Choice Hotels International raises full-year outlook

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Written by Linda Hohnholz

ROCKVILLE, MD – Choice Hotels International, Inc today reported the following highlights for the third quarter of 20141:

ROCKVILLE, MD – Choice Hotels International, Inc today reported the following highlights for the third quarter of 20141:

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

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

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

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

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

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

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

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

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

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

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

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

Discontinued Operations

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

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

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

Outlook

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

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

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

Franchising

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

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

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

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

SkyTouch

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

Execution of third-party contracts results in annualized revenue ranging between $4 million and $6 million with realized revenues for the year ended December 31, 2014 totaling approximately $1 million; and
SG&A expenses are forecasted to be approximately $19 million related to investment in business development, sales and marketing and non-capitalizable product development expenditures related to the division’s cloud-based hotel operating system’s technology related products and services.

Discontinued Operations

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

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

Consolidated Outlook

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

Items Impacting Comparability

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

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

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

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

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Linda Hohnholz

Editor in chief for eTurboNews based in the eTN HQ.

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