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.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic continues to cause disruptions to the global economy and
the hospitality industry, including in the United States , where more than 80% of
our franchised hotels are located. The COVID-19 pandemic has led governments and
other authorities and businesses around the world to impose or recommend
measures intended to control its spread, including temporary closures of and
occupancy limits on many businesses, travel restrictions, cancellation of
events, social distancing measures and other governmental regulations. As a
result, the COVID-19 pandemic and its consequences have reduced travel and
demand for hotel rooms, which has had a material adverse impact on the
hospitality industry and the Company both financially and operationally. The
development of effective vaccines and the on-going distribution and vaccination
efforts have been significant and positive developments and we believe have
contributed to improved operating metrics since the second quarter of 2021.
However, the extent to which the COVID-19 pandemic will continue to impact the
hospitality industry and our operations remains uncertain and will depend
largely on future developments, including the rate and pace of vaccination in
the broader population, the severity and duration of resurgences or variants of
the virus, and the effectiveness of actions by government authorities and the
public to continue to contain the pandemic.
The impacts of COVID-19 on the Company's business were first experienced toward
the end of the first quarter of 2020, with domestic occupancy levels ranging
between 25.5% and 32.5% in the last ten days of March 2020 resulting in
significant decreases in revenue per available room ("RevPAR"). These trends
steadily improved, albeit remained significantly impacted, over the remainder of
2020, resulting in full year 2020 domestic RevPAR experiencing a decline of
approximately 30.7% from full year 2019. The Company continued to experience
significant negative impacts through the first quarter of 2021, although an
increase in leisure travel reservations was observed in March 2021 that steadily
improved through September 2021 . The third quarter 2021 domestic RevPAR
experienced an increase of approximately 56.4% and 11.4% relative to third
quarter 2020 and third quarter 2019, respectively. As of both September 30, 2021
and September 30, 2020 , there were less than 1% of Company's domestic hotel
system that had temporarily suspended operations due to governmental restriction
or a franchisee's election.
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 of
September 30, 2021 , the Company had approximately $1.0 billion in cash and
additional available 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.
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In response to the COVID-19 pandemic, we implemented measures during 2020 to
focus on the safety of our customers, employees, franchisees and their staff,
while at the same time seeking to mitigate the impact on franchisees' and our
Company's financial position and operations. The duration of these measures
cannot be predicted at this time. The measures that remain in effect during the
third quarter of 2021 include, but are not limited to, the following:
•Preserving fee-deferral programs for domestic and international franchisees.
•Continuing to extend capital-intensive brand deadlines and offer more flexible
brand standard options to assist franchisees.
•Advising franchisees on benefits and eligibility requirements of government
relief SBA programs and other CARES Act and American Rescue Plan Act of 2021
provisions.
•Maintaining a proactive, ongoing multi-channel franchisee outreach and
education program that is actively assisting our franchisees in accessing
available capital.
While a recovery in the hospitality industry has commenced, industry projections
anticipate that recovery to 2019 operating performance will span multiple years.
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.
In April 2020 , in light of uncertainty resulting from the COVID-19 pandemic, we
determined to suspend future, undeclared dividends and temporarily suspended
activity under the Company's share repurchase program. Given our strong
liquidity and credit profile, the Company's board of directors declared on May
7, 2021 , a quarterly cash dividend of $0.225 per share of common stock and
approved resumption of the share repurchase program. Additionally, on September
9, 2021 , the Company's board of directors declared a quarterly cash dividend of
$0.225 per share of common stock, which was paid in October 2021 .
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, see Risk Factors in Part
II, Item 1A of our first quarter 2021 Form 10-Q and 2020 Form 10-K.
Overview
We are primarily a hotel franchisor with franchise agreements and owned hotels
representing 7,102 hotels open comprising 601,776 rooms and 912 hotels under
construction, awaiting conversion or approved for development comprising 78,547
rooms as of September 30, 2021 , located in 50 states, the District of Columbia
and more than 40 countries and territories outside the 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 Extended Stay Hotel®, 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 five Cambria hotels, while its international franchise
operations are conducted through a combination of direct franchising and master
franchising or master development (collectively, "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 in the
United States . Therefore, our description of our business is primarily focused
on the domestic operations, which encompasses the United States and Caribbean
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, five owned hotels, and other
sources. Historically, the hotel industry has been seasonal in nature. For most
hotels, demand is ordinarily
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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. However, as a result of the COVID-19
pandemic, historical trends may not be reliable to predict future performance.
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. 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 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 third quarter 2021 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. Due to increased RevPAR growth during the second and
third quarters of 2021 and our management of discretionary marketing and
reservation system expenditures, we anticipate marketing and reservation
revenues to exceed expenses for full year 2021.
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.
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As discussed above, the Company has taken and is continuing to take measures to
combat the impact of the COVID-19 pandemic on our business. These measures have
been and remain a priority in order to mitigate the financial impacts to our
franchisees and the Company. We believe these measures support the Company's
preparedness and complement the strategic priorities we execute against 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. As noted above, 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, maintaining a guest
loyalty program, a central reservation system, property and yield management
programs and systems, revenue management services, quality assurance standards,
qualified vendor relationships and expanding our partnerships with other
travel-related companies that provide services to our franchisees and guests. We
believe that healthy brands, which deliver a compelling return on investment,
will enable us to sell additional hotel franchises and raise royalty rates. We
have multiple brands that meet the needs of many types of guests, and can be
developed at various price points and applied to both new and existing hotels.
This ensures that we have brands suitable for creating growth in a variety of
market conditions. Improving the performance of the hotels in our system,
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. As disclosed above, prior to the
second and third quarters 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. In April
2020 , in light of uncertainty resulting from the COVID-19 pandemic, we
determined to suspend future, undeclared dividends and temporarily suspended
activity under the Company's share repurchase program. Given our strong
liquidity and credit profile, the Company's board of directors declared on May
7, 2021 , a quarterly cash dividend of $0.225 per share of common stock and
approved resumption of the share repurchase program. Additionally, on September
9, 2021 , the Company's board of directors declared a quarterly cash dividend of
$0.225 per share of common stock.
The Company also allocates capital to financing, investment and guaranty support
to incent franchise development for certain brands in strategic markets; hotel
ownership; and exploring growth opportunities in business areas that are
adjacent or complementary to our core hotel franchising business, which leverage
our core competencies and are additive to our franchising business model. The
timing and amount of these investments are subject to market and other
conditions. In light of uncertainty resulting from the COVID-19 pandemic and to
preserve liquidity, we have limited certain discretionary investments until such
time as we determine conditions are appropriate to resume such activity.
We believe our growth investments and strategic priorities, when properly
implemented, will enhance our profitability, maximize our financial returns and
continue to generate value for our shareholders. The ultimate measure of our
success will be reflected in the items below.
Results of Operations: Royalty fees, operating income, net income and diluted
earnings per share ("EPS") represent key measurements of our financial
performance. These measurements are primarily driven by the operations of our
hotel franchise system and therefore, our analysis of the Company's operations
is primarily focused on the size, performance and potential growth of the hotel
franchise system as well as our variable overhead costs.
Our discussion of results excludes the Company's marketing and reservation
system revenues and expenses. The Company's franchise agreements require the
payment of marketing and reservation system fees to be used exclusively by the
Company for expenses associated with providing franchise services such as
central reservation systems, national marketing, and media advertising. The
Company is obligated to expend the marketing and reservation system fees it
collects from franchisees in accordance with the franchise agreements.
Furthermore, franchisees are required to reimburse the Company for any deficits
generated by these marketing and reservation system activities. Over time, the
Company expects cumulative revenues and expenses to break even and, therefore,
no income or loss will be generated from marketing and reservation system
activities. As a result, the Company generally excludes the financial impacts of
this program from the analysis of its operations.
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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 resulting from the impacts of the
COVID-19 pandemic, quarterly and/or annual deficits may be generated. During the
nine months ended September 30, 2021 , marketing and reservation system revenues
exceeded expenses by $56.7 million . During the nine months ended September 30,
2020 , marketing and reservation system expenses exceeded revenues by $36.4
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. However, in April 2020 in light of
uncertainty resulting from the COVID-19 pandemic, we determined to suspend
future, undeclared dividends and temporarily suspended activity under the
Company's share repurchase program. On May 7, 2021 , the Company's board of
directors declared a quarterly cash dividend of $0.225 per share of common stock
and approved resumption of the share repurchase program. Additionally, on
September 9, 2021 , the Company's board of directors declared a quarterly cash
dividend of $0.225 per share of common stock. We believe the Company's cash flow
from operations and available financing capacity is sufficient to meet the
expected future operating, investing and financing needs of the business.
Refer to MD&A heading "Liquidity and Capital Resources" for additional analysis.
Inflation: Inflation has been moderate in recent years and has not had a
significant impact on our business. We are monitoring the implications of
governmental assistance programs related to COVID-19 on future inflation trends
and any resulting impacts on our business.
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 system 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 system 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 September 30, Nine Months Ended September 30,
(in thousands) 2021 2020 2021 2020
Total revenues $ 323,369 $ 210,771 $ 784,660 $ 580,679
Adjustments:
Marketing and reservation system revenues (156,871) (107,141) (384,380) (297,203)
Revenues, excluding marketing and
reservation system activities $ 166,498 $ 103,630
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Operations Review
Comparison of Operating Results for the Three-Month Periods Ended September 30,
2021 and 2020
Summarized financial results for the three months ended September 30, 2021 and
2020 are as follows:
(in thousands) 2021 2020
REVENUES
Royalty fees $ 127,317 $ 79,666 Initial franchise and relicensing fees 6,149 6,071 Procurement services
13,010 10,115
Marketing and reservation system 156,871 107,141
Owned hotels 11,377 4,201
Other 8,645 3,577
Total revenues 323,369 210,771
OPERATING EXPENSES Selling, general and administrative 35,110 31,779 Depreciation and amortization
5,883 6,382
Marketing and reservation system 116,216 113,808
Owned hotels 7,054 3,812
Total operating expenses 164,263 155,781
Loss on impairment of assets - (4,290)
Operating income 159,106 50,700
OTHER INCOME AND EXPENSES, NET
Interest expense 11,638 12,691
Interest income (1,202) (1,744)
Loss on extinguishment of debt - 15,958
Other (gains) losses 407 (2,030)
Equity in net (gain) loss of affiliates (3,326) 1,731
Total other income and expenses, net 7,517 26,606
Income before income taxes 151,589 24,094
Income tax expense (benefit) 34,934 9,594
Net income $ 116,655 $ 14,500
Results of Operations
The Company recorded income before income taxes of $151.6 million for the
three-month period ended September 30, 2021 , a $127.5 million increase from the
same period of the prior year. The increase in income before income taxes
primarily reflects a $108.4 million increase in operating income, recognition of
a $16.0 million loss on extinguishment of debt during the three-month period
ended September 30, 2020 , a $5.0 million increase in equity in net (gain) loss
of affiliates, and a $1.1 million decrease in interest expense, partially offset
by a $2.4 million decrease in other (gains) losses for the three-month period
ended September 30, 2020 .
Operating income increased $108.4 million primarily due to a $47.6 million
increase in royalty revenues, a $47.4 million increase in the net surplus
generated from marketing and reservation system activities, a $5.0 million
increase in other revenues, a $3.9 million increase in owned hotels revenues in
excess of expense, recognition of $4.3 million in impairment of assets during
the three-month period ended September 30, 2020 , and a $2.9 million increase in
procurement services revenues, partially offset by a $3.3 million increase in
SG&A expenses.
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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 ended September 30, 2021 increased
$46.6 million to $123.0 million from $76.4 million for the three months ended
September 30, 2020 , an increase of 61.0%. The increase in domestic royalties
reflect a 56.4% increase in domestic RevPAR. System-wide RevPAR increased due to
a 25.6% increase in average daily rates and a 1,280 basis point increase in
occupancy. The increase in domestic royalties is also due to a 1.2% increase in
the number of domestic franchised hotel rooms and a 8 basis point increase in
the effective royalty rate from 4.91% for the three months ended September 30,
2020 to 4.99% for the three months ended September 30, 2021 .
A summary of the Company's domestic franchised hotels operating information is
as follows:
Three Months Ended Three Months Ended
September 30, 2021 September 30, 2020 Change
Average Average Average
Daily Daily Daily
Rate Occupancy RevPAR Rate Occupancy RevPAR Rate Occupancy RevPAR
Comfort $ 110.72 67.8 % $ 75.03 $ 86.80 53.3 % $ 46.24 27.6 % 1,450 bps 62.3 %
Sleep 95.70 66.4 % 63.55 78.07 52.4 % 40.89 22.6 % 1,400 bps 55.4 %
Quality 94.48 62.2 % 58.76 76.57 48.7 % 37.25 23.4 % 1,350 bps 57.7 %
Clarion 101.17 51.9 % 52.47 78.58 37.3 % 29.29 28.7 % 1,460 bps 79.1 %
Econo Lodge 76.51 57.1 % 43.66 63.66 47.2 % 30.03 20.2 % 990 bps 45.4 %
Rodeway 76.21 56.9 % 43.37 63.02 50.2 % 31.62 20.9 % 670 bps 37.2 %
WoodSpring 54.11 85.5 % 46.26 46.41 76.5 % 35.50 16.6 % 900 bps 30.3 %
MainStay 87.15 69.1 % 60.18 79.23 62.4 % 49.43 10.0 % 670 bps 21.7 %
Suburban 59.26 73.5 % 43.54 51.46 68.3 % 35.14 15.2 % 520 bps 23.9 %
Cambria Hotels 148.85 62.2 % 94.15 110.04 41.3 % 45.44 35.3 % 2,090 bps 107.2 %
Ascend Hotel
Collection 158.37 63.3 % 98.50 126.71 51.1 % 64.80 25.0 % 1,220 bps 52.0 %
Total $ 94.59 64.9 % $ 61.37 $ 75.29 52.1 % $ 39.24 25.6 % 1,280 bps 56.4 %
A summary of domestic hotels and rooms in our franchise system at
September 30, 2021 September 30, 2020 Variance
Hotels Rooms Hotels Rooms Hotels Rooms % %
Comfort 1,665 131,066 1,629 128,213 36 2,853 2.2 % 2.2 %
Sleep 414 29,167 403 28,534 11 633 2.7 % 2.2 %
Quality 1,666 125,061 1,688 128,751 (22) (3,690) (1.3) % (2.9) %
Clarion 183 21,917 179 22,364 4 (447) 2.2 % (2.0) %
Econo Lodge 734 44,112 781 47,036 (47) (2,924) (6.0) % (6.2) %
Rodeway 531 30,657 567 32,251 (36) (1,594) (6.3) % (4.9) %
WoodSpring 300 36,112 285 34,290 15 1,822 5.3 % 5.3 %
MainStay 97 6,780 74 4,673 23 2,107 31.1 % 45.1 %
Suburban 70 6,366 62 6,236 8 130 12.9 % 2.1 %
Cambria Hotels 58 8,060 53 7,599 5 461 9.4 % 6.1 %
Ascend Hotel Collection 224 28,175 213 22,192 11 5,983 5.2 % 27.0 %
Total Domestic Franchises 5,942 467,473 5,934 462,139 8 5,334 0.1 % 1.2 %
As of both September 30, 2021 and September 30, 2020 , there were less than 1% of
the Company's domestic hotel system that 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 September 30, 2021
increased $1.0 million to $4.3 million compared to the three months ended
September 30, 2020 as a result of improvements in RevPAR performance, despite
reductions of the international franchise system size by 32 hotels (from 1,192
as of September 30, 2020 to 1,160 as of September 30, 2021 ) and
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13 rooms (from 134,316 as of September 30, 2020 to 134,303 as of September 30,
2021 ). As of September 30, 2021 and September 30, 2020 , approximately 2% and 3%,
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 potential duration of 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.
During the third quarter of 2021, the Company awarded 89 domestic franchise
agreements representing 7,640 rooms compared to 81 franchising agreements
representing 6,573 rooms for the third quarter of 2020. Domestic franchise
agreements awarded for new construction hotels totaled 32 contracts representing
3,178 rooms during the three months ended September 30, 2021 , compared to 21
contracts representing 1,805 rooms for the three months ended September 30,
2020 . Conversion hotel awarded franchise agreements totaled 57 representing
4,462 rooms for the three months ended September 30, 2021 , compared to 60
agreements representing 4,768 rooms for the three months ended September 30,
2020 .
The Company awarded 56 domestic relicensing contracts during the three months
ended September 30, 2021 , compared to 54 executed during the three months ended
September 30, 2020 . The Company awarded 6 domestic renewal agreements during the
three months ended September 30, 2021 , compared to 5 awarded during the three
months ended September 30, 2020 .
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 remained unchanged at $6.1 million for
both the three months ended September 30, 2020 and September 30, 2021 .
At September 30, 2021 , the Company had 859 franchised hotels with 71,346 rooms
under construction, awaiting conversion or approved for development in its
domestic system as compared to 945 hotels and 76,155 rooms at September 30,
2020 . The number of new construction franchised hotels in the Company's domestic
pipeline decreased from 710 at September 30, 2020 to 652 at September 30, 2021 .
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 235 hotels at September 30, 2020
to 207 hotels at September 30, 2021 . Conversion hotels typically open three to
six months after the execution of a franchise agreement. The Company had an
additional 53 franchised hotels with 7,201 rooms under construction, awaiting
conversion or approved for development in its international system as of
September 30, 2021 , compared to 48 hotels and 5,592 rooms at September 30, 2020 .
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.
Procurement Services: Revenues increased $2.9 million from $10.1 million for the
three months ended September 30, 2020 to $13.0 million for the three months
ended September 30, 2021 . These results reflect an increase in fees generated
from travel-related partnerships and qualified vendors resulting from increased
occupancy during the third quarter of 2021 at our franchised hotels.
Other Revenues: Other revenues increased $5.0 million from $3.6 million for the
three months ended September 30, 2020 to $8.6 million for the three months ended
September 30, 2021 driven by an increase in non-compliance fees and other
franchising revenues.
Selling, General and Administrative Expenses: The cost to operate the business
is reflected in SG&A on the consolidated statements of income. SG&A expenses
were $35.1 million for the three months ended September 30, 2021 , an increase of
$3.3 million from the three months ended September 30, 2020 .
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SG&A expenses for the three months ended September 30, 2021 and 2020 include
approximately $0.3 million and $0.4 million , respectively, related to the
Company's alternative growth initiatives and expenses related to operations and
maintenance of an office building.
Excluding SG&A expenses for alternative growth initiatives and office building
operations, SG&A for the three months ended September 30, 2021 increased $3.4
million to $34.8 million in the current quarter primarily due to cost increases
for general corporate purposes and lifting of certain cost mitigation measures
related to the COVID-19 pandemic, partially offset by a decrease in provision
for credit losses in accounts receivable recorded in accordance with Topic 326
and a decrease in the Company's deferred compensation liabilities based on
decreases in the underlying investments.
Loss on Impairment of Assets: In the third quarter of 2020, the Company
recognized $4.3 million charge related to the long-lived assets of a commercial
office-building owned by the Company.
Loss on Extinguishment of Debt: During the third quarter of 2020, the Company
recorded a loss on the extinguishment of debt of $16.0 million related to the
Tender Offer and early pay off of the Term Loan.
Other (Gains) Losses: The Company recorded other net losses of $0.4 million for
the three months ended September 30, 2021 , compared to other net gains of $2.0
million for the three months ended September 30, 2020 . 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 (Gain) Loss of Affiliates: The Company recorded net gains of $3.3
million from its unconsolidated joint ventures for the three months ended
September 30, 2021 , compared to net losses of $1.7 million for the three months
ended September 30, 2020 . These investments relate to the Company's program to
offer equity support to qualified franchisees to develop and operate Cambria
Hotels in strategic markets. The fluctuation is primarily attributable to the
distribution from an unconsolidated joint venture which sold its underlying
assets resulting in a gain of $4.3 million in the third quarter of 2021, in
addition to increased losses for the three months ended September 30, 2020 of
operating joint venture hotels as impacted by the COVID-19 pandemic. Refer to
Note 4 to our consolidated financial statements for additional information. We
anticipate the results recognized from these investments will continue to be
impacted by the uncertainty of the COVID-19 pandemic for the remainder of 2021.
Income Tax Expense (Benefit): The effective income tax rates were 23.1%
and 39.4% for the three months ended September 30, 2021 and 2020, respectively.
The effective income tax rate for the three months ended September 30, 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 $0.4 million of excess tax
benefits from share-based compensation and $0.7 million of additional federal
R&D tax credits.
On January 1, 2018 , the Company adopted ASU 2016-16, which provides guidance on
recognition of current income tax consequences for intercompany asset transfers
(other than inventory) at the time of transfer. On January 1, 2020 , the Company
completed a reorganization of its foreign legal entity structure that resulted
in a $30.6 million tax benefit. In accordance with ASU 2016-16, the Company
recorded the $30.6 million benefit and a corresponding deferred tax asset in the
first quarter of 2020. Due to a decrease in the forecasted income of
international entities resulting from adverse impacts of the COVID-19 pandemic,
the Company recorded a valuation allowance of $5.1 million in the third quarter
of 2020 reflecting a change in the anticipated realizability of this deferred
tax asset.
The effective income tax rate for the three months ended September 30, 2020 was
higher than the U.S. federal income tax rate of 21.0% primarily due to the
establishment of a valuation allowance of $5.1 million and state income taxes,
partially offset by the impact of foreign operations, a $1.5 million adjustment
to our deferred taxes, and $0.7 million excess tax benefits from share-based
compensation.
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Operations Review
Comparison of Operating Results for the Nine-Month Periods Ended September 30,
2021 and 2020
Summarized financial results for the nine months ended September 30, 2021 and
2020 are as follows:
(In thousands) 2021 2020
REVENUES
Royalty fees $ 299,606 $ 200,157 Initial franchise and relicensing fees 18,904 20,031 Procurement services
36,293 34,609
Marketing and reservation system 384,380 297,203
Owned hotels 24,724 15,731
Other 20,753 12,948
Total revenues 784,660 580,679
OPERATING EXPENSES Selling, general and administrative 99,847 104,098 Depreciation and amortization
18,477 19,309
Marketing and reservation system 327,674 333,564
Owned hotels 16,534 12,822
Total operating expenses 462,532 469,793
Loss on impairment of assets - (5,516)
Operating income 322,128 105,370
OTHER INCOME AND EXPENSES, NET
Interest expense 35,106 37,153
Interest income (3,717) (6,277)
Loss on extinguishment of debt - 16,565
Other (gains) losses (2,906) (858)
Equity in net (gain) loss of affiliates 1,492 7,172
Total other income and expenses, net 29,975 53,755
Income before income taxes 292,153 51,615
Income tax expense (benefit) 67,279 (15,907)
Net income $ 224,874 $ 67,522
Results of Operations
The Company recorded income before income taxes of $292.2 million for the
nine-month period ended September 30, 2021 , a $240.6 million increase from the
same period of the prior year. The increase in income before income taxes
reflects a $216.8 million increase in operating income, recognition of a $16.6
million loss on extinguishment of debt during the nine-month period ended
September 30, 2020 , a $5.7 million increase in equity of net (gains) losses of
affiliates, a $2.0 million increase in other (gains) losses, and a $2.1 million
decrease in interest expense, partially offset by $2.6 million decrease in
interest income.
Operating income increased $216.8 million primarily due to a $99.4 million
increase in royalty revenues, a $93.1 million increase in the net surplus
generated from marketing and reservation system activities, expenses, a $7.9
million increase in other revenues, a $5.3 million increase in owned hotels
revenues in excess of expenses, a $4.3 million decrease in SG&A expenses,
recognition of $5.5 million in impairment of assets during the nine-month period
ended September 30, 2020 , a $1.7 million increase in procurement services
revenues, partially offset by a $1.1 million decrease in initial franchise and
relicensing fees.
The primary reasons for these fluctuations are described in more detail below.
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Royalty Fees
Domestic royalty fees for the nine months ended September 30, 2021 increased
$97.7 million to $288.8 million , a 51% increase compared to the nine months
ended September 30, 2020 . The increase in royalties reflect a 46.0% increase in
RevPAR. System-wide RevPAR increased due to a 1,230 basis point increase in
occupancy rates and a 15.1% increase in average daily rates. The increase in
domestic royalties is also due to a 1.2% increase in the number of domestic
franchised hotel rooms and a 7 basis point increase in the effective royalty
rate from 4.93% for the nine months ended September 30, 2020 to 5.00% for the
nine months ended September 30, 2021 .
A summary of the Company's domestic franchised hotels operating information is
as follows:
Nine Months Ended Nine Months Ended
September 30, 2021 September 30, 2020 Change
Average Average Average
Daily Daily Daily
Rate Occupancy RevPAR Rate Occupancy RevPAR Rate Occupancy RevPAR
Comfort $ 97.74 60.8 % $ 59.40 $ 85.22 46.2 % $ 39.40 14.7 % 1,460 bps 50.8 %
Sleep 86.39 59.6 % 51.45 77.36 46.5 % 35.98 11.7 % 1,310 bps 43.0 %
Quality 83.94 54.5 % 45.77 73.23 42.1 % 30.81 14.6 % 1,240 bps 48.6 %
Clarion 87.91 43.8 % 38.52 74.79 33.3 % 24.93 17.5 % 1,050 bps 54.5 %
Econo Lodge 68.35 51.1 % 34.94 59.66 41.2 % 24.56 14.6 % 990 bps 42.3 %
Rodeway 68.20 52.0 % 35.48 60.15 44.0 % 26.45 13.4 % 800 bps 34.1 %
WoodSpring 50.83 81.9 % 41.63 46.14 72.0 % 33.24 10.2 % 990 bps 25.2 %
MainStay 79.84 62.8 % 50.15 77.38 55.1 % 42.61 3.2 % 770 bps 17.7 %
Suburban 54.49 71.5 % 38.95 52.14 63.7 % 33.21 4.5 % 780 bps 17.3 %
Cambria Hotels 129.62 55.1 % 71.44 116.78 38.3 % 44.78 11.0 % 1,680 bps 59.5 %
Ascend Hotel
Collection 138.31 54.4 % 75.28 120.21 43.9 % 52.72 15.1 % 1,050 bps 42.8 %
Total $ 83.70 58.2 % $ 48.71 $ 72.71 45.9 % $ 33.36 15.1 % 1,230 bps 46.0 %
International royalty fees for the nine months ended September 30, 2021
increased $1.6 million to $10.9 million compared to the nine months ended
September 30, 2020 as a result of increases in RevPAR performance, despite
reductions of the international franchise system decreasing by 32 hotels (from
1,192 as of September 30, 2020 to 1,160 as of September 30, 2021 ) and 13 rooms
(from 134,316 as of September 30, 2020 to 134,303 as of September 30, 2021 ). As
of September 30, 2021 and September 30, 2020 , approximately 2% and 3%,
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.
During the nine months ended September 30, 2021 , the Company awarded 289
domestic franchise agreements representing 28,308 rooms compared to 232
franchise agreements representing 18,022 rooms for the nine months ended
September 30, 2020 . Domestic franchise agreements awarded for new construction
hotels totaled 88 representing 8,471 rooms during the nine months ended
September 30, 2021 compared to 71 franchise agreements representing 6,102 rooms
for the nine months ended September 30, 2020 . Conversion hotel awarded franchise
agreements totaled 201 representing 19,837 rooms for the nine months ended
September 30, 2021 compared to 161 franchise agreements representing 11,920
rooms for the nine months ended September 30, 2020 .
The Company awarded 236 domestic relicensing contracts during the nine months
ended September 30, 2021 , compared to 164 executed during the nine months ended
September 30, 2020 . The Company awarded 19 domestic renewal agreements during
both the nine months ended September 30, 2021 , compared to 25 executed during
nine months ended September 30, 2020 .
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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 $20.0 million
during the nine months ended September 30, 2020 to $18.9 million during nine
months ended September 30, 2021 .
Given the uncertainty as to the duration of the COVID-19 pandemic and virus
variants, 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 $1.7 million from $34.6 million for the
nine months ended September 30, 2020 to $36.3 million for the nine months ended
September 30, 2021 . These results reflect a increase in fees generated from
travel-related partnerships and qualified vendors resulting from increased
occupancy during the second and third quarters of 2021 at our franchised hotels.
Other Revenues: Other revenues increased $7.9 million from $12.9 million for the
nine months ended September 30, 2020 to $20.8 million in the same period of the
current year driven by an increase in non-compliance fees and other franchising
revenues.
Selling, General and Administrative Expenses: The cost to operate the business
is reflected in SG&A on the consolidated statements of income. SG&A expenses
were $99.8 million for the nine months ended September 30, 2021 , a decrease of
$4.3 million from the nine months ended September 30, 2020 .
SG&A expenses for the nine months ended September 30, 2021 and 2020 include
approximately $1.1 million and $1.9 million , respectively, related to the
Company's alternative growth initiatives and expenses related to operations and
maintenance of an office building.
Excluding SG&A for alternative growth initiatives and office building
operations, SG&A for the nine months ended September 30, 2021 decreased $3.4
million to $98.8 million in the current year primarily due to a decrease in
provision for credit losses in accounts and notes receivable recorded in
accordance with Topic 326, partially offset by cost increases for general
corporate purposes and lifting of certain cost mitigation measures related to
the COVID-19 pandemic, and an increase in the Company's deferred compensation
liabilities based on increases in the underlying investments.
Loss on impairment of assets: For the nine months ended September 30, 2020 , the
Company recognized a $1.2 million charge related to a prospective
self-development project the Company is no longer pursuing and a $4.3 million
impairment charge related to the long-lived assets of a commercial office
building owned by the Company.
Interest Expense: The Company recorded interest expense of $35.1 million for the
nine months ended September 30, 2021 , a decrease of $2.1 million from the nine
months ended September 30, 2020 . The decrease in interest expense is a result of
lower effective interest rates on outstanding borrowings in the comparative
periods.
Interest Income: The Company recorded interest income of $3.7 million for the
nine months ended September 30, 2021 , a decrease of $2.6 million from the nine
months ended September 30, 2020 . The decrease in interest income is primarily a
result of an increase in loans on non-accrual of interest status.
Loss on Extinguishment of Debt: During the first quarter of 2020, the Company
recorded a loss on the extinguishment of debt of $0.6 million related to the
early pay off of a construction loan in the amount of $33.1 million , inclusive
of accrued and unpaid interest.
During the third quarter of 2020, the Company recorded a loss on the
extinguishment of debt of $16.0 million related to the Tender Offer and early
pay off of the Term Loan.
Other (Gains) Losses: The Company recorded other net gains of $2.9 million for
the nine months ended September 30, 2021 , compared to other net gains of $0.9
million , an increase of $2.0 million for the nine months ended September 30,
2020 . The gains relate to increases in the Company's deferred compensation
assets based on increases in the underlying investments and foreign currency
transaction gains.
Equity in Net (Gain) Loss of Affiliates: The Company recorded net losses of $1.5
million from its unconsolidated joint ventures for the nine months ended
September 30, 2021 compared to net losses of $7.2 million for the nine months
ended September 30, 2020 . These investments relate to the Company's program to
offer equity support to qualified franchisees to develop and operate Cambria
Hotels in strategic markets. The fluctuation is primarily attributable to the
sales of ownership interests of and
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distributions from unconsolidated joint ventures resulting in gains of $2.6
million in the second quarter of 2021 and $4.3 million in the third quarter of
2021, in addition to increased losses for the three months ended September 30,
2020 of operating joint venture hotels as impacted by the COVID-19 pandemic,
partially offset by an other-than-temporary impairment of an unconsolidated
joint venture resulting in a loss of $4.8 million in the first quarter of 2021.
We anticipate the results recognized from these investments will continue to be
impacted by the COVID-19 pandemic for the remainder of 2021.
Income Tax Expense (Benefit): The effective income tax rates were 23.0% and
(30.8)% for the nine months ended September 30, 2021 and 2020, respectively.
The effective income tax rate for the nine months ended September 30, 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 $2.4 million of excess tax
benefits from share-based compensation and $0.7 million of additional federal
R&D tax credits.
On January 1, 2018 , the Company adopted ASU 2016-16, which provides guidance on
recognition of current income tax consequences for intercompany asset transfers
(other than inventory) at the time of transfer. On January 1, 2020 , the Company
completed a reorganization of its foreign legal entity structure that resulted
in a $30.6 million tax benefit. In accordance with ASU 2016-16, the Company
recorded the $30.6 million benefit and a corresponding deferred tax asset in the
first quarter of 2020. Due to a decrease in the forecasted income of
international entities resulting from adverse impacts of the COVID-19 pandemic,
the Company recorded a valuation allowance of $5.1 million in the third quarter
of 2020 reflecting a change in the anticipated realizability of this deferred
tax asset.
The effective income tax rate for the nine months ended September 30, 2020 was
lower than the U.S. federal income tax rate of 21.0% primarily due to the
impacts ASU 2016-16 and the corresponding valuation allowance, $3.4 million of
excess tax benefits from share-based compensation, an adjustment to our deferred
taxes, and the impact of foreign operations, partially offset by state income
taxes and a change in estimated uncertain tax positions.
Liquidity and Capital Resources
In response to the COVID-19 pandemic, we have taken steps to adjust the
Company's cost structure and increase its financial flexibility and liquidity.
At September 30, 2021 , the Company had approximately $1.0 billion in cash and
available 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. As of September 30, 2021 , we were in compliance with the financial
covenants of our credit agreements and expect to remain in such compliance.
In April 2020 , in light of uncertainty resulting from the COVID-19 pandemic, we
determined to suspend future, undeclared dividends and temporarily suspended
activity under the Company's share repurchase program. Given our strong
liquidity and credit profile, the Company's board of directors declared on May
7, 2021 , a quarterly cash dividend of $0.225 per share of common stock and
approved resumption of the share repurchase program. Additionally, on September
9, 2021 , the Company's board of directors declared a quarterly cash dividend of
$0.225 per share of common stock. As a result, the company expects to pay
dividends totaling approximately $25 million during 2021.
Operating Activities
During the nine months ended September 30, 2021 and 2020, net cash provided by
operating activities totaled $245.2 million and $69.7 million , respectively.
Operating cash flows increased $175.5 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 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, the franchisee must repay the unamortized incentive
payment plus interest. During the nine months ended September 30, 2021 and 2020,
the Company's net advances for these purposes totaled $28.5 million and $17.0
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. At September 30, 2021 , the Company had commitments to extend
an additional $269.2 million for these purposes provided the conditions of the
payment are met by its franchisees.
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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 nine months ended
September 30, 2021 , marketing and reservation system revenues exceeded expenses
by $56.7 million . During the nine months ended September 30, 2020 , marketing and
reservation system expenses exceeded revenues by $36.4 million .
Investing Activities
Cash utilized for investing activities totaled $52.6 million and $30.5 million
for the nine months ended September 30, 2021 and 2020, respectively. The
increase in cash utilized for investing activities for the nine months ended
September 30, 2021 primarily reflects the following items:
During the nine months ended September 30, 2021 and 2020, capital expenditures
in property and equipment totaled $46.1 million and $32.2 million , respectively.
The increase in capital expenditures primarily reflects costs incurred to
support the continued growth of the Cambria Hotels brand, including acquisition
of a land parcel in the third quarter of 2021 to develop into a Cambria hotel.
During the nine months ended September 30, 2020 , the Company realized proceeds
of $9.2 million from the sale of state tax credits earned from rehabilitation
improvements made to a historic building converted to a Cambria Hotel. The
proceeds were applied to lower the basis of the owned hotel property and
equipment.
The Company maintains equity method investments related to the Company's program
to offer equity support to qualified franchisees to develop and operate Cambria
Hotels in strategic markets. During the nine months ended September 30, 2021 and
2020, the Company invested $2.2 million and $4.6 million , respectively, to
support these efforts. In addition, during the nine months ended September 30,
2021 and 2020, the Company received distributions and sales proceeds from these
joint ventures totaling $3.4 million and $15.6 million , respectively. To the
extent existing unconsolidated joint ventures 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 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 nine months ended September 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 .
For the nine months ended September 30, 2020 , the Company advanced and received
repayments totaling $9.8 million and $5.1 million for these purposes,
respectively. At September 30, 2021 , the Company had commitments to extend an
additional $7.7 million for these purposes provided certain conditions are met
by its franchisees.
From time to time, our board of directors authorizes specific transactions and
general programs which permit us to provide financing, investment and
guaranties, and similar credit support to qualified franchisees, as well as to
acquire, develop, and resell real estate and hotels to incent franchise
development. Since 2006, we have engaged in these financial support activities
to encourage acceleration of the growth of our Cambria Hotels brand, primarily
in strategic markets and locations. Over the next three to five years, we expect
to continue to deploy capital in support of this brand and expect our
outstanding investment not to exceed $725 million over that time period. 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. Our support of the Cambria Hotels brand's growth is expected to be
primarily in the form of franchise agreement acquisition costs, joint venture
investments, hotel ownership and development, senior mortgage loans, development
loans, mezzanine lending, and through the operation of a land-banking program.
With respect to our lending, hotel ownership and joint venture investments, we
generally expect to recycle these loans and investments within a five year
period. At September 30, 2021 , the Company had approximately $561.9 million
outstanding pursuant to these financial support activities.
Financing Activities
Financing cash flows relate primarily to the Company's borrowings, open market
treasury stock repurchases, 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
On August 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, dated July
21, 2015 .
The Restated Credit Agreement provides for a $600 million unsecured credit
facility with a maturity date of August 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.
On July 2, 2019 , the Company exercised a one-year extension option on the
Restated Credit Agreement, extending the maturity date from August 20, 2023 to
August 20, 2024 . On August 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 is August 20, 2025 . On August 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 is August 20, 2026 .
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.
On February 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. On August 11,
2021 , we amended the Restated Credit Agreement to provide customary language 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.
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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. At September 30, 2021 , the Company maintained a
total leverage ratio of 2.65x 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 of December 31, 2020 and September 30, 2021 .
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
On July 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 on January 15, 2031 , with interest to be paid
semi-annually on January 15th and July 15th beginning January 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 in April 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 on January 15th and
July 15th of each year, commencing on January 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 to October 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
On November 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 on December 1, 2029 , with interest to be paid semi-annually on
December 1st and June 1st . The Company used the net proceeds of this offering,
after deducting underwriting discounts, commissions and other offering expenses,
to repay previously outstanding senior notes in the principal amount of $250
million due August 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 to September 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
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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
On June 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 2012 Senior Notes will mature on
July 1, 2022 , with interest to be paid semi-annually on January 1st and July
1st . 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
on August 23, 2012 .
The Company may redeem the 2012 Senior Notes at its option at a redemption price
equal to the greater of (a) 100% of the principal amount of the notes to be
redeemed and (b) the sum of the present values of the remaining scheduled
principal and interest payments from the redemption date to the date of maturity
discounted to the redemption date on a semi-annual basis at the Treasury Rate,
plus 50 basis points. Additionally, at the option of the holders of the 2012
Senior Notes, the Company may be required to repurchase all or a portion of the
2012 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.
On July 9, 2020 , the Company commenced the tender offer (the "Tender Offer") to
purchase up to $160.0 million aggregate principal amount of the Company's 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. On
July 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 on July 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.
Construction Loan
In March 2018 , the Company entered into a construction loan agreement for the
rehabilitation and development of a former office building into a Cambria Hotel
through a consolidating joint venture with a commercial lender, which was
secured by the building. The construction was completed and the hotel opened in
the third quarter of 2019, resulting in the satisfaction of the completion
guaranty. On March 5, 2020 , the Company paid off the construction loan in the
amount of $33.1 million inclusive of accrued and unpaid interest and recorded a
loss on extinguishment of debt of $0.6 million .
Fixed Rate Collateralized Mortgage
On December 30, 2014 , a court awarded the Company title to an office building as
settlement for a portion of an outstanding loan receivable for which the
building was pledged as collateral. In conjunction with the court award, the
Company also assumed the $9.5 million mortgage on the property with a fixed
interest rate of 7.26%. The mortgage was collateralized by the office building,
required monthly payments of principal and interest and matured in December 2020
with a balloon payment due of $6.9 million . Payments were made in each quarter
of 2020, with the balloon payment of $6.9 million made at maturity in December
2020 .
Economic Development Loans
The Company entered into economic development agreements with various
governmental entities in conjunction with the relocation of its corporate
headquarters in April 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. At September 30, 2021 , 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 on December
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 by April 30th following the measurement date. Any
outstanding advances at the expiration of the Company's ten year corporate
headquarters lease in 2023 will be forgiven in full. The advances will be
included in long-term debt in 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
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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 of September 30, 2021 .
Dividends
In April 2020 , in light of uncertainty resulting from the COVID-19 pandemic, we
determined to suspend future, undeclared dividends. Given our strong liquidity
and credit profile, on May 7, 2021 , the Company's board of directors declared, a
quarterly cash dividend of $0.225 per share of common stock and approved
resumption of the share repurchase program. Additionally, on September 9, 2021 ,
the Company's board of directors declared a quarterly cash dividend of $0.225
per share of common stock. The declaration of future dividends is subject to the
discretion of our board of directors.
During the nine months ended September 30, 2021 , the Company paid $12.5 million
in cash dividends.
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 April 2020 in light of uncertainty resulting from the COVID-19 pandemic, we
temporarily suspended activity under our share repurchase program. On May 7,
2021 , the Company's board of directors approved resumption of the share
repurchase program.
During the nine months ended September 30, 2021 , the Company repurchased 36,328
shares of its common stock under the share repurchase program at a total cost of
$4.2 million . Through September 30, 2021 , the Company repurchased 51.7 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 84.7 million shares at an average price of $17.60 per share. As of
September 30, 2021 , the Company had 3.4 million shares remaining under the
current share repurchase authorization.
During the nine months ended September 30, 2021 , the Company redeemed 52,955
shares of common stock at a total cost of $5.8 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 performance vested
restricted stock units and restricted stock grants. These redemptions were
outside the share repurchase program.
Off Balance Sheet Arrangements
The Company has entered into various limited payment guaranties with regards to
the Company's VIEs supporting their efforts to develop and own hotels franchised
under the Company's brands. Under these limited payment guaranties, the Company
has agreed to guarantee a portion of the outstanding debt until certain
conditions are met, such as (a) the loan matures, (b) certain debt covenants are
achieved, (c) the maximum amount guaranteed by the Company is paid in full or
(d) the Company, through its affiliates, ceases to be a member of the VIE. The
maximum exposure of principal incidental to these limited payment guaranties is
$5.7 million , plus unpaid expenses and accrued unpaid interest. As of September
30, 2021 and December 31, 2020 , the Company believed the likelihood of having to
perform under the aforementioned limited payment guaranties was remote. 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 for further discussion of our off-balance sheet arrangements.
Critical Accounting Policies
Our accounting policies comply with principles generally accepted in the United
States . Discussion of these policies is included in Note 1 to our consolidated
financial statements as of and for the year ended December 31, 2020 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 the "Recently Adopted Accounting Standards" section of Note 1 for
information related to our adoption of new accounting standards in 2021.
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Table of Contents 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, continuation or resurgence of the COVID-19 pandemic, including with respect to new strains or variants; the rate and pace 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 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, 2020 , filed with theSEC onFebruary 26, 2021 . 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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