Item 1. Financial Statements
ITEM 1.
FINANCIAL STATEMENTS
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
Six Months Ended
June 30,
June 30,
2020
2019
2020
2019
REVENUES
Royalty fees
$
50,152
$
106,427
$
120,491
$
186,780
Initial franchise and relicensing fees
6,676
6,675
13,960
13,482
Procurement services
10,697
20,829
24,494
32,776
Marketing and reservation system
79,677
172,465
190,062
282,529
Owned hotels
2,108
—
11,530
—
Other
2,423
11,288
9,371
20,437
Total revenues
151,733
317,684
369,908
536,004
OPERATING EXPENSES
Selling, general and administrative
36,115
46,909
61,865
85,390
Depreciation and amortization
6,398
3,405
12,927
7,021
Marketing and reservation system
89,309
160,121
219,756
279,960
Owned hotels
2,976
—
9,010
—
Provision for credit losses
7,849
71
10,934
1,104
Total operating expenses
142,647
210,506
314,492
373,475
Impairment of goodwill
—
—
—
( 3,097
)
Loss on asset dispositions and impairments
( 1,226
)
—
( 1,226
)
( 7,304
)
Loss on sale of business
—
( 4,641
)
—
( 4,641
)
Gain on sale of assets, net
—
—
—
100
Operating income
7,860
102,537
54,190
147,587
OTHER INCOME AND EXPENSES, NET
Interest expense
13,082
11,093
24,462
22,304
Interest income
( 2,245
)
( 2,784
)
( 4,533
)
( 5,397
)
Loss on extinguishment of debt
—
—
607
—
Other (gains) losses
( 3,585
)
( 906
)
692
( 3,104
)
Equity in net loss of affiliates
3,486
980
5,441
3,151
Total other income and expenses, net
10,738
8,383
26,669
16,954
Income (loss) before income taxes
( 2,878
)
94,154
27,521
130,633
Income tax (benefit) expense
( 437
)
19,765
( 25,501
)
26,163
Net (loss) income
$
( 2,441
)
$
74,389
$
53,022
$
104,470
Basic (losses) earnings per share
$
( 0.04
)
$
1.34
$
0.96
$
1.88
Diluted (losses) earnings per share
$
( 0.04
)
$
1.33
$
0.95
$
1.87
Cash dividends declared per share
$
—
$
0.215
$
0.225
$
0.43
The accompanying notes are an integral part of these consolidated financial statements.
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CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
Six Months Ended
June 30,
June 30,
2020
2019
2020
2019
Net (loss) income
$
( 2,441
)
$
74,389
$
53,022
$
104,470
Other comprehensive (loss) income, net of tax:
Amortization of loss on cash flow hedge
—
216
—
431
Foreign currency translation adjustment
187
( 452
)
( 477
)
( 659
)
Other comprehensive (loss) income, net of tax
187
( 236
)
( 477
)
( 228
)
Comprehensive (loss) income
$
( 2,254
)
$
74,153
$
52,545
$
104,242
The accompanying notes are an integral part of these consolidated financial statements.
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CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
June 30, 2020
December 31, 2019
ASSETS
Current assets
Cash and cash equivalents
$
314,139
$
33,766
Receivables (net of allowance for credit losses of $36,341 and $18,482, respectively)
149,062
141,566
Income taxes receivable
8,909
11,126
Notes receivable
34,077
26,265
Less: Allowance for notes receivable credit losses
( 4,163
)
( 861
)
Other current assets
22,455
24,727
Total current assets
524,479
236,589
Property and equipment, at cost, net
350,459
351,502
Operating lease right-of-use assets
21,700
24,088
Goodwill
159,196
159,196
Intangible assets, net
291,198
290,421
Notes receivable
109,622
106,749
Less: Allowance for notes receivable losses
( 11,687
)
( 3,695
)
Investments, employee benefit plans, at fair value
25,138
24,978
Investments in unconsolidated entities
72,929
78,655
Deferred income taxes
49,878
20,747
Other assets
93,129
97,442
Total assets
$
1,686,041
$
1,386,672
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities
Accounts payable
$
57,814
$
73,449
Accrued expenses and other current liabilities
59,258
90,364
Deferred revenue
49,983
71,594
Current portion of long-term debt
7,157
7,511
Liability for guest loyalty program
44,525
82,970
Total current liabilities
218,737
325,888
Long-term debt
1,232,136
844,102
Long-term deferred revenue
124,152
112,662
Deferred compensation and retirement plan obligations
29,590
29,949
Income taxes payable
23,394
26,147
Operating lease liabilities
17,288
21,270
Liability for guest loyalty program
76,819
46,698
Other liabilities
6,677
3,467
Total liabilities
1,728,793
1,410,183
Commitments and Contingencies
Common stock, $0.01 par value; 160,000,000 shares authorized; 95,065,638 shares issued at June 30, 2020 and December 31, 2019; 55,363,895 and 55,702,628 shares outstanding at June 30, 2020 and December 31, 2019, respectively
951
951
Additional paid-in-capital
223,719
231,160
Accumulated other comprehensive loss
( 5,027
)
( 4,550
)
Treasury stock, at 39,701,743 and 39,363,010 shares at June 30, 2020 and December 31, 2019, respectively
( 1,264,527
)
( 1,219,905
)
Retained earnings
1,002,132
968,833
Total shareholders’ deficit
( 42,752
)
( 23,511
)
Total liabilities and shareholders’ deficit
$
1,686,041
$
1,386,672
The accompanying notes are an integral part of these consolidated financial statements.
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CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
2020
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
53,022
$
104,470
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
12,927
7,021
Depreciation and amortization – marketing and reservation system
9,585
8,599
Franchise agreement acquisition cost amortization
5,558
5,051
Gain on disposal of assets
—
( 2,189
)
Provision for credit losses, net
24,675
3,535
Loss on sale of business
—
4,641
Loss on asset disposition and impairments
1,226
7,304
Impairment of goodwill
—
3,097
Loss on extinguishment of debt
607
—
Non-cash stock compensation and other charges
458
8,173
Non-cash interest and other loss (income)
1,097
( 2,910
)
Deferred income taxes
( 27,098
)
2,418
Equity in net losses from unconsolidated joint ventures, less distributions received
5,588
5,380
Franchise agreement acquisition costs, net of reimbursements
( 12,567
)
( 19,122
)
Change in working capital and other, net of acquisition
( 73,626
)
( 37,729
)
Net cash provided by operating activities
1,452
97,739
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment
( 21,094
)
( 38,177
)
Investment in intangible assets
( 830
)
( 1,037
)
Proceeds from sales of assets
—
10,585
Payment on business disposition, net
—
( 10,783
)
Contributions to equity method investments
( 2,997
)
( 13,676
)
Distributions from equity method investments
3,113
7,509
Purchases of investments, employee benefit plans
( 1,932
)
( 2,276
)
Proceeds from sales of investments, employee benefit plans
1,901
1,714
Issuance of notes receivable
( 7,730
)
( 4,877
)
Collections of notes receivable
63
5,442
Other items, net
( 27
)
309
Net cash used in investing activities
( 29,533
)
( 45,267
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings pursuant to revolving credit facilities
170,300
9,400
Net borrowings pursuant to term loan
249,500
—
Principal payments on long-term debt
( 33,369
)
( 248
)
Purchase of treasury stock
( 54,536
)
( 42,437
)
Dividends paid
( 25,228
)
( 24,131
)
Debt issuance costs
( 492
)
—
Proceeds from issuance of long-term debt
—
20,715
Payments on transfer of interest in notes receivable
—
( 24,409
)
Proceeds from exercise of stock options
2,768
16,271
Net cash provided by (used in) financing activities
308,943
( 44,839
)
Net change in cash and cash equivalents
280,862
7,633
Effect of foreign exchange rate changes on cash and cash equivalents
( 489
)
132
Cash and cash equivalents at beginning of period
33,766
26,642
Cash and cash equivalents at end of period
$
314,139
$
34,407
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Income taxes, net of refunds
$
1,114
$
15,434
Interest, net of capitalized interest
$
23,248
$
21,126
Non-cash investing and financing activities:
Dividends declared but not paid
$
46
$
11,974
Investment in property and equipment acquired in accounts payable
$
1,317
$
1,583
The accompanying notes are an integral part of these consolidated financial statements.
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CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Common
Stock -
Shares
Outstanding
Common
Stock -
Par
Value
Additional
Paid-in-
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Retained
Earnings
Total
Balance as of December 31, 2018
55,679,207
$
951
$
213,170
$
( 5,446
)
$
( 1,187,625
)
$
795,178
$
( 183,772
)
Net income
—
—
—
—
—
30,081
30,081
Other comprehensive income (loss)
—
—
—
8
—
—
8
Other (1)
—
—
—
—
—
( 614
)
( 614
)
Share based payment activity
408,545
—
3,214
—
9,706
—
12,920
Dividends declared ($0.215 per share)
—
—
—
—
—
( 12,149
)
( 12,149
)
Treasury purchases
( 414,077
)
—
—
—
( 31,951
)
—
( 31,951
)
Balance as of March 31, 2019
55,673,675
$
951
$
216,384
$
( 5,438
)
$
( 1,209,870
)
$
812,496
$
( 185,477
)
Net income
—
—
—
—
—
74,389
74,389
Other comprehensive income (loss)
—
—
—
( 236
)
—
—
( 236
)
Share based payment activity
151,856
—
6,010
—
5,102
—
11,112
Dividends declared ($0.215 per share)
—
—
—
—
—
( 11,962
)
( 11,962
)
Treasury purchases
( 129,175
)
—
—
—
( 10,486
)
—
( 10,486
)
Balance as of June 30, 2019
55,696,356
$
951
$
222,394
$
( 5,674
)
$
( 1,215,254
)
$
874,923
$
( 122,660
)
Common
Stock -
Shares
Outstanding
Common
Stock -
Par
Value
Additional
Paid-in-
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Retained
Earnings
Total
Balance as of December 31, 2019
55,702,628
$
951
$
231,160
$
( 4,550
)
$
( 1,219,905
)
$
968,833
$
( 23,511
)
Cumulative-effect adjustment (2)
—
—
—
—
—
( 6,831
)
( 6,831
)
Net income
—
—
—
—
—
55,463
55,463
Other comprehensive income (loss)
—
—
—
( 664
)
—
—
( 664
)
Share based payment activity
294,826
—
( 9,607
)
—
8,089
—
( 1,518
)
Dividends declared ($0.225 per share) (3)
—
—
—
—
—
( 12,721
)
( 12,721
)
Treasury purchases
( 657,031
)
—
—
—
( 54,072
)
—
( 54,072
)
Balance as of March 31, 2020
55,340,423
$
951
$
221,553
$
( 5,214
)
$
( 1,265,888
)
$
1,004,744
$
( 43,854
)
Net income
—
—
—
—
—
( 2,441
)
( 2,441
)
Other comprehensive income (loss)
—
—
—
187
—
—
187
Share based payment activity (3)
29,997
—
2,166
—
1,825
( 171
)
3,820
Dividends declared (3)
—
—
—
—
—
—
—
Treasury purchases
( 6,525
)
—
—
—
( 464
)
—
( 464
)
Balance as of June 30, 2020
55,363,895
$
951
$
223,719
$
( 5,027
)
$
( 1,264,527
)
$
1,002,132
$
( 42,752
)
(1) Impact of adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Update (“ASU”) No. 2014-09, Revenue From Contracts with Customers (Topic 606) and subsequent amendments to the initial guidance ("Topic 606") related to a foreign joint venture accounted for as an equity method investment.
(2) Reflects the cumulative effect of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which was adopted on January 1, 2020. Refer to Note 1 for additional details.
(3) During the fourth quarter of 2019, the Company's board of directors announced a 5% increase to the quarterly dividend rate to $0.225 per share from $0.215 per share, beginning with the dividend payable in the first quarter of 2020. On February 28, 2020, the Company’s board of directors declared a quarterly cash dividend of $0.225 per share of common stock. The dividend was payable on April 16, 2020 to shareholders of record on April 2, 2020. In light of uncertainty resulting from the COVID-19 pandemic, we have taken the action to suspend future, undeclared dividends for at least the remainder of 2020. In the second quarter of 2020, dividends were paid upon vesting of certain performance-based stock grants which are captured in Share based payment activity.
The accompanying notes are an integral part of these consolidated financial statements.
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CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1 . Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of Choice Hotels International, Inc. and its subsidiaries (together the "Company") have been prepared by the Company in accordance with United States of America generally accepted accounting principles ("GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). These unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present the Company's financial position and results of operations. Except as otherwise disclosed, all adjustments are of a normal recurring nature. Certain prior year amounts in our Consolidated Statements of Income have been reclassified in order to maintain comparability with current year presentation.
Certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP have been omitted. The Company believes the disclosures made are adequate to make the information presented not misleading.
The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2019 and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 2, 2020 . Interim results are not necessarily indicative of the entire year results. All inter-company transactions and balances between Choice Hotels International, Inc. and its subsidiaries have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are detailed in the “Summary of Significant Accounting Policies” section of Note 1 in the Annual Report on Form 10-K for the year ended December 31, 2019 . The significant accounting policies that changed in 2020 are set forth below.
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) and issued subsequent amendments to the initial guidance at various points thereafter ("Topic 326"). Under legacy standards, we recognized an impairment of receivables when it was probable that a loss had been incurred. Topic 326 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts (which includes losses that may be incurred in future periods), and enhanced disclosures to provide insight to significant estimates and judgments used in estimating credit losses. The Company adopted Topic 326 on January 1, 2020 using the modified retrospective approach resulting in a cumulative-effect adjustment of $ 6.8 million (inclusive of deferred taxes) recorded in retained earnings as of the date of adoption. The scope and provisions of Topic 326 most significantly impacted the allowance for the Company's Notes receivables. While Trade receivables are in the scope, the provisions of Topic 326 did not significantly alter the accounting policy for allowance for trade receivables given the duration of such receivables is typically 30 days. Refer to Note 3 for further details on the adoption of Topic 326 and the impact to the Company's accounting policies for Notes receivable.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 modifies disclosure requirements on fair value measurements. The Company adopted ASU 2018-13 on a retrospective basis on January 1, 2020, with limited modifications to its fair value footnote disclosure. Refer to Note 7 .
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) : Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
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internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted ASU 2018-15 on a prospective basis on January 1, 2020. As the majority of the Company's hosting arrangements are service contracts, the capitalization and subsequent amortization of implementation costs incurred after adoption are expected to impact the timing, but not classification, of expense recognition.
Recently Issued Accounting Standard
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 enhances and simplifies various aspects of the income tax accounting guidance in Accounting Standards Codification ("ASC") 740, Income Taxes. The guidance is effective for annual reporting periods beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted. T he Company is evaluating the effect of adopting ASU 2019-12, but does not expect adoption will have a material impact on the consolidated financial statements and disclosures .
2 . Revenue
Contract Liabilities
Contract liabilities relate to (i) advance consideration received, such as initial franchise and relicensing fees paid when a franchise agreement is awarded and system implementation fees paid at time of installation, for services considered to be part of the brand intellectual property performance obligation and (ii) amounts received when Choice Privileges points are issued, but for which revenue is not yet recognized since the related points have not been redeemed.
Initial and relicensing fees are charged when (i) new hotels enter the franchise system, (ii) there is a change of ownership, or (iii) existing franchise agreements are extended. These revenues are recognized as revenue ratably as services are provided over the enforceable period of the franchise agreement. System implementation fees charged to franchisees are also deferred and recognized as revenue over the enforceable period of the franchise agreement. The enforceable period is the period from hotel opening to the first date the franchisee or the Company can terminate the franchise agreement without incurring a significant penalty. Deferred revenues from initial and relicensing fees and system implementation fees will typically be recognized over a five - to ten -year period, unless the franchise agreement is terminated and the hotel exits the franchise system whereby remaining deferred amounts will be recognized to revenue in the period of termination.
Loyalty points represent a performance obligation attributable to usage of the points, and thus revenues are recognized at the point in time when the loyalty points are redeemed by members for benefits. The estimated fair value of future redemptions is reflected in current and non-current Liability for guest loyalty program in the consolidated balance sheets. The amount of the loyalty program fees in excess of the point liability represents current and non-current deferred revenue, which is recognized to revenue as points are redeemed including an estimate of future forfeitures. The anticipated redemption pattern of the points is the basis for current and non-current designation of each liability, which was adjusted in the first quarter of 2020 to reflect an anticipated longer issuance to redemption period in light of impacts from the COVID-19 pandemic. Loyalty points are typically redeemed within three years of issuance.
Significant changes in the contract liabilities balances during the period December 31, 2019 to June 30, 2020 are as follows:
(in thousands)
Balance as of December 31, 2019
$
163,847
Increases to the contract liability balance due to cash received
31,948
Revenue recognized in the period
( 35,093
)
Balance as of June 30, 2020
$
160,702
Remaining Performance Obligations
The aggregate amount of transaction price allocated to unsatisfied or partially unsatisfied performance obligations is $ 160.7 million as of June 30, 2020 . This amount represents fixed transaction price that will be recognized as revenue in future periods, which is primarily captured in the consolidated balance sheet as current and non-current deferred revenue.
Based on practical expedient elections permitted by Topic 606, the Company does not disclose the value of unsatisfied performance obligations for (i) variable consideration subject to the sales or usage-based royalty constraint or comprising a component of a series (including franchise, partnership, qualified vendor, and software as a service ("SaaS") agreements), (ii) variable consideration for which we recognize revenue at the amount to which we have the right to invoice for services performed, or (iii) contracts with an expected original duration of one year or less.
Disaggregation of Revenue
Three Months Ended
Three Months Ended
June 30, 2020
June 30, 2019
(in thousands)
Over time
Point in time
Total
Over time
Point in time
Total
Royalty fees
$
50,152
$
—
$
50,152
$
106,427
$
—
$
106,427
Initial franchise and relicensing fees
6,676
—
6,676
6,675
—
6,675
Procurement services
10,161
536
10,697
19,648
1,181
20,829
Marketing and reservation system
54,436
25,241
79,677
130,203
42,262
172,465
Owned hotels
1,639
361
2,000
—
—
—
Other
2,163
—
2,163
10,886
141
11,027
Total Topic 606 revenues
$
125,227
$
26,138
151,365
$
273,839
$
43,584
317,423
Non-Topic 606 revenues
368
261
Total revenues
$
151,733
$
317,684
Six Months Ended
Six Months Ended
June 30, 2020
June 30, 2019
(in thousands)
Over time
Point in time
Total
Over time
Point in time
Total
Royalty fees
$
120,491
$
—
$
120,491
$
186,780
$
—
$
186,780
Initial franchise and relicensing fees
13,960
—
13,960
13,482
—
13,482
Procurement services
23,449
1,045
24,494
31,135
1,641
32,776
Marketing and reservation system
153,765
36,297
190,062
234,281
48,248
282,529
Owned hotels
9,660
1,654
11,314
—
—
—
Other
8,850
—
8,850
19,755
141
19,896
Total Topic 606 revenues
$
330,175
$
38,996
369,171
$
485,433
$
50,030
535,463
Non-Topic 606 revenues
737
541
Total revenues
$
369,908
$
536,004
Non-Topic 606 revenues primarily represent revenue from leasing and are presented in Owned hotels and Other revenues in the consolidated statements of income.
As presented in Note 11 , the Corporate & Other segment amounts represent $ 4.5 million and $ 4.1 million for the three months ended June 30, 2020 and 2019 , respectively, $ 15.4 million and $ 7.4 million for the six months ended June 30, 2020 and 2019 , respectively, and are included in the Over time column of Other revenues and the Owned Hotels and Non-Topic 606 revenues rows. The remaining revenues relate to the Hotel Franchising segment. Royalty fees and Marketing and reservation system revenues are presented net of $ 0.1 million in intersegment revenues for the three months ended June 30, 2020 and $ 0.9 million in intersegment revenues for the six months ended June 30, 2020 , as described in Note 11 .
3 . Notes Receivable and Allowance for Credit Losses
The Company has provided financing in the form of notes receivable loans to franchisees to support the development of properties in strategic markets. As of June 30, 2020 and December 31, 2019 , the Company had $ 143.7 million and $ 133.0 million , respectively, in notes receivable loans outstanding.
The Company has developed a systematic methodology to determine its allowance for credit losses across our portfolio of notes receivable loans. The Company monitors the risk and performance of our portfolio by the level of security in collateral (i.e., senior, subordinated or unsecured). As each of the Company’s notes receivable loans has unique risk characteristics, the Company deploys its methodology to calculate allowances for credit losses at the individual notes receivable loan level.
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The Company primarily utilizes a discounted cash flow ("DCF") approach to measure the credit allowance, influenced by the key economic variables of each note receivable loan. The Company identified the key economic variables for these loans to be loan-to-cost ("LTC") or loan-to-value ("LTV") ratios and debt service coverage ratio ("DSCR"). The LTC or LTV ratio represents the loan principal relative to the project cost or value and is an indication of the ability to be re-paid principal at loan maturity. The DSCR represents borrower net operating income as a percentage of the interest and principal payments incurred (i.e., debt service) on all debt of the borrower and is an indication of the ability of the borrower to timely pay amounts due during the term of the loan. The LTC or LTV ratios and DSCR are considered during loan underwriting as indications of risk and, accordingly, we believe these factors are the most representative risk indicators for calculating the allowance for credit loss. Loans with higher LTC or LTV ratios and lower DSCR ratios generally are representative of loans with greater risk and, accordingly, have higher credit allowances as a percentage of loan principal. Conversely, loans with lower LTC or LTV ratios and higher DSCR ratios generally are representative of loans with lesser risk and, accordingly, have lower credit allowances as a percentage of loan principal.
The following table shows the composition of the Company's notes receivable balances based on the level of security credit quality indicator:
(in thousands)
June 30, 2020
December 31, 2019
Senior
$
107,968
$
98,545
Subordinated
33,284
32,153
Unsecured
2,447
2,316
Total notes receivable
143,699
133,014
Total allowance for notes receivable credit losses
15,850
4,556
Total notes receivable, net of allowance
$
127,849
$
128,458
Current portion, net of allowance
$
29,914
$
25,404
Long-term portion, net of allowance
$
97,935
$
103,054
Amortized cost basis by year of origination and level of security credit quality indicator are as follows:
(in thousands)
2020
2019
2018
Prior
Total
Senior
$
—
$
25,847
$
20,664
$
61,457
$
107,968
Subordinated
—
2,364
11,785
19,135
33,284
Unsecured
—
—
621
1,826
2,447
Total notes receivable
$
—
$
28,211
$
33,070
$
82,418
$
143,699
As disclosed in Note 1 , Topic 326 requires a cumulative-effect adjustment to the consolidated balance sheet as of the beginning of the first reporting period in which the guidance is effective. As of the adoption date of January 1, 2020, the Company established a credit allowance on its notes receivable loans of $ 12.9 million , an increase from a previous loan allowance of $ 4.6 million as of December 31, 2019. The cumulative-effect adjustment of adopting Topic 326 of $ 6.8 million , net of tax impact, is recorded in the consolidated balance sheets in the Retained earnings line item.
The following table summarizes the activity related to the Company’s notes receivable allowance for credit losses, including the impacts of adopting Topic 326. The provisions recorded in the six months ended June 30, 2020 reflect the increased likelihood of adverse outcomes on loans to borrowers with contemplation to impacts of the COVID-19 pandemic and estimates of other expected credit losses.
(in thousands)
June 30, 2020
December 31, 2019
Beginning balance
$
4,556
$
4,685
Reserves established from adoption of Topic 326
8,348
—
Provision for credit losses
2,946
—
Write-offs
—
( 129
)
Ending balance
$
15,850
$
4,556
The Company considers loans to be past due and in default when payments are not made when due. Although the Company considers loans to be in default if payments are not received on the due date, the Company does not suspend the accrual of interest until those payments are more than 30 days past due. The Company applies payments received for loans on non-accrual
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status first to interest and then to principal. The Company does not resume interest accrual until all delinquent payments are received. The amortized cost basis of notes receivable on non-accrual status was $ 29.9 million and $ 1.7 million at June 30, 2020 and December 31, 2019 , respectively.
The Company has identified loans totaling approximately $ 14.2 million and $ 16.3 million , respectively, with stated interest rates that are less than market rate, representing a total discount of $ 1.1 million and $ 1.3 million as of June 30, 2020 and December 31, 2019 , respectively. These discounts are reflected as a reduction of the outstanding loan amounts and are amortized over the life of the related loan.
Past due balances of notes receivable by credit quality indicators are as follows:
(in thousands)
30-89 days
Past Due
> 90 days
Past Due
Total
Past Due
Current
Total
Notes Receivable
As of June 30, 2020
Senior
$
15,664
$
—
$
15,664
$
92,304
$
107,968
Subordinated
—
2,209
2,209
31,075
33,284
Unsecured
—
—
—
2,447
2,447
$
15,664
$
2,209
$
17,873
$
125,826
$
143,699
As of December 31, 2019
Senior
$
—
$
—
$
—
$
98,545
$
98,545
Subordinated
—
—
—
32,153
32,153
Unsecured
—
—
—
2,316
2,316
$
—
$
—
$
—
$
133,014
$
133,014
The Company evaluated its off-balance-sheet credit exposure for loan commitments and determined the likelihood of having to perform is remote as of June 30, 2020 . Refer to Note 12 .
Variable Interest through Notes Issued
The Company has issued notes receivables to certain entities that have created variable interests in these borrowers totaling $ 125.8 million and $ 126.5 million as of June 30, 2020 and December 31, 2019 , respectively. The Company has determined that it is not the primary beneficiary of these variable interest entities ("VIEs"). These loans have stated fixed and/or variable interest amounts.
4 . Investments in Unconsolidated Entities
The Company maintains a portfolio of investments owned through noncontrolling interests in equity method investments with one or more partners. The Company has equity method investments in joint ventures that represent VIEs totaling $ 72.7 million and $ 74.4 million on the consolidated balance sheets at June 30, 2020 and December 31, 2019 , respectively. These investments relate to the Company's program to offer equity support to qualified franchisees to develop and operate Cambria Hotels in strategic markets. Based on an analysis of who has the power to direct the activities that most significantly impact these entities performance and who has an obligation to absorb losses of these entities or a right to receive benefits from these entities that could potentially be significant to the entity, the Company determined that it is not the primary beneficiary of any of these VIEs. The Company based its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and the relevant development, operating management and financial agreements. Although the Company is not the primary beneficiary of these VIEs, it does exercise significant influence through its equity ownership and as a result the Company's investment in these entities is accounted for under the equity method. For the three months ended June 30, 2020 and 2019 , the Company recognized losses totaling $ 2.6 million and $ 1.6 million , respectively, from these investments. For the six months ended June 30, 2020 and 2019 , the Company recognized losses totaling $ 4.6 million and $ 4.0 million , respectively, from these investments. The Company's maximum exposure to losses related to its investments in VIEs is limited to its equity investments as well as certain limited payment guaranties described in Note 12 of these financial statements.
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5 . Debt
Debt consists of the following:
June 30, 2020
December 31, 2019
(in thousands)
$400 million senior unsecured notes due 2022 with an effective interest rate of 6.0% less deferred issuance costs of $1.9 million and $2.3 million at June 30, 2020 and December 31, 2019, respectively
$
398,117
$
397,680
$400 million senior unsecured notes due 2029 with an effective interest rate of 3.88%, less a discount and deferred issuance costs of $5.7 million and $6.0 million at June 30, 2020 and December 31, 2019, respectively
394,334
394,039
$600 million senior unsecured revolving credit facility with an effective interest rate of 1.49% and 2.76%, less deferred issuance costs of $2.4 million and $2.7 million at June 30, 2020 and December 31, 2019, respectively
186,096
15,502
$250 million term loan due 2021 with an effective interest rate of 3.25%, less a discount and deferred issuance costs of $0.8 million at June 30, 2020
249,173
—
Construction loan with an effective interest rate of 6.23%, less deferred issuance costs of $0.6 million at December 31, 2019.
—
32,465
Fixed rate collateralized mortgage with an effective interest rate of 4.57%, plus a fair value adjustment of $0.1 million and $0.2 million at June 30, 2020 and December 31, 2019, respectively
7,157
7,511
Economic development loans with an effective interest rate of 3.0% at June 30, 2020 and December 31, 2019, respectively
4,416
4,416
Total debt
$
1,239,293
$
851,613
Current portion of long-term debt
$
7,157
$
7,511
Long-term debt
$
1,232,136
$
844,102
The Company increased borrowings on its senior unsecured revolving credit facility by $ 170.3 million and entered into a $ 250 million unsecured term loan in the six months ended June 30, 2020, primarily to increase liquidity in response to the COVID-19 pandemic. The additional drawn amounts that were not otherwise utilized for operational purposes during the quarter are being held as cash on the Company’s consolidated balance sheet. See the Liquidity and Capital Resources header of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information.
On February 18, 2020, the Company entered into the First Amendment (the "Amendment") to the Amended and Restated Senior Unsecured Credit Agreement (the “Credit Agreement”) among the Company, Deutsche Bank AG New York Branch, as administrative agent and the lenders party thereto. The Amendment amended the Credit Agreement. Prior to the Amendment, the Credit Agreement provided that if certain subsidiaries of the Company were to incur certain recourse debt or become obligors in respect of certain recourse debt of the Company or certain of its other subsidiaries, those obligated subsidiaries were required to guarantee the Company’s obligations under the unsecured revolving credit facility provided pursuant to the Restated Credit Agreement (the “springing guarantee”). The Amendment, among other things, removes the springing guarantee and other provisions and references in the Credit Agreement related to the potential existence of subsidiary guarantors.
On March 5, 2020 , the Company paid off the construction loan in the amount $ 33.1 million inclusive of accrued and unpaid interest and recorded a loss on extinguishment of debt of $ 0.6 million .
On April 16, 2020 , the Company entered into a senior unsecured credit agreement, which provides for a $ 250 million unsecured term loan (the "Term Loan") with a scheduled maturity date of April 15, 2021 , subject to an optional one-year extension that can be requested by the Company prior to the initial maturity date, with any such extension subject to the consent of the lenders under the Credit Agreement and certain customary conditions.
On July 23, 2020 , the Company issued $ 450 million aggregate principal amount of 3.700 % senior unsecured notes due 2031 (the "2020 Senior Notes"). The 2020 Senior Notes mature on January 15, 2031. Interest on the 2020 Senior Notes is payable semi-annually on January 15 th and July 15 th of each year, commencing January 15, 2021. In connection with the closing of the sale of the 2020 Senior Notes, on July 23, 2020 , the Company announced the early tender results of a cash tender offer (the “Tender Offer”) for the purchase of approximately $ 183.4 million aggregate principal amount of the Company’s 5.750 % senior unsecured notes due 2022 (the “2012 Senior Notes”). The Company used the net proceeds of the 2020 Senior Note offering, after deducting underwriting discounts, commissions and other offering expenses, to repay the Term Loan in full and fund the purchase price of the 2012 Senior Notes tendered and accepted by the Company for purchase pursuant to the Tender Offer. In contemplation of the Term Loan repayment from proceeds of the 2020 Senior Note issuance, the Term Loan has been classified as a long-term liability at June 30, 2020.
Refer to Note 14 and the Liquidity and Capital Resources header of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information.
6 . Accumulated Other Comprehensive Loss
The following represents the changes in accumulated other comprehensive loss, net of tax, by component for the six months ended June 30, 2020 and 2019 :
(in thousands)
Loss on Cash Flow Hedge
Foreign Currency Items
Total
Balance as of December 31, 2019
$
—
$
( 4,550
)
$
( 4,550
)
Other comprehensive loss before reclassification
—
( 477
)
( 477
)
Net current period other comprehensive income (loss)
—
( 477
)
( 477
)
Balance as of June 30, 2020
$
—
$
( 5,027
)
$
( 5,027
)
(in thousands)
Loss on Cash Flow Hedge
Foreign Currency Items
Total
Balance as of December 31, 2018
$
( 1,436
)
$
( 4,010
)
$
( 5,446
)
Other comprehensive loss before reclassification
—
( 659
)
( 659
)
Amounts reclassified from accumulated other comprehensive loss
431
—
431
Net current period other comprehensive income (loss)
431
( 659
)
( 228
)
Balance as of June 30, 2019
$
( 1,005
)
$
( 4,669
)
$
( 5,674
)
During the three and six months ended June 30, 2019 , $ 0 and $ 0.4 million , respectively, was reclassified from accumulated other comprehensive loss to Interest expense in the Company's Consolidated Statements of Income with reference to a cash flow hedge loss on an interest rate contract. There was no income tax expense or benefit. There were no amounts reclassified during the three and six months ended June 30, 2020 , as the debt related to the Interest rate contract was paid off in December 2019.
7 . Fair Value Measurements
The Company estimates the fair value of its financial instruments utilizing a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The following summarizes the three levels of inputs, as well as the assets that the Company values using those levels of inputs.
Level 1 : Quoted prices in active markets for identical assets and liabilities. The Company’s Level 1 assets consist of marketable securities (primarily mutual funds) held in the Deferred Compensation Plan.
Level 2 : Observable inputs, other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable. The Company’s Level 2 assets consist of money market funds held in the Company's Deferred Compensation Plan.
Level 3 : Unobservable inputs, supported by little or no market data available, where the reporting entity is required to develop its own assumptions to determine the fair value of the instrument. The Company does not currently have any assets recorded at fair value whose fair value was determined using Level 3 inputs and there were no transfers of Level 3 assets during the three and six months ended June 30, 2020 .
As of June 30, 2020 and December 31, 2019 , the Company had the following assets recorded in the consolidated balance sheets measured at fair value on a recurring basis:
Fair Value Measurements at Reporting Date Using
(in thousands)
Total
Level 1
Level 2
Level 3
As of June 30, 2020
Mutual funds (1)
$
23,203
$
23,203
$
—
$
—
Money market funds (1)
3,255
—
3,255
—
Total
$
26,458
$
23,203
$
3,255
$
—
As of December 31, 2019
Mutual funds (1)
$
24,927
$
24,927
$
—
$
—
Money market funds (1)
2,192
—
2,192
—
Total
$
27,119
$
24,927
$
2,192
$
—
(1) Included in Investments, employee benefit plans, at fair value and Other current assets on the consolidated balance sheets.
Other financial instruments disclosure
The Company believes that the fair value of its current assets and current liabilities, including the Term Loan prior to its repayment in July 2020, approximate their reported carrying amounts due to the short-term nature of these items. In addition, the interest rates of the Company's senior unsecured revolving credit facility adjust frequently based on current market rates; accordingly its carrying amount approximates fair value.
The Company estimates the fair value of notes receivable, which approximate their carrying value, utilizing an analysis of future cash flows and credit worthiness for similar types of arrangements. Based upon the availability of market data, the notes receivable have been classified as Level 3 inputs. The primary sensitivity in these calculations is based on the selection of appropriate interest and discount rates. For further information on notes receivable, refer to Note 3 .
The fair values of the Company's $ 400 million senior unsecured notes due 2022 and $ 400 million senior unsecured notes due 2029 are classified as Level 2, as the significant inputs are observable in an active market. At June 30, 2020 and December 31, 2019 , the $ 400 million senior unsecured notes due 2022 had an approximate fair value of $ 423.3 million and $ 432.0 million , respectively. At June 30, 2020 and December 31, 2019 , the $ 400.0 million senior unsecured notes due 2029 had an approximate fair value of $ 400.6 million and $ 403.4 million , respectively.
Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. Settlement of such fair value amounts may not be possible and may not be a prudent management decision.
8 . Income Taxes
The effective income tax rates were 11.8 % and 21.0 % for the three months ended June 30, 2020 and 2019 , respectively. The effective income tax rates were ( 92.3 )% and 20.0 % for the six months ended June 30, 2020 and 2019 , respectively.
The effective income tax rate for the three months ended June 30, 2020 was lower than the U.S. federal income tax rate of 21.0% due to excess tax benefits from share-based compensation and the impact of foreign operations, partially offset by state income taxes and a change in estimated uncertain tax positions. The effective income tax rate for the three months ended June 30, 2019 was the same as the U.S. federal income tax rate of 21.0% due to excess tax benefits from share-based compensation of $ 1.0 million and the impact of foreign operations, offset by state income taxes.
On January 1, 2018, the Company adopted ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other than Inventory ("ASU 2016-16"), which provides guidance on recognition of current income tax consequences for inter-company asset transfers (other than inventory) at the time of transfer. On January 1, 2020 , the Company completed a reorganization of its foreign legal entity structure that resulted in a $ 30.6 million tax benefit. In accordance with ASU 2016-16, the Company recorded the $ 30.6 million benefit and a corresponding deferred tax asset in the first quarter of 2020.
The effective income tax rate for the six months ended June 30, 2020 was lower than the U.S. federal income tax rate of 21.0% due to this $ 30.6 million benefit, $ 2.7 million of excess tax benefits from share-based compensation, and the impact of foreign operations, partially offset by state income taxes and a change in estimated uncertain tax positions. The effective income tax
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rate for the six months ended June 30, 2019 was lower than the U.S. federal income tax rate of 21.0% due to excess tax benefits from share-based compensation of $ 3.0 million and the impact of foreign operations, partially offset by state income taxes.
9 . Share-Based Compensation and Capital Stock
The components of the Company’s pretax share-based compensation activity and associated income tax (expense) benefit are as follows for the three and six months ended June 30, 2020 and 2019 :
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands)
2020
2019
2020
2019
Stock options
$
490
$
535
$
981
$
1,126
Restricted stock
2,099
2,170
4,043
4,146
Performance vested restricted stock units
( 324
)
1,338
( 5,511
)
2,489
Total share-based compensation expense (benefit)
$
2,265
$
4,043
$
( 487
)
$
7,761
Income tax expense (benefit)
$
( 539
)
$
( 966
)
$
116
$
( 1,854
)
Refer to the discussion of Performance Vested Restricted Stock Units (“PVRSUs”) leveraging for unvested grants below.
A summary of stock-based award activity as of June 30, 2020 and changes during the six months ended are presented below:
Stock Options
Restricted Stock
Performance Vested
Restricted Stock Units
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Shares
Weighted
Average
Grant Date
Fair Value
Shares
Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2020
873,895
$
61.69
312,097
$
75.23
330,716
$
70.03
Granted
158,620
91.28
131,268
88.59
93,388
91.28
Performance-Based Leveraging (1)
—
—
—
—
30,116
61.31
Exercised/Vested
( 52,010
)
53.21
( 114,549
)
69.48
( 176,471
)
58.68
Expired
—
—
—
—
( 16,117
)
60.50
Forfeited
( 3,696
)
91.28
( 34,926
)
81.94
( 16,039
)
82.23
Outstanding at June 30, 2020
976,809
$
66.84
2.5 years
293,890
$
82.64
245,593
$
85.03
Options exercisable at June 30, 2020
634,948
$
57.51
2.5 years
(1) PVRSUs outstanding have been increased by 30,116 units due to the Company exceeding the targeted performance conditions contained in PVRSUs granted in prior periods which vested in the three months ending June 30, 2020 .
The stock options granted by the Company had an exercise price equal to the market price of the Company's common stock on the date of grant. The fair value of the options granted was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:
2020 Grants
Risk-free interest rate
0.99
%
Expected volatility
20.88
%
Expected life of stock option
5.9 years
Dividend yield
0.99
%
Requisite service period
4 years
Contractual life
10 years
Weighted average fair value of options granted (per option)
$
17.25
Restricted stock awards generally vest ratably over the service period beginning with the first anniversary of the grant date. Vesting service period of shares granted during the six months ended June 30, 2020 range from 12 to 48 months .
The Company has granted PVRSUs to certain employees. The vesting of these stock awards is contingent upon the Company achieving performance targets over a 36 month requisite service period and the employees' continued employment. The performance conditions affect the number of shares that will ultimately vest and can range between 0 % and 200 % of the shares
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granted. Management monitors the leveraging of unvested PVRSUs and adjusts the leveraging percentages based on estimated achievement of performance targets. During the six months ended June 30, 2020 , the Company reduced the leveraging factor for 239,437 unvested PVRSUs to 0 % , based on management's estimate of achievement of performance targets with contemplation to impacts from the COVID-19 pandemic, contained in PVRSUs granted in the current and prior periods.
Share Repurchases and Redemptions
There were no purchases of common stock under the share repurchase program during the three months ended June 30, 2020 . The Company purchased 548,031 shares of common stock under the share repurchase program at a total cost of $ 43.3 million during six months ended June 30, 2020 . During the three and six months ended June 30, 2020 , the Company redeemed 6,525 and 115,525 shares of common stock at a total cost of approximately $ 0.5 million and $ 11.2 million , respectively, from employees to satisfy the option exercise price and statutory minimum tax-withholding requirements related to the exercising of stock options and vesting of performance vested restricted stock units and restricted stock grants. These redemptions were outside the share repurchase program.
In light of uncertainty resulting from the COVID-19 pandemic, the Company has temporarily suspended activity under the share repurchase program. Refer to the Liquidity and Capital Resources header of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information.
10 . Earnings Per Share
The computation of basic and diluted (losses) earnings per common share is as follows:
Three Months Ended
Six Months Ended
June 30,
June 30,
(in thousands, except per share amounts)
2020
2019
2020
2019
Numerator:
Net (loss) income
$
( 2,441
)
$
74,389
$
53,022
$
104,470
Loss (income) allocated to participating securities
14
( 468
)
( 301
)
( 640
)
Net (loss) income available to common shareholders
$
( 2,427
)
$
73,921
$
52,721
$
103,830
Denominator:
Weighted average common shares outstanding – basic
55,054
55,323
55,199
55,335
Basic (losses) earnings per share
$
( 0.04
)
$
1.34
$
0.96
$
1.88
Numerator:
Net (loss) income
$
( 2,441
)
$
74,389
$
53,022
$
104,470
Loss (income) allocated to participating securities
14
( 466
)
( 300
)
( 638
)
Net (loss) income available to common shareholders
$
( 2,427
)
$
73,923
$
52,722
$
103,832
Denominator:
Weighted average common shares outstanding – basic
55,054
55,323
55,199
55,335
Diluted effect of stock options and PVRSUs
—
237
258
273
Weighted average common shares outstanding – diluted
55,054
55,560
55,457
55,608
Diluted (losses) earnings per share
$
( 0.04
)
$
1.33
$
0.95
$
1.87
The Company's unvested restricted shares contain rights to receive nonforfeitable dividends, and thus are participating securities requiring the two-class method of computing earnings per share ("EPS"). The calculation of EPS for common stock shown above excludes the income attributable to the unvested restricted share awards from the numerator and excludes the dilutive impact of those awards from the denominator.
The Company had 1.0 million outstanding stock options at both June 30, 2020 and 2019 . Stock options are included in the diluted EPS calculation using the treasury stock method and average market prices during the period, unless the stock options would be anti-dilutive.
For the three months ended June 30, 2020 , 1.0 million anti-dilutive stock options were excluded from the diluted EPS calculation. For the six months ended June 30, 2020 , 0.2 million anti-dilutive stock options were excluded from the diluted EPS calculation. For the three months ended June 30, 2019 , no anti-dilutive stock options were excluded from the diluted EPS
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calculation. For the six months ended June 30, 2019 , 0.2 million anti-dilutive stock options were excluded from the diluted EPS calculation.
PVRSUs are also included in the diluted EPS calculation when the performance conditions have been met at the reporting date. However, at June 30, 2020 and 2019 , PVRSUs totaling 245,593 and 315,561 , respectively, were excluded from the computation since the performance conditions had not been met.
11 . Reportable Segment Information
Hotel Franchising: Hotel Franchising includes the Company's hotel franchising operations consisting of its fourteen brands. The fourteen brands are aggregated within this segment considering their similar economic characteristics, types of customers, distribution channels and regulatory business environments. Revenues from the hotel franchising business include royalty fees, initial franchise and relicensing fees, marketing and reservation system fees, procurement services revenue and other hotel franchising related revenue. The Company is obligated under its hotel franchise agreements to provide marketing and reservation services appropriate for the operation of its systems. These services do not represent separate reportable segments as their operations are directly related to the Company's hotel franchising business. The revenues received from franchisees that are used to pay for part of the Company's ongoing operations are included in hotel franchising revenues and are offset by the related expenses paid for marketing and reservation activities to calculate hotel franchising operating income.
The Company evaluates its hotel franchising segment based primarily on the results of the segment without allocating corporate expenses, income taxes or indirect general and administrative expenses, which are included in the Corporate & Other column. Corporate & Other revenues include owned hotel revenues and rental income related to an office building owned by the Company, as well as revenues related to the Company's vacation rental activities and its SaaS technology solutions divisions which provide cloud-based property management software to non-franchised hoteliers and vacation rental management companies. Equity in earnings or losses from hotel franchising related joint ventures is allocated to the Company's hotel franchising segment. The Company does not allocate interest expense, interest income, other gains and losses or income taxes to its segments.
Intersegment revenue adjustment is from the elimination of Hotel Franchising revenue which include royalty and marketing and reservation system fees charged to our owned hotels against franchise fee expense recognized by our owned hotels in Corporate & Other operating income (loss).
Our President and Chief Executive Officer, who is our chief operating decision maker, does not use assets by operating segment when assessing performance or making operating segment resource allocations and therefore assets by segment are not disclosed below.
The following table presents the financial information for the Company's segments:
Three Months Ended June 30, 2020
Three Months Ended June 30, 2019
(in thousands)
Hotel
Franchising
Corporate &
Other
Intersegment Eliminations
Consolidated
Hotel
Franchising
Corporate &
Other
Intersegment Eliminations
Consolidated
Revenues
$
147,318
$
4,512
$
( 97
)
$
151,733
$
313,629
$
4,055
$
—
$
317,684
Operating income (loss)
$
33,296
$
( 25,436
)
$
—
$
7,860
$
119,336
$
( 16,799
)
$
—
$
102,537
Income (loss) before income taxes
$
29,811
$
( 32,689
)
$
—
$
( 2,878
)
$
118,354
$
( 24,200
)
$
—
$
94,154
Six Months Ended June 30, 2020
Six Months Ended June 30, 2019
(in thousands)
Hotel
Franchising
Corporate &
Other
Intersegment Eliminations
Consolidated
Hotel
Franchising
Corporate &
Other
Intersegment Eliminations
Consolidated
Revenues
$
355,365
$
15,417
$
( 874
)
$
369,908
$
528,621
$
7,383
$
—
$
536,004
Operating income (loss)
$
83,830
$
( 29,640
)
$
—
$
54,190
$
189,793
$
( 42,206
)
$
—
$
147,587
Income (loss) before income taxes
$
78,390
$
( 50,869
)
$
—
$
27,521
$
186,641
$
( 56,008
)
$
—
$
130,633
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12 . Commitments and Contingencies
The Company is not a party to any litigation other than litigation in the ordinary course of business. The Company's management and legal counsel do not expect that the ultimate outcome of any of its currently ongoing legal proceedings, individually or collectively, will have a material adverse effect on the Company's financial position, results of operations or cash flows.
Contingencies
The Company entered into various limited payment guaranties with regards to the Company’s VIEs supporting the VIE’s efforts to develop and own hotels franchised under the Company’s brands. Under these limited payment guaranties, the Company has agreed to guarantee a portion of the outstanding debt until certain conditions are met such as (a) the loan matures, (b) certain debt covenants are achieved, (c) the maximum amount guaranteed by the Company is paid in full or (d) the Company, through its affiliates, ceases to be a member of the VIE. The maximum exposure of principal incidental to these limited payment guaranties is $ 5.7 million , plus unpaid expenses and accrued unpaid interest. As of June 30, 2020 and December 31, 2019 , the Company believed the likelihood of having to perform under the aforementioned limited payment guaranties was remote. In the event of performance, the Company has recourse for one of the transactions in the form of a membership interest pledge as collateral for the guaranty.
Commitments
The Company has the following commitments outstanding at June 30, 2020 :
•
The Company provides financing in the form of franchise agreement acquisition payments to franchisees for property improvements, hotel development efforts and other purposes. These payments are typically made at commencement of construction or hotel opening, in accordance with agreed upon provisions in individual franchise agreements. At June 30, 2020 , the Company had commitments to extend an additional $ 288.2 million for these purposes provided the conditions of the payment are met by its franchisees.
•
To the extent existing unconsolidated joint ventures proceed to the hotel construction phase, the Company is committed to make capital contributions totaling $ 9.3 million to support their efforts to construct Cambria hotels.
•
The Company committed to provide financing in the form of mezzanine loans or credit facilities to franchisees for Choice brand development efforts. The Company has committed to provide an aggregate of approximately $ 15.6 million , upon certain conditions being met. As of June 30, 2020 , $ 13.4 million have been disbursed.
•
In March 2018, the Company entered into a construction loan agreement for the rehabilitation and development of a former office building into a hotel through a consolidated joint venture with a commercial lender, which is secured by the building. The construction loan can be drawn up to $ 34.9 million . On March 5, 2020 , the Company paid off the construction loan in the amount $ 33.1 million inclusive of accrued and unpaid interest and recorded a loss on extinguishment of debt of $ 0.6 million .
•
The Company’s franchise agreements require the payment of franchise fees, which include marketing and reservation system fees. In accordance with terms of our franchise agreements, the Company is obligated to use the marketing and reservation system revenues it collects from the current franchisees comprising its various hotel brands to provide marketing and reservation services appropriate to support the operation of the overall system. To the extent revenues collected exceed expenditures incurred, the Company has a commitment to the franchisee system to make expenditures in future years. Conversely, to the extent expenditures incurred exceed revenues collected, the Company has the contractual enforceable right to assess and collect such amounts.
In the ordinary course of business, the Company enters into numerous agreements that contain standard indemnities whereby the Company indemnifies another party for breaches of representations and warranties. Such indemnifications are granted under various agreements, including those governing (i) purchases or sales of assets or businesses, (ii) leases of real estate, (iii) licensing of trademarks, (iv) access to credit facilities, (v) issuances of debt or equity securities, and (vi) certain operating agreements. The indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords in lease contracts, (iii) franchisees in licensing agreements, (iv) financial institutions in credit facility arrangements, (v) underwriters in debt or equity security issuances and (vi) parties under certain operating agreements. In addition, these parties are also generally indemnified against any third party claim resulting from the transaction that is contemplated in the underlying agreement. While some of these indemnities extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute
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of limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under these indemnities, nor is the Company able to develop an estimate of the maximum potential amount of future payments to be made under these indemnifications as the triggering events are not subject to predictability. With respect to certain of the aforementioned indemnities, such as indemnifications of landlords against third party claims for the use of real estate property leased by the Company, the Company maintains insurance coverage that mitigates potential liability .
13 . Transactions with Unconsolidated Joint Ventures
The Company has a management fee arrangement for marketing services with a joint venture partner. For the three months ended June 30, 2020 and 2019 , fees earned and payroll costs reimbursed under this arrangement totaled $ 0.1 million and $ 0.6 million , respectively. For the six months ended June 30, 2020 and 2019 , fees earned and payroll costs reimbursed under this arrangement totaled $ 0.5 million and $ 0.9 million , respectively.
The Company has entered into franchise agreements with certain of the unconsolidated joint ventures discussed in Note 4 . Pursuant to these franchise agreements, for the three months ended June 30, 2020 and 2019 , the Company recorded royalty and marketing reservation system fees of approximately $ 2.2 million and $ 7.0 million , respectively. For the six months ended June 30, 2020 and 2019 , the Company recorded royalty and marketing reservation system fees of approximately $ 6.8 million and $ 11.6 million , respectively. The Company recorded $ 1.8 million and $ 1.4 million as a receivable due from these joint ventures as of June 30, 2020 and December 31, 2019 , respectively. In addition, the Company paid commissions of $ 12 thousand and $ 0.1 million for three months ended June 30, 2020 and 2019 , respectively, and $ 49 thousand and $ 0.1 million for the six months ended June 30, 2020 and 2019 , respectively, to an on-line travel agent for which the Company is a joint venture member.
14 . Subsequent Events
On July 9, 2020 , the Company announced it entered into an underwriting agreement for the issuance and sale of the 2020 Senior Notes. Concurrent with the offering of the 2020 Senior Notes, the Company commenced the Tender Offer to purchase up to $ 160.0 million aggregate principal of the 2012 Senior Notes, subject to increase or decrease. The Tender Offer was subsequently upsized to $ 180.0 million aggregate principal amount of the 2012 Senior Notes.
On July 23, 2020 , the Company closed its sale of $ 450.0 million aggregate principal amount of the 2020 Senior Notes. The Company used the net proceeds of the 2020 Senior Notes offering, after deducting underwriting discounts, commissions and other offering expenses, to repay the Term Loan in full and fund the purchase price of the 2012 Senior Notes tendered and accepted by the Company for purchase pursuant to the Tender Offer. We estimate the 2012 Senior Notes tender and full repayment of the Term Loan will result in a loss on extinguishment of debt of approximately $ 16.0 million in the third quarter of 2020.
Interest on the 2020 Senior Notes is payable semi-annually on January 15 th and July 15 th of each year, commencing on January 15, 2021. The interest rate payable on the 2020 Senior Notes will be subject to adjustment based on certain rating events. The Company may redeem the 2020 Senior Notes, in whole or in part, at its option at the applicable redemption price before maturity. If the Company redeems the 2020 Senior Notes prior to October 15, 2030 (three months prior to the maturity date), the redemption price will be equal to 100 % of the principal amount of the 2020 Senior Notes being redeemed plus accrued and unpaid interest thereon to, but not including, the redemption date. Additionally, at the option of the holders of the 2020 Senior Notes, the Company may be required to repurchase all or a portion of the 2020 Senior Notes of a holder upon the occurrence of a change of control event at a price equal to 101 % of their aggregate principal amount, plus accrued and unpaid interest, to the date of repurchase.
Additionally, on July 23, 2020 , the Company issued a press release announcing the early tender results and an increase in the aggregate principal maximum tender amount from $ 180.0 million to $ 183.4 million . The Tender Offer expired on August 5, 2020 .
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.