Choice Hotels Reports Third Quarter 2011 Diluted EPS of $0.71, Domestic RevPAR Growth of 5.4%

Choice Hotels International, Inc., (NYSE: CHH) reported the following highlights for third quarter 2011:

• Diluted earnings per share ("EPS") for third quarter 2011 were $0.71 compared to $0.68 for the same period of the prior year.  

• Excluding special items, adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") were $64.9 million for the three months ended September 30, 2011, compared to $57.3 million for the same period of 2010. Operating income increased 14% from $54.9 million for the three months ended September 30, 2010 to $62.4 million for the same period of the current year.

• Franchising revenues increased 8.5% from $79.9 million for the three months ended September 30, 2010 to $86.7 million for the same period of 2011.  Total revenues for the three months ended September 30, 2011 increased 5% to $192.3 million compared to the same period of 2010.

• Excluding special items, adjusted selling, general and administrative ("SG&A") expenses declined 3% from $22.9 million for third quarter of 2010 to $22.1 million for the same period of the current year.  SG&A expenses were $22.6 million for the three months ended September 30, 2011, compared to $23.2 million for the same period of 2010.

• Changes in the fair value of investments held in certain of the company's retirement plans are accounted for as investment gains and losses and are presented under the caption Other (gains) and losses with a corresponding adjustment to compensation expense in SG&A. During the three months ended September 30, 2011, the company recorded $1.2 million in investment losses related to these investments. As a result of the decline in the value of these investments, the deferred compensation liability to the participants also declined resulting in a $1.3 million reduction of compensation expense reflected in SG&A expenses. During the three months ended September 30, 2010, investment gains totaling $0.7 million were recorded in Other (gains) and losses which resulted in an increase in SG&A expense of $0.8 million to reflect the increase in the deferred compensation liability to participants.

• The effective income tax rate for the three months ended September 30, 2011 was 25.7% compared to 26.4% for the same period of the prior year. Excluding discrete items totaling $4.3 million and $4.0 million recorded during the three months ended September 30, 2011 and 2010, the company's effective income tax rates were approximately 33.2% and 33.6%, respectively.

• Worldwide unit growth increased 0.8 percent from September 30, 2010 comprised of domestic and international unit growth of 0.4 percent and 2.5 percent, respectively.

• Domestic system-wide revenue per available room ("RevPAR") increased 5.4% for the third quarter of 2011 compared to the same period of 2010.    

• The effective royalty rate increased 2 basis points to 4.29% for the three months ended September 30, 2011 compared to 4.27% for the same period of the prior year.

• The company executed 79 new domestic hotel franchise contracts for the three months ended September 30, 2011, compared to the 79 contracts executed in the same period of the prior year.

• The number of domestic hotels under construction, awaiting conversion or approved for development declined 21% from September 30, 2010 to 430 hotels representing 35,114 rooms; the worldwide pipeline declined 18% from September 30, 2010 to 524 hotels representing 43,829 rooms.

"We continue to work closely with our franchisees to improve their unit profitability by driving incremental business to their hotels and providing them with targeted services and support to enhance property-level operating performance," said Stephen P. Joyce, president and chief executive officer.  "The fundamental strength of our operating model remains strong, as we continue to invest in programs that drive incremental business for our franchisees while returning value to our shareholders through share repurchases and dividends."

Special Items

During the three and nine months ended September 30, 2011, the company recorded employee termination benefits charges of approximately $0.4 million and $0.8 million, respectively. In addition, during the nine months ended September 30, 2011, the company reduced the carrying amount of a parcel of land held for sale resulting in a loss of $1.8 million included in other gains and losses.  These amounts represented diluted EPS of $0.03 for the nine months ended September 30, 2011 but did not have an effect on the reported diluted EPS for the three months ended September 30, 2011.

During the three and nine months ended September 30, 2010, the company recorded employee termination benefits charges of approximately $0.3 million and $0.5 million, respectively. These amounts did not have an effect on the reported diluted EPS for the periods reported.

Outlook for 2011

The company's fourth quarter 2011 diluted EPS is expected to be $0.43. The company expects full-year 2011 adjusted diluted EPS to be approximately $1.89.  Adjusted EBITDA for full-year 2011 are expected to be approximately $183 million. These estimates include the following assumptions:

• The company expects net domestic unit growth to be relatively flat in 2011;
• RevPAR is expected to increase approximately 6.5% for the fourth quarter of 2011 and increase approximately 6% for full-year 2011;
• The effective royalty rate is expected to increase 2 basis points for full-year 2011;
• All figures assume the existing share count and an effective tax rate of 34.0% and 30.5% for the fourth quarter and full-year 2011, respectively;
• Adjusted EBITDA for the full year 2011 excludes $0.8 million of operating expenses related to employee termination benefits.  Adjusted diluted EPS excludes the aforementioned employee termination benefits as well as a $1.8 million loss on land held for sale which together represent approximately $0.03 diluted EPS for full year 2011.

Use of Free Cash Flow

The company has historically used its free cash flow (cash flow from operations less capital expenditures) to return value to shareholders, primarily through share repurchases and dividends.

For the nine months ended September 30, 2011 the company paid $32.9 million of cash dividends to shareholders. The current quarterly dividend rate per common share is $0.185, subject to declaration by our board of directors.

During the three and nine months ended September 30, 2011, the company purchased approximately 0.7 million shares of its common stock under the share repurchase program at an average price of $29.79 for a total cost of $22.2 million under the share repurchase program. Subsequent to September 30, 2011 and through October 26, 2011, the company repurchased an additional 0.6 million shares at a total cost of $18.0 million at an average price of $32.00 and has authorization to purchase up to an additional 2.3 million shares under this program.  We expect to continue making repurchases in the open market and through privately negotiated transactions, subject to market and other conditions. No minimum number of share repurchases has been fixed. Since Choice announced its stock repurchase program on June 25, 1998, the company has repurchased 43.9 million shares of its common stock for a total cost of $1 billion through September 30, 2011. Considering the effect of a two-for-one stock split in October 2005, the company had repurchased 76.9 million shares through September 30, 2011 under the share repurchase program at an average price of $13.51 per share.  

Our board of directors previously authorized us to enter into programs which permit us to offer financing, investment and guaranty support to qualified franchisees as well as to acquire and resell real estate to incent franchise development for certain brands in top markets.  Over the next several years, we expect to continue to opportunistically deploy capital pursuant to these programs to promote growth of our emerging brands.  The amount and timing of the investment in these programs will be dependent on market and other conditions.  Notwithstanding these programs, the company expects to continue to return value to its shareholders through a combination of share repurchases and dividends, subject to market and other conditions.

To see full details of results, please go to the company's website.  


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