ROCKVILLE, Md., Aug. 8, 2018 /PRNewswire/ -- Choice Hotels International, Inc. (NYSE: CHH), one of the world's largest hotel companies, today reported its results for the three months ended June 30, 2018. Highlights include:

• Net income was $79.8 million, or $1.40 per diluted share, for the second quarter of 2018. Adjusted net income, excluding certain items described in Exhibit 6, increased 49 percent to $63.4 million from the 2017 second quarter.
• Adjusted diluted earnings per share (EPS) were $1.11 for the second quarter of 2018, a 48-percent increase from the 2017 second quarter.
• Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the second quarter 2018 were $94.3 million, an increase of 20 percent from the same period of 2017.
• Total revenues for the three months ended June 30, 2018 increased 13 percent from the second quarter of 2017 to $295.4 million.
• The company raised its full-year guidance for adjusted EBITDA to a range between $333 million to $339 million and adjusted EPS to a range between $3.71 to $3.77.
• The company repurchased 0.4 million shares of common stock for an aggregate cost of $29 million during the second quarter. Year-to-date share repurchases now total approximately $71 million.
• Choice Privileges, the company's award-winning loyalty program, surpassed 37 million members.

"Choice Hotels' long-term strategy of investing in our brands is paying off, as demonstrated by our strong financials, robust development pipeline, and powerful franchisee base," said Patrick Pacious, president and chief executive officer, Choice Hotels. "We are pleased with our first-half development results, which exceeded our 2017 performance by 10 percent. In addition, the continued growth in lodging demand and Choice's strong performance resulted in a 20-percent increase in adjusted EBITDA. We're optimistic that our performance will continue through year-end and into 2019."

Additional details for the company's hotel franchising business 2018 second-quarter results are as follows:

Overall Results

• Total hotel franchising revenues for the second quarter increased 14 percent from the second quarter of the prior year to $134.8 million.
• Adjusted EBITDA from hotel franchising activities for the second quarter increased 18 percent from the second quarter of the prior year to $95.8 million.
• Adjusted hotel franchising margins for the second quarter increased 90 basis points to 68.2 percent from the second quarter of the prior year.

Royalties

• Domestic royalty fees for the second quarter totaled $97.6 million, a 13-percent increase from the second quarter of the prior year.
• Domestic systemwide revenue per available room (RevPAR) increased 2.7 percent compared to the same period of the prior year. Average daily rates and occupancy rates increased 2.4 percent and 20 basis points, respectively, for the second quarter of 2018 compared to the same period of the prior year.
• Effective domestic royalty rate increased 15 basis points for the second quarter compared to the same period of the prior year.
• The number of domestic franchised hotels and rooms, as of June 30, 2018, increased 6.5 percent and 8.8 percent, respectively, from June 30, 2017.

Development

• New executed domestic franchise agreements totaled 188 in the second quarter of 2018, an increase of 7 percent from the same period of the prior year.
• The company awarded 34 new domestic extended-stay franchise agreements, including 13 WoodSpring franchise agreements, an increase of 143 percent over the same period of the prior year.
• New construction domestic franchise agreements increased 36 percent in the second quarter of 2018 from the comparable period of 2017.
• The company's total domestic pipeline of hotels awaiting conversion, under construction, or approved for development, as of June 30, 2018, increased 32 percent to 950 hotels from June 30, 2017.
• The new-construction domestic pipeline totaled 701 hotels at June 30, 2018, a 34-percent increase from June 30, 2017, and the conversion pipeline increased 26 percent to 249 hotels.

Tax Reform

On December 22, 2017, the "Tax Cut and Jobs Act" ("Act"), was signed into law. The Act, among other changes, reduces the corporate income tax rate to 21 percent. The Act, as well as certain non-recurring discrete tax items, reduced the company's effective income tax rate for the second quarter of 2018 to 20.2 percent compared to 33.7 percent for the same period of the prior year. The effective income tax rate for the six months ended June 30, 2018, was 19.6 percent compared to 32.3 percent for the same period of 2017.

Use of Cash Flows

DividendsDuring the six months ended June 30, 2018, the company paid cash dividends totaling approximately $24 million. Based on the current quarterly dividend rate of $0.215 per share of common stock, the company expects to pay dividends of approximately $49 million during 2018.

Stock RepurchasesDuring the six months ended June 30, 2018, the company repurchased approximately $71 million in shares of common stock under its stock repurchase program, as well as repurchases from employees in connection with tax withholding and option exercises relating to awards under the company's equity incentive plans. At June 30, 2018, the company had authorization to purchase up to 3.2 million additional shares of common stock under its share repurchase program.

Hotel Development & FinancingPursuant to its program to encourage acceleration of the growth of the upscale Cambria Hotels brand, the company advanced approximately $40 million in support of the brand's development during the six months ended June 30, 2018. The company also recycled approximately $8 million of prior investments in Cambria Hotels development projects, resulting in net advances of $32 million for the six months ended June 30, 2018. Advances under this program are primarily in the form of joint-venture investments, forgivable key money loans, senior mortgage loans, development loans, and mezzanine lending as well as through the operation of a land-banking program. As of June 30, 2018, the company had approximately $280 million reflected in its consolidated balance sheet pursuant to these financial support activities. With respect to lending and joint-venture investments, the company generally expects to recycle these loans and investments within a five-year period.

Revenue Recognition

Effective January 1, 2018, the company adopted the new revenue recognition standard ("ASC 606") on a full retrospective basis. As a result, the condensed financial statements for the three and six months ended June 30, 2017, have been recast. The adoption of ASC 606 did not change the timing of cash flows or cash available for return to shareholders but did alter the timing of earnings recognition. In addition, the adoption of ASC 606 resulted in changes in classifications of certain items within the company's financial statements. The provisions of ASC 606 impacted the company's revenue recognition as follows:

• Initial and relicensing fees earned upon execution of a franchise agreement are recognized as revenue ratably as services are provided over the enforceable period of the franchise license arrangement. This represents a change from prior practice, whereby the company typically recognized revenue for initial and relicensing fees in full in the period of agreement execution.
• Sales commissions, which are paid upon the execution of a franchise agreement, are recognized ratably over the period a hotel is expected to remain in the company's franchise system rather than expensed as incurred.
• Amortization of franchise agreement acquisition costs are recognized as a reduction of revenue rather than as a component of depreciation and amortization.
• Revenue related to the Choice Privileges program, which is reported as a component of marketing and reservation system fees, is deferred as points are awarded and recognized upon point redemption, net of reward reimbursements paid to a third-party. Previously, revenue was recognized on a gross basis at the time the points were issued with a corresponding deferral of revenue equal to the expected future costs of the award. Deferred revenue was then recognized as actual points were redeemed and costs for those redemptions incurred.

ASC 606 also impacted the company's accounting for surpluses and deficits generated from marketing and reservation system activities. The company has historically, consistent with its existing agreements, not earned a profit or generated a loss from marketing and reservation activities, and as a result, the company recorded excess marketing and reservation system revenues or expenses as assets or liabilities on the company's balance sheet prior to the adoption of ASC 606. However, as a result of the adoption of ASC 606, the company is no longer permitted under US GAAP to defer revenues and expenses or records assets and liabilities when system revenues exceed expenses in the current period or vice versa. The company intends to manage these activities to break-even over time but anticipates that net income or loss may be generated quarterly due to the seasonal nature of the hotel industry and annually based on the level of investments needed for new initiatives that benefit the company's franchisees. Given the company's intentions with respect to marketing and reservation system activities and its obligations to franchisees, the company has excluded the financial impact of these programs from its adjusted financial metrics.

Outlook

The company's consolidated 2018 outlook reported below includes the forecasted results of the WoodSpring acquisition from February 1, 2018 through December 31, 2018. In addition, the company's EBITDA and diluted EPS guidance has been prepared based on the impact of the new revenue recognition guidance. The estimate of the allocation of the purchase price of WoodSpring and the impact of ASC 606 on the company's forecasted results is preliminary and subject to change.

The adjusted numbers in the company's outlook exclude the projected impact of integration- and acquisition-related costs as well as the net surplus or deficit generated from the company's marketing and reservation system activities. See Exhibit 7 for the calculation of adjusted forecasted results and the reconciliation to the comparable GAAP measures.

Consolidated Outlook

• Net income for full-year 2018 is expected to range between $206 million and $210 million, or $3.62 to $3.68 per diluted share.
• Adjusted diluted EPS for full-year 2018 is expected to range between $3.71 and $3.77. The company expects full-year 2018 adjusted net income to range between $211 million and $215 million.
• Adjusted EBITDA for full-year 2018 is expected to range between $333 million and $339 million.
• The effective tax rate is expected to be approximately 22.5 percent for third quarter 2018 and 21 percent for full-year 2018.
• The company's third-quarter 2018 adjusted diluted EPS is expected to range between $1.13 and $1.17.
• Adjusted diluted EPS estimates are based on the current number of shares of common stock outstanding and, therefore, do not reflect any subsequent changes that may occur due to new equity grants or further repurchases of common stock under the company's stock repurchase program.
• The adjusted diluted EPS and consolidated adjusted EBITDA estimates assume that the company incurs net reductions in adjusted EBITDA related to non-hotel franchising activities at the midpoint of the range for these investments.

Hotel Franchising

• Adjusted EBITDA from hotel franchising activities for full-year 2018 is expected to range between $337 million and $343 million.
• Net domestic unit growth for 2018 is expected to range between 7 percent and 8 percent.
• Domestic RevPAR is expected to increase between 0 percent and 1.5 percent for the third quarter and between 1.5 percent and 3.0 percent for full-year 2018.
• The domestic effective royalty rate is expected to increase between 11 and 14 basis points for full-year 2018 as compared to full-year 2017.

Non-Hotel Franchising Activities

• Net reductions in full-year 2018 adjusted EBITDA relating to the company's non-hotel franchising operations are expected to range between approximately $3 million and $5 million.

Conference Call

Choice Hotels International will conduct a conference call on Wednesday, August 8, 2018, at 10:00 a.m. ET to discuss the company's 2018 second-quarter results. The dial-in number to listen to the call domestically is 877-870-4263 and the number for international participants is 1-412-317-0790. A live webcast will also be available on the company's investor relations website, http://investor.choicehotels.com/, and can be accessed via the Events and Presentations tab.

About Choice HotelsChoice Hotels International, Inc. (NYSE: CHH) is one of the largest and most successful lodging franchisors in the world. With more than 6,800 hotels, representing more than 550,000 rooms, in over 40 countries and territories, the Choice family of hotel brands provide business and leisure travelers with a range of high-quality lodging options from limited service to full-service hotels in the upscale, midscale, extended stay and economy segments. Choice Privileges®, an award-winning loyalty program, offers members benefits ranging from everyday rewards to exceptional experiences. For more information, visit www.choicehotels.com.

Forward-Looking Statements Certain matters discussed in this press release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, our use of words such as "expect," "estimate," "believe," "anticipate," "should," "will," "forecast," "plan," "project," "assume" or similar words of futurity identify such forward-looking statements. These forward-looking statements are based on management's current beliefs, assumptions and expectations regarding future events, which in turn are based on information currently available to management. Such statements may relate to projections of the company's revenue, earnings and other financial and operational measures, company debt levels, ability to repay outstanding indebtedness, payment of dividends, repurchases of common stock, future operations, and expected benefits from the Tax Cuts and Jobs Act, among other matters. We caution you not to place undue reliance on any such forward-looking statements. Forward-looking statements do not guarantee future performance and involve known and unknown risks, uncertainties and other factors.

Several factors could cause actual results, performance or achievements of the company to differ materially from those expressed in or contemplated by the forward-looking statements. Such risks include, but are not limited to, changes to general, domestic and foreign economic conditions; foreign currency fluctuations; operating risks common in the lodging and franchising industries; changes to the desirability of our brands as viewed by hotel operators and customers; changes to the terms or termination of our contracts with franchisees; our ability to keep pace with improvements in technology utilized for marketing and reservations systems and other operating systems; our ability to grow our franchise system; exposure to risks related to our hotel development and financing activities; fluctuations in the supply and demand for hotels rooms; our ability to realize anticipated benefits from acquired businesses; the level of acceptance of alternative growth strategies we may implement; operating risks associated with our international operations; the outcome of litigation; and our ability to manage our indebtedness. These and other risk factors are discussed in detail in the company's filings with the Securities and Exchange Commission including our annual report on Form 10-K for 2017 and our quarterly reports filed on Form 10-Q. Except as may be required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Non-GAAP Financial MeasurementsThe company evaluates its operations utilizing the performance metrics of Adjusted EBITDA, hotel franchising revenues, adjusted hotel franchising SG&A, Adjusted EBITDA from hotel franchising activities, adjusted hotel franchising margins, adjusted net income and adjusted diluted EPS, which are all non-GAAP financial measurements. These measures, which are reconciled to the comparable GAAP measures in Exhibit 6, should not be considered as an alternative to any measure of performance or liquidity as promulgated under or authorized by GAAP, such as net income, EPS, total revenues and operating margins. The company's calculation of these measurements may be different from the calculations used by other companies and therefore comparability may be limited.

We discuss management's reasons for reporting these non-GAAP measures and how each non-GAAP measure is calculated below.

In addition to the specific adjustments noted below with respect to each measure, the non-GAAP measures presented herein also exclude acquisition related transition and transaction costs to allow for period-over-period comparison of ongoing core operations before the impact of these charges.

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization: Adjusted EBITDA reflects net income excluding the impact of interest expense, interest income, provision for income taxes, depreciation and amortization, franchise agreement acquisition cost amortization, other (gains) and losses, equity in net income (loss) of unconsolidated affiliates, mark to market adjustments on non-qualified retirement plan investments and surplus or deficits generated by marketing and reservation system activities. We consider adjusted EBITDA to be an indicator of operating performance because we use it to measure our ability to service debt, fund capital expenditures, and expand our business. We also use adjusted EBITDA, as do analysts, lenders, investors and others, to evaluate companies because it excludes certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be dependent on a company's capital structure, debt levels and credit ratings. Accordingly, the impact of interest expense on earnings can vary significantly among companies. The tax positions of companies can also vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provision for income taxes can vary considerably among companies. Adjusted EBITDA also excludes depreciation and amortization because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets or amortizing franchise agreement acquisition costs. These differences can result in considerable variability in the relative asset costs, estimated lives and therefore the depreciation and amortization expense among companies. Mark to market adjustments on non-qualified retirement plan investments recorded in SG&A are excluded from EBITDA as the company accounts for these investments in accordance with accounting for deferred compensation arrangements when investments are held in a rabbi trust and invested. Changes in the fair value of the investments are recognized as both compensation expense in SG&A and other gains and losses. As a result, the changes in the fair value of the investments do not have a material impact on the company's net income. Surpluses and deficits generated from marketing and reservation activities are excluded as the company's franchise agreements require the marketing and reservation system revenues to be used exclusively for expenses associated with providing franchise services such as central reservation and property management systems, reservation delivery and national marketing and media advertising. Franchisees are required to reimburse the company for any deficits generated from these marketing and reservation system activities and the company is required to spend any surpluses generated in future periods. Since these activities will be managed to break-even over time, quarterly or annual surpluses and deficits have been excluded from the measurements utilized to assess the company's operating performance.

Adjusted Net Income and Adjusted Diluted Earnings Per Share: Adjusted net income and diluted EPS excludes the impact of surpluses or deficits generated from marketing and reservation system activities. Surpluses and deficits generated from marketing and reservation activities are excluded as the company's franchise agreements require the marketing and reservation system revenues to be used exclusively for expenses associated with providing franchise services such as central reservation and property management systems, reservation delivery and national marketing and media advertising. Franchisees are required to reimburse the company for any deficits generated from these marketing and reservation system activities and the company is required to spend any surpluses generated in future periods. Since these activities will be managed to break-even over time, quarterly or annual surpluses and deficits have been excluded from the measurements utilized to assess the company's operating performance. We consider adjusted net income and adjusted diluted EPS to be an indicator of operating performance because excluding these items allows for period-over period comparisons of our ongoing operations.

Hotel Franchising Revenues, Adjusted Hotel Franchising EBITDA, Adjusted Hotel Franchising SG&A and Margins: The company reports hotel franchising revenues, adjusted hotel franchising EBITDA, adjusted franchising hotel SG&A and margins which exclude marketing and reservation system activities; the SkyTouch Technology division; vacation rental activities, including operations that provide Software as a Service ("SaaS") technology solutions to vacation rental management companies; and revenue generated from the ownership of an office building that is leased to a third-party. These non-GAAP measures are a commonly used measure of performance in our industry and facilitate comparisons between the company and its competitors. Marketing and reservation system activities are excluded as the company's franchise agreements require the marketing and reservation system revenues to be used exclusively for expenses associated with providing franchise services such as central reservation and property management systems, reservation delivery and national marketing and media advertising. Franchisees are required to reimburse the company for any deficits generated from these marketing and reservation system activities and the company is required to spend any surpluses generated in future periods. Since these activities will be managed to break-even over time, quarterly or annual surpluses and deficits have been excluded from the measurements utilized to assess the company's operating performance. SkyTouch Technology is a division of the company that develops and markets cloud-based technology products, including inventory management, pricing and connectivity to third party channels, to hoteliers not under franchise agreements with the company. The operations for SkyTouch Technology and our vacation rental activities are excluded since they do not reflect the company's core franchising business but are adjacent, complementary lines of business.

© 2018 Choice Hotels International, Inc. All rights reserved.

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