approximately 5.94%.
OnJuly 25, 2012, the company entered into a senior secured credit facility consisting of a$200 millionrevolving credit tranche and a$150 millionterm loan tranche, with a four year term. The company may elect to have borrowings under the senior secured credit facility bear interest at (i) a base rate plus a margin ranging from 100 to 325 basis points based on the company’s total leverage ratio or (ii) LIBOR plus a margin ranging from 200 to 425 basis points based on the company’s total leverage ratio.? As a result of entering into the senior secured credit facility, the company’s existing$300 millionsenior unsecured revolving credit facility was terminated. Under the$300 millionsenior unsecured revolving credit facility the company could elect to have borrowings bear interest at (i) a base rate plus a margin ranging from 5 to 80 basis points based on the company’s credit rating or (ii) LIBOR plus a margin ranging from 105 to 180 basis points based on the company’s credit rating.
The proceeds from the issuance of the$400 millionsenior notes and the company’s new senior secured credit facility were utilized to pay the special cash dividend.
The company’s fourth quarter 2012 diluted EPS is expected to be at least$0.40. The company expects full-year 2012 diluted EPS to range between$2.05 and $2.07.? EBITDA for full-year 2012 are expected to range between$201 million and $202.5 million. These estimates include the following assumptions:
- The company expects net domestic unit growth to increase by approximately 1% in 2012;
- RevPAR is expected to increase approximately 4% for fourth quarter of 2012 and increase between 6% and 6.5% for full-year 2012;
- The effective royalty rate is expected to remain flat for full-year 2012;
- All figures assume the existing share count;
- An effective tax rate of 33.0% for the fourth quarter and 29.1% for full-year 2012 and we expect our recurring effective tax rate for future periods to be approximately 31.5%.
Choice will conduct a conference call on Thursday, October 25, 2012 at 9:30 a.m. EDT to discuss the company’s third quarter 2012 results. The dial-in number to listen to the call is 1-866-383-8003, and the access code is 78277943. International callers should dial 1-617-597-5330 and enter the access code 78277943.? The conference call also will be Webcast simultaneously via the company’s Web site, www.choicehotels.com.? Interested investors and other parties wishing to access the call via the Webcast should go to the Web site and click on the Investor Info link.? The Investor Information page will feature a conference call microphone icon to access the call.
The call will be recorded and available for replay beginning at 12:30 p.m. EDTon Thursday, October 25, 2012through Thursday, November 1, 2012by calling 1-888-286-8010 and entering access code 20807104. The international dial-in number for the replay is 1-617-801-6888, access code 20807104. In addition, the call will be archived and available on www.choicehotels.com via the Investor Info link.
About Choice Hotels
Choice Hotels International, Inc. franchises approximately 6,200 hotels, representing more than 495,000 rooms, inthe United States and more than 30 other countries and territories. ?As ofSeptember 30, 2012, 360 hotels, representing 29,000 rooms, were under construction, awaiting conversion or approved for development in the United States.? Additionally, 75 hotels, representing approximately 7,000 rooms, were under construction, awaiting conversion or approved for development in more than 20 other countries and territories.? The company’sComfort Inn, Comfort Suites, Quality,Sleep Inn, Clarion, Cambria Suites, MainStay Suites,Suburban Extended Stay Hotel,Econo Lodge and Rodeway Inn brands serve guests worldwide.? In addition, via its Ascend Collection membership program, travelers have upscale lodging options at historic, boutique and unique hotels.
Additional corporate information may be found on the Choice Hotels International, Inc.web site, which may be accessed at www.choicehotels.com.
Certain matters discussed in this press release?constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.? Generally, our use of words such as “expect,” “estimate,” “believe,” “anticipate,” “will,” “forecast,” “plan”,” project,” “assume” or similar words of futurity identify such 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, earnings and other financial and operational measures, company debt levels, ability to repay outstanding indebtedness, payment of dividends, and 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 actual results, performance or achievements of the company to differ materially from those expressed in or contemplated by the forward-looking statements.??Such risks include, but are not limited to, changes to general, domestic and foreign economic conditions;? operating risks common in the lodging and 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; our ability to keep pace with improvements in technology utilized for reservations systems and other operating systems; fluctuations in the supply and demand for hotels rooms; and?our ability to manage effectively our indebtedness.? These and other risk factors are discussed in detail in the Risk Factors section of the company’s Form 10-K for the year endedDecember 31, 2011, filed with theSecurities and Exchange CommissiononFebruary 29, 2012and our quarterly reports filed on Form 10-Q.??We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Statement Concerning Non-GAAP Financial Measurements Presented in Exhibit 8
EBITDA, franchising revenues and franchising margins are non-GAAP financial measurements.? This information should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted inthe United States(“GAAP”), such as operating income, total revenues and operating margins.? The company’s calculation of these measurements may be different from the calculations used by other companies and therefore comparability may be limited.? The company has included an exhibit accompanying this release that reconciles these measures to the comparable GAAP measurement. We discuss management’s reasons for reporting these non-GAAP measures below.
Earnings Before Interest, Taxes, Depreciation and Amortization: EBITDA reflects earnings excluding the impact of interest expense, tax expense, depreciation and amortization. Our management considers EBITDA to be an indicator of operating performance because it can be used to measure our ability to service debt, fund capital expenditures, and expand our business. EBITDA is a commonly used measure of performance in our industry. In addition, it is used by analysts, lenders, investors and others, as well as by us, to facilitate comparisons between the company and its competitors because it excludes certain items that can vary widely across different industries or among companies within the same industry.
Franchising Revenues and Margins:? The company reports franchising revenues and margins which exclude marketing and reservation revenues and hotel operations.? Marketing and reservation activities are excluded from revenues and operating margins since the company is required by its franchise agreements to use these fees collected for marketing and reservation activities. Cumulative reservation and marketing system fees not expended are recorded as a liability on the company’s financial statements and are carried over to the next fiscal year and expended in accordance with the franchise agreements. Cumulative marketing and reservation expenditures in excess of system fees collected for marketing and reservation activities are recorded as a receivable on the company’s financial statements. In addition, the company has the contractual authority to require that the franchisees in the system at any given point repay the company for any deficits related to marketing and reservation activities.? Hotel operations are excluded since they do not reflect the most accurate measure of the company’s core franchising business. These non-GAAP measures are a commonly used measure of performance in our industry and facilitate comparisons between the company and its competitors.
Choice Hotels, Choice Hotels International, Comfort Inn, Comfort Suites, Quality, Sleep Inn, Clarion, Cambria Suites, MainStay Suites, Suburban Extended Stay Hotel, Econo Lodge, Rodeway Inn and Ascend Collectionare proprietary trademarks and service marks of Choice Hotels International.