Choice Hotels International Reports A 17% Increase In Third Quarter Diluted Earnings Per Share

ROCKVILLE, Md., Oct. 27, 2016 /PRNewswire/ -- Choice Hotels International, Inc. (NYSE:CHH) today reported the following highlights for the third quarter 2016:

• Diluted earnings per share ("EPS") for the three months ended September 30, 2016 totaled $0.84 per share, an increase of 17 percent from the same period of 2015.
• Net income for the three months ended September 30, 2016 totaled $47.6 million, an increase of 15 percent from the same period of 2015. 
• Revenues for the three months ended September 30, 2016 totaled $267.6 million, an increase of 11 percent from the same period of 2015.
• Franchising revenues for the three months ended September 30, 2016 totaled $113.1 million, an increase of 7 percent from the same period of 2015 and domestic system-wide gross room revenues for the three months ended September 30, 2016 totaled approximately $2.1 billion.
• Domestic royalty fees for the three months ended September 30, 2016 totaled $90.7 million, an increase of 7 percent from the same period of 2015.
• Domestic system-wide revenue per available room ("RevPAR") increased 4.5 percent in the third quarter of 2016, as occupancy and average daily rates increased 70 basis points and 3.4 percent, respectively, from the same period of 2015.
• Domestic RevPAR performance for the third quarter of 2016 exceeded total industry results by 120 basis points and also exceeded growth reported by Smith Travel Research for the primary chain scale segments in which the company competes.
• Effective domestic royalty rate for the three months ended September 30, 2016 was 4.39 percent, an increase of 12 basis points from the same period of 2015.
• Domestic hotel executed franchise agreements totaled 161 for the three months ended September 30, 2016, an increase of 25 percent from the same period of 2015, including a 13 percent and 30 percent increase in new construction and conversion agreements, respectively.
• Comfort family of brands recorded its 24^th consecutive month of RevPAR index gains compared to its competition and over the last two years the company has executed 162 new construction franchise agreements which is more than double the number of agreements executed in the prior two year period.
• The company's domestic pipeline of hotels awaiting conversion, under construction or approved for development as of September 30, 2016 increased 20 percent from September 30, 2015. The domestic new construction pipeline for the company's Comfort brand as of September 30, 2016 totaled 180 hotels, a 30 percent increase from September 30, 2015.
• Adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") from hotel franchising activities for the three months ended September 30, 2016 totaled $85.5 million, an increase of 5 percent over the prior year period.

"We are pleased with our results for the third quarter, which were highlighted by a 17 percent increase in diluted earnings per share and a 4.5% increase in our domestic RevPAR which continues to outpace the RevPAR performance of the industry," said Stephen P. Joyce, chief executive officer, Choice Hotels. "In addition, our efforts to rejuvenate the Comfort brand are working, including the implementation of higher standards for hotels joining the brand, requiring meaningful property improvement plans at contract windows and targeting underperforming Comforts for termination and replacement with new construction product.  These efforts have resulted in 24 consecutive months of RevPAR index gains and are helping to fuel the growth of our new construction development pipeline."

Special Item

During the nine months ended September 30, 2016, the company recorded an executive termination benefit charge of approximately $2.2 million. This special item impacted diluted EPS by $0.02 per share for the nine months ended September 30, 2016. The company uses non-GAAP measures that exclude executive termination benefits because those non-GAAP measures allow for period-over-period comparison of on-going core operations before the impact of these charges. These non-GAAP measures, which are reconciled to the comparable GAAP measures in Exhibit 8, include adjusted net income, adjusted diluted EPS, adjusted hotel franchising selling, general and administrative expenses, adjusted EBITDA and adjusted hotel franchising margins. 

Use of Cash Flows

Dividends

During the nine months ended September 30, 2016, the company paid cash dividends totaling approximately $35 million. Based on the current quarterly dividend rate of $0.205 per common share, the company expects to pay dividends of approximately $46 million during 2016.

Share Repurchases

The company repurchased 0.6 million shares of common stock under its share repurchase program during the nine months ended September 30, 2016, at a total cost of approximately $29 million. The company currently has authorization to purchase up to 1.1 million additional shares under this program. 

Hotel Development & Financing

Pursuant to its program to encourage acceleration of the growth of our upscale select-service Cambria hotels & suites brand, the company advanced approximately $78 million in support of the Cambria brand during the nine months ended September 30, 2016. The company also recycled approximately $25 million of investments in support of Cambria resulting in net advances of $53 million for the current year.  These advances are primarily in the form of joint venture investments, forgivable key money loans, senior and mezzanine lending and site acquisitions.  On September 30, 2016, the company had approximately $181 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.

Outlook

The company's consolidated 2016 outlook reflects the following assumptions:

Hotel Franchising

• Adjusted EBITDA from franchising activities for full-year 2016 are expected to range between $272 million and $274 million;
• Net domestic unit growth for 2016 is expected to be approximately 2%;
• RevPAR is expected to increase between 4% and 5% for the fourth quarter and range between 3.5% and 4.25% for full-year 2016; and
• The effective royalty rate is expected to increase between 10 and 11 basis points for full-year 2016 as compared to full-year 2015.

Non-Hotel Franchising Activities

• Net reductions in full-year 2016 EBITDA relating to our non-hotel franchising operations, which primarily relate to SkyTouch and vacation rental activities are expected to range between approximately $18 million and $19 million.

Other Items

• The effective tax rate is expected to be approximately 33% for the fourth quarter and approximately 31.5% for full-year 2016.
• Adjusted EBITDA and adjusted EPS estimates exclude executive termination benefits incurred in the nine months ended September 30, 2016 as discussed above under Special Item.
• Diluted EPS estimates are based on the current number of shares outstanding and thus do not factor in any changes that may occur due to new equity grants or any further repurchases of common stock under the company's share repurchase program.

Consolidated Outlook

The company's fourth quarter 2016 diluted EPS is expected to be at least $0.51. The company expects full-year 2016 adjusted diluted EPS to range between $2.43 and $2.46 and full year 2016 adjusted EBITDA to range between $253 million and $256 million.

Conference Call

Choice will conduct a conference call on Thursday, October 27, 2016 at 10:00 a.m. EDT to discuss the company's third quarter 2016 results. The dial-in number to listen to the call domestically is 1-855-638-5678 and the number for international participants is 1-920-663-6286.  The conference call also will be webcast simultaneously via the company's website, www.choicehotels.com.  Interested investors and other parties wishing to access the call via the webcast should go to the website and click on the Investor Info link.  The Investor page will feature a conference call microphone icon to access the call.

The call will be recorded and available for replay beginning at 1:00 p.m. EDT on Thursday, October 27, 2016 by calling 1-855-859-2056 (domestic) or 1-404-537-3406 (international) and entering access code 96677474. In addition, the call will be archived and available on choicehotels.com via the Investor Info link.

About Choice Hotels

Choice Hotels International, Inc. (NYSE: CHH) is one of the world's largest lodging companies. With more than 6,400 hotels franchised in more than 40 countries and territories, Choice Hotels International® represents more than 500,000 rooms around the globe.  As of September 30, 2016, 745 hotels were in our development pipeline. Our company's Ascend Hotel Collection®, Cambria® hotels & suites, Comfort Inn®, Comfort Suites®, Sleep Inn®, Quality®, Clarion®, MainStay Suites®, Suburban Extended Stay Hotel®, Econo Lodge®, Rodeway Inn®, and Vacation Rentals by Choice Hotels^TM brands provide a spectrum of lodging choices to meet guests' needs. With more than 28 million members and counting, our Choice Privileges® rewards program enhances every trip a guest takes, with benefits ranging from instant, every day rewards to exceptional experiences, starting right when they join.  All hotels and vacation rentals are independently owned and operated. Visit us at www.choicehotels.com for more information.

SkyTouch Technology® is a business division of Choice Hotels 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.

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 and future operations, among other matters.   We caution you not to place undue reliance on any such forward-looking statements.  Forward-looking statements do not guarantee future performance and involve known and unknown risks, uncertainties and other factors.

Several factors could cause actual results, performance or achievements of the company to differ materially from those expressed in or contemplated by the forward-looking statements.  Such risks include, but are not limited to, changes to general, domestic and foreign economic conditions; 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 development 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 reports on Form 10-K and our quarterly reports filed on Form 10-Q.  We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Statement Concerning Non-GAAP Financial Measurements Presented in this Press Release

Adjusted EBITDA, franchising revenues, adjusted hotel franchising SG&A, Adjusted EBITDA from hotel franchising activities and adjusted hotel franchising margins are non-GAAP financial measurements.  These measures should not be considered as an alternative to any measure of performance or liquidity as promulgated under or authorized by generally accepted accounting principles in the United States ("GAAP"), such as net income, total revenues and operating margins.  The company's calculation of these measurements may be different from the calculations used by other companies and therefore comparability may be limited.  The company has included an exhibit accompanying this release that reconciles these items to the most comparable GAAP financial measures. We discuss management's reasons for reporting these non-GAAP measures below.

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, other (gains) and losses, equity in net income of unconsolidated affiliates and executive termination benefits. 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. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies.

Franchising Revenues, Adjusted Hotel Franchising EBITDA, Adjusted Hotel Franchising SG&A and Margins:  The company reports franchising revenues, adjusted hotel franchising EBITDA, adjusted franchising hotel SG&A and margins which exclude marketing and reservation revenues; the SkyTouch Technology division; recently acquired operations that provide Software as a Service ("SaaS") technology solutions to vacation rental management companies; revenue generated from the ownership of an office building that is leased to a third-party and executive termination benefits.  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 activities are excluded since the company is required by its franchise agreements to use the fees collected for marketing and reservation activities; as such, no income or loss to the company is generated. Cumulative marketing and reservation system fees not expended are recorded as a liability in the company's financial statements and are carried over to the next year and expended in accordance with the franchise agreements. Cumulative marketing and reservation expenditures in excess of fees collected for marketing and reservation activities are deferred and recorded as an asset in the company's financial statements and recovered in future periods.  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 technology solutions provider are excluded since they do not reflect the company's core franchising business but are adjacent, complementary lines of business.

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