Choice Hotels International Reports Full Year 2012
Choice Hotels International Reports Full Year 2012 Adjusted Diluted EPS of $2.11 Per Share
Full Year New Domestic Hotel Franchise Contracts Rise 42%
SILVER SPRING, Md., Feb. 11, 2013 /PRNewswire/ -- Choice Hotels International, Inc., (NYSE:CHH) today reported the following highlights for the fourth quarter and full year 2012:
"2012 was a record breaking year for the company in terms of operating performance. We established new company records for the size of the domestic franchise system, total franchising revenues, franchising margins, operating cash flows, operating income and earnings per share," said Stephen P. Joyce, president and chief executive officer. "We are very pleased with our development results which increased 42 percent over the prior year, highlighted by the conversion of 46 properties, formerly operated as Jameson Inns, to our system and the execution of several Cambria Suites agreements in key markets important for Cambria's long-term success. We remain optimistic that the development and RevPAR environments will continue to improve and result in further growth of our business in 2013."
Full Year Highlights
Adjusted diluted earnings per share ("EPS") for full year 2012 were $2.11 compared to $1.92 for full year 2011, a 10% increase. Adjusted diluted EPS for full year 2012 and 2011 exclude certain special items, as described below, totaling $0.04 and $0.07, respectively.
Excluding special items, adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") increased 10% to $203.7 million for the year ended December 31, 2012, compared to the prior year. Operating income increased 12% from $171.9 million for the year ended December 31, 2011 to $193.1 million for full year 2012.
Franchising revenues increased 6% to $302.2 million for the year ended December 31, 2012 from $285.4 million for the same period of 2011. Total revenues increased 8% to $691.5 million for the year ended December 31, 2012 compared to the same period of 2011.
Adjusted franchising margins increased 280 basis points from 61.5% for the year ended December 31, 2011 to 64.3% for the same period of the current year.
Domestic royalty fees for the year ended December 31, 2012 increased $15.4 million to $235.7 million from $220.3 million for the year ended December 31, 2011, an increase of 7%.
Domestic unit and room growth increased 1.6 percent and 0.8 percent from December 31, 2011, respectively.
Domestic system-wide revenue per available room ("RevPAR") increased 6.2% for the year ended December 31, 2012 compared to the year ended December 31, 2011 as occupancy and average daily rates increased 200 basis points and 2.5 percent, respectively.
The effective royalty rate increased 1 basis point to 4.33% for the year ended December 31, 2012 compared to 4.32% for the same period of the prior year.
The company executed 473 new domestic hotel franchise contracts for the year ended December 31, 2012 compared to 332 new domestic hotel franchise contracts in the same period of the prior year, a 42% increase.
The number of worldwide hotels under construction, awaiting conversion or approved for development as of December 31, 2012 was 482 hotels representing 38,969 rooms.
The effective income tax rate for the year ended December 31, 2012 was 28.7% compared to 30.1% for the same period of 2011.
During the year ended December 31, 2012, the company paid cash dividends totaling approximately $654.1 million, including a special cash dividend of $10.41 per share or approximately $600.7 million and purchased approximately 0.5 million shares of its common stock for a total cost of $19.9 million under the share repurchase program.
Fourth Quarter Highlights
Adjusted diluted EPS for fourth quarter 2012 were $0.45 compared to $0.46 for the same period of the prior year. Diluted EPS were $0.42 for the fourth quarter of 2012 compared to $0.42 for the same period of 2011. Adjusted diluted EPS for fourth quarter 2012 and 2011 exclude certain special items, as described below, totaling $0.03 and $0.04, respectively.
Excluding special items, adjusted EBITDA increased 11% to $49.3 million for the three months ended December 31, 2012 compared to the same period of the prior year. Operating income for the three months ended December 31, 2012 increased 17% from the same period of the prior year to $45.2 million.
Franchising revenues increased 4% from $73.9 million for the three months ended December 31, 2011 to $77.0 million for the same period of 2012. Total revenues for the three months ended December 31, 2012 increased 7% compared to the same period of the prior year.
Domestic system-wide revenue per available room ("RevPAR") increased 4.2% for the three months ended December 31, 2012 compared to the same period of 2011 as occupancy and average daily rates increased 120 basis points and 2.0 percent, respectively.
The effective royalty rate increased 5 basis points to 4.36% for the three months ended December 31, 2012 compared to 4.31% for the same period of the prior year.
The company executed 214 new domestic hotel franchise contracts for the three months ended December 31, 2012 compared to 128 new domestic hotel franchise contracts in the same period of the prior year, a 67% increase.
Reached an agreement with affiliates of Colony Capital, LLC, including Colony Financial, Inc., and hospitality management company Aimbridge Hospitality, to convert 46 properties, formerly operated as Jameson Inns, to the company's Quality Inn, Comfort Inn and Econo Lodge brands, representing the company's largest single conversion transaction, excluding brand acquisitions.
Expanded Cambria Suites into additional major markets with new franchise agreements executed for hotels in New York City, Phoenix, Arizona and Plano, Texas.
Interest expense for the three months ended December 31, 2012 increased $7.1 million over the same period of the prior reflecting the financing transactions entered into during the second and third quarter of 2012 in conjunction with the payment of the $600 million special cash dividend paid on August 23, 2012.
Special Items
On December 27, 2012, the company settled its supplemental executive retirement plan and paid the actuarial equivalent of the lump sum value of the full accrued benefit to each participant. As a result of the settlement, the company recognized a settlement loss in SG&A expense totaling $1.8 million for the three months and year ended December 31, 2012. In addition, during the year ended December 31, 2012, the company recorded employee termination benefits charges in SG&A of approximately $0.5 million and recognized a loss on the extinguishment of debt totaling $0.5 million. These special items represent diluted EPS of $0.03 and $0.04 for the three months and year ended December 31, 2012, respectively.
During the three months and year ended December 31, 2011, the company recorded employee termination benefit charges included in SG&A expenses of approximately $3.6 million and $4.4 million, respectively. In addition, during the year ended December 31, 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 special items represent diluted EPS of $0.04 and $0.07 for the three months and year ended December 31, 2011, respectively.
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.
Dividends
For the year ended December 31, 2012, the company paid $654.1 million of cash dividends to shareholders which included a special cash dividend in the amount of $10.41 per share or approximately $600.7 million paid on August 23, 2012. The company's current quarterly dividend rate per common share is $0.185, subject to declaration by our board of directors.
Share Repurchases
During the year ended December 31, 2012, the company repurchased 0.5 million shares for a total cost of $19.9 million and has authorization to purchase up to an additional 1.4 million shares under this program. The company did not repurchase any shares of common stock under the share repurchase program during the three months ended December 31, 2012. We expect to continue making repurchases under our share repurchase program 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 45.3 million shares of its common stock for a total cost of $1.1 billion through December 31, 2012. Considering the effect of a two-for-one stock split in October 2005, the company had repurchased 78.3 million shares through December 31, 2012 under the share repurchase program at an average price of $13.89 per share.
Other
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 strategic markets. During the year ended December 31, 2012, the company advanced, net of repayments, approximately $41 million related to mezzanine financing and sliver equity investments to construct Cambria Suites in such markets as New York City and White Plains, New York, Phoenix, Arizona and Plano, Texas. At December 31, 2012 the company had approximately $68 million outstanding related to this program. Over the next several years, we expect to continue to opportunistically deploy capital pursuant to these programs to promote growth of our emerging brands. We expect these advances to range between $20 million and $40 million per year, however, 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.
Balance Sheet
At December 31, 2012, the company had gross debt of $855.3 million and cash and cash equivalents totaling $134.2 million resulting in net debt of $721.1 million. At December 31, 2011, the company had gross debt of $252.7 million and cash equivalents totaling $107.1 million resulting in net debt of $145.6 million.
On June 27, 2012, the company issued unsecured senior notes in an aggregate principal amount of $400 million, in an underwritten, registered public offering. These notes will mature in July 2022 and bear a coupon rate of interest of 5.75%. Considering bond issuance costs, the company's effective interest costs related to these senior notes is approximately 5.94%.
On July 25, 2012, the company entered into a senior secured credit facility consisting of a $200 million revolving credit tranche and a $150 million term loan tranche, with a four year term. The company may elect to have borrowings under the senior secured credit facility bear interest at (i) a base rate plus a margin ranging from 100 to 325 basis points based on the company's total leverage ratio or (ii) LIBOR plus a margin ranging from 200 to 425 basis points based on the company's total leverage ratio. As a result of entering into the senior secured credit facility, the company's existing $300 million senior unsecured revolving credit facility was terminated. Under the $300 million senior unsecured revolving credit facility the company could elect to have borrowings bear interest at (i) a base rate plus a margin ranging from 5 to 80 basis points based on the company's credit rating or (ii) LIBOR plus a margin ranging from 105 to 180 basis points based on the company's credit rating.
The proceeds from the issuance of the $400 million senior notes and the company's new senior secured credit facility were utilized to pay the special cash dividend paid on August 23, 2012.
At December 31, 2012 and 2011, the company had outstanding mezzanine financing, real estate investments and sliver equity investments totaling $68 million and $27 million, respectively pursuant to its program to offer financing and investment support to incent franchise development for the Cambria Suites brand in strategic markets. These investments are reported in other current assets and other assets on the company's consolidated balance sheet.
Outlook
The company's first quarter 2013 diluted EPS is expected to be $0.26. The company expects full-year 2013 diluted EPS to range between $1.96 and $1.98. EBITDA for full-year 2013 are expected to range between $215 million and $217 million. These estimates include the following assumptions:
The company expects net domestic unit growth to increase by approximately 1.5% in 2013;
RevPAR is expected to increase approximately 5% for first quarter of 2013 and increase between 4.5% and 5.5% for full-year 2013;
The effective royalty rate is expected to increase 3 basis points for full-year 2013;
All figures assume the existing share count;
An effective tax rate of 28.5% and 30.6% for the first quarter and full-year 2013, respectively.
Conference Call
Choice will conduct a conference call on Tuesday, February 12, 2013 at 9:00 a.m. EST to discuss the company's fourth quarter 2012 results.