Choice Hotels Reports 3rd Quarter Recurring Diluted EPS Increases 22%

SILVER SPRING, Md. (October 18, 2001) - Choice Hotels International, Inc. (NYSE: CHH), the world`s second largest hotel franchisor, today reported third quarter 2001 recurring net income of $19.8 million, or $0.45 recurring diluted earnings per share (EPS), compared to the $19.4 million in recurring net income and $0.37 recurring diluted EPS reported for third quarter 2000, thus exceeding consensus estimates by four cents.

“We are extremely pleased with the strong performance achieved in the third quarter,” said Charles A. Ledsinger, Jr., president and chief executive officer. “As we see with our results, Choice is much less susceptible to economic cycles than our owner-operator competitors.”

He continued, “Despite a distinct softening in the economy, our revenues grew 6% for the quarter and have grown 7% year-to-date. Our EBITDA growth is steady, reaching 8% for the quarter and more than 7% for the year-to-date.”

The company also announced that, given the industry RevPAR decline since September 11, it expects fourth quarter 2001 recurring diluted EPS to be in the range of $0.27 to $0.31, or $1.23 to $1.27 for the full 2001 year.

In addition, the company noted that, assuming RevPAR declines in 2002 in the 1% to 5% range, recurring diluted EPS for the year should fall into the range of $1.31 to $1.37, given the current number of shares outstanding.


“While the long-term effects of the aftermath of September 11 are not yet known, we expect our brands and hotels to be less sensitive to the overall industry decline, given our franchise structure and hotel locations,” said Ledsinger.

In discussing the aftermath of September 11, Ledsinger noted, “We have seen our business rebound from an initially precipitous drop-off. While RevPAR dropped 25% from the previous year`s level initially, after about six days we began to see increased reservations activity and we now have daily RevPAR averaging about 10% under last year. More importantly, our average daily rate has held up relatively steady during this crisis.”

He added, “This performance confirms that our mid-priced, limited service products serve us well in a time of economic and political uncertainty. Because about 75% of our business reaches our hotels by car, we are extremely well-positioned in our highway locations to attract first-time guests whose travel patterns are taking them more in our direction now.”

Third Quarter Results:
Recurring earnings before interest, taxes, depreciation and amortization (EBITDA) increased to $38.5 million for the third quarter and $88.2 million for the first nine months of 2001, respective increases of 8.0% and 7.3% over the $35.6 million for third quarter 2000 and $82.1 million for the first nine months of 2000. EBITDA margins were 72.3% for the third quarter and 66.9% for the year-to-date through September 30.

The company reported royalty revenues of $44.6 million for third quarter 2001, compared to $43.4 million for third quarter 2000, an increase of 2.8%. Because Choice`s practice is to bill franchisees on monthly actual performance in arrears, royalty revenues for September hotel performance are recognized in the fourth quarter. The system-wide domestic effective royalty rate increased from 3.88% in third quarter 2000 to 3.96% for the third quarter of 2001. Domestic revenue per available room (RevPAR) was $44.85 for the third quarter of 2001, compared to $45.85 for the same period a year ago.

For the first nine months of 2001, Choice reported recurring net income of $42.9 million or $0.96 recurring diluted EPS versus recurring net income of $43.6 million and $0.82 recurring diluted EPS for the first nine months of 2000. Royalty revenues for the first nine months of 2001 increased 4.9% to $107.6 million from the $102.6 million for the same period of a year ago. The system-wide domestic effective royalty rate increased 9 basis points for the first nine months of 2001 to 3.93% from 3.84% for the same period a year ago. Domestic RevPAR also was up 0.7% from $36.76 for the first nine months of 2000 to $37.00 for the first nine months of 2001.

Partner service revenue, which in part operates through Choice`s proprietary online purchasing system, increased 39% in third quarter 2001 to $3 million. For the year-to-date, partner service revenue has increased 36%.

Total debt to rolling 12-month EBITDA declined to 2.42 times from 2.83 times a year earlier, reflecting the 28.6% improvement in cash flow from operations and the monetization of key investments. Choice`s franchising business model does not require significant ongoing maintenance capital expenditures.

During the three months ended September 30, 2001, the company recorded an equity loss of $11.7 million related to changes in its equity investment in Friendly Hotels plc. Friendly continues to restructure its organization to strengthen its balance sheet, improve its operations and accelerate growth of its franchising business. Further adverse fixed asset valuation adjustments due to a decline in economic conditions, incremental professional fees associated with the restructuring and balance sheet accrual adjustments primarily account for the $11.7 million charge. Further writedowns relating to this investment may occur in the future. The equity loss is excluded from the company’s recurring net income and recurring diluted EPS. In the event that Friendly has future liquidity issues, the company does not intend to fund future losses.