Choice Hotels International, Inc., today reported the following highlights for third quarter 2010:
* Adjusted diluted earnings per share (“EPS”) for third quarter 2010 were $0.68 compared to $0.56 for the same period of the prior year. Diluted EPS were $0.68 for third quarter 2010 compared to $0.55 for third quarter 2009. Adjusted diluted EPS for third quarter 2009 exclude certain special items, as described below, totaling $0.01.
* Excluding special items, adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) were $57.3 million for the three months ended September 30, 2010, compared to $51.7 million for the same period of 2009. Operating income for the three months ended September 30, 2010 and 2009 was $54.9 million and $48.1 million, respectively.
* Franchising revenues increased 7% from $74.6 million for the three months ended September 30, 2009 to $79.9 million for the same period of 2010. Total revenues for the three months ended September 30, 2010 increased 11% compared to the same period of 2009.
* Domestic unit and room growth increased 1.2% and 0.7%, respectively, from September 30, 2009.
* Domestic system-wide revenue per available room (“RevPAR”) increased 7.4% for the third quarter of 2010 compared to the same period of 2009 primarily as a result of occupancy rates increasing 420 basis points.
* The effective royalty rate increased 7 basis points to 4.30% for the three months ended September 30, 2010 compared to 4.23% for the same period of the prior year.
* The company executed 79 new domestic hotel franchise contracts for both the three months ended September 30, 2010 and 2009.
* The number of domestic hotels under construction, awaiting conversion or approved for development declined 27% from September 30, 2009 to 545 hotels representing 44,627 rooms; the worldwide pipeline declined 26% from September 30, 2009 to 638 hotels representing 52,723 rooms.
* On August 25, 2010, the company completed and issued unsecured senior notes in an aggregate principal amount of $250 million, in an underwritten, registered public offering. The notes will mature in August 2020 and bear a coupon rate of interest of 5.7%. Considering bond issuance and related interest rate hedging costs, the company’s effective interest cost is approximately 6.2%. The proceeds from these senior notes were utilized to repay other outstanding indebtedness under the company’s unsecured revolving credit facility.
* The effective income tax rate for the three months ended September 30, 2010 was 26.4% compared to 35.0% for the same period of the prior year. Excluding discrete items, totaling $3.8 million (approximately $0.06 diluted earnings per share), recorded during the three months ended September 30, 2010, the company’s effective income tax rate was approximately 34.7%.
“During the third quarter, we were pleased to see strong gains in RevPAR domestically across every brand in the Choice family, enabling us to post positive year-to-date domestic RevPAR performance,” said Stephen P. Joyce, president and chief executive officer. “While the hotel transaction environment and lack of access to financing continues to impact our franchise sales results, our recently launched incentive program for the Quality, Clarion, and Econo Lodge brands has been well-received by developers. With our roster of strong, well-known brands and proven ability to deliver reservations to our franchisees’ hotels, we are well-positioned for growth as the hotel development environment improves.”
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 special items did not have an impact on diluted EPS for the three and nine months ended September 30, 2010.
During the three and nine months ended September 30, 2009, the company recorded employee termination benefits of approximately $1.5 million and $2.3 million, respectively. During the nine months ended September 30, 2009, the company also recorded a $1.5 million charge related to the sublease of a portion of its office space. These special items represent diluted EPS of $0.01 and $0.03 for the three and nine months ended September 30, 2009.
Outlook for 2010
The company’s fourth quarter 2010 adjusted diluted EPS is expected to be $0.38. The company expects full-year 2010 adjusted diluted EPS to be between $1.77 and $1.79. Adjusted EBITDA for full-year 2010 are expected to be between $168.5 million and $170.5 million. These estimates include the following assumptions:
* The company expects net domestic unit growth of approximately 1% in 2010;
* RevPAR is expected to increase approximately 7% to 8% for fourth quarter of 2010 and increase approximately 2% for full-year 2010;
* The effective royalty rate is expected to increase 6 basis points for full-year 2010;
* All figures assume the existing share count and an effective tax rate of 34.7% for the fourth quarter and 32.3% for full-year 2010.
* Adjusted EBITDA and adjusted diluted EPS for the fourth quarter and full year 2010 exclude $1.0 million and $1.5 million, respectively of operating expenses related to employee termination benefits which represent approximately $0.01 diluted EPS for both periods.
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, 2010 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 nine months ended September 30, 2010, the company purchased approximately 0.3 million shares of its common stock at an average price of $32.36 for a total cost of $8.7 million under the share repurchase program and has authorization to purchase up to an additional 3.6 million shares under this program. During the three months ended September 30, 2010 the Company purchased approximately 0.1 million shares of its common stock for a total cost of $1.9 million at an average price of $34.85. 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 43.2 million shares of its common stock for a total cost of $1 billion through September 30, 2010. Considering the effect of a two-for-one stock split in October 2005, the company had repurchased 76.2 million shares through September 30, 2010 under the share repurchase program at an average price of $13.35 per share.
Our Board 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. Recent market conditions have resulted in an increase in opportunities to incent development under these programs. As a result, during the nine months ended September 30, 2010, the Company has advanced approximately $18.9 million pursuant to these programs (of which $5 million has been repaid to the Company).
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. Our current expectation is that our annual investment in these programs will range between $20 million to $40 million. 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.