What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 215 added, 215 removed, 426 unchanged (50% of the section changed)

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Lower occupancy trends continued into the second quarter of 2020, where we experienced decreases in domestic RevPAR of 60.1% from the comparative prior year April and 49.6% from the comparative prior year second quarter.

Since early April, we have observed steadily increasing domestic occupancy levels, with weekly domestic occupancy exceeding 50% during the final week of June 2020.

In July, domestic RevPAR declined approximately 33.3% over the comparative prior year monthly period.

The extent to which the COVID-19 pandemic will continue to impact the hospitality industry and our operations is uncertain and will depend largely on future developments, including the severity and duration of resurgences of the virus and actions by government authorities to contain the pandemic.

We continue to expect significant impact on our results of operations for the third quarter as well as the full year 2020.

However, we expect the impact of the pandemic on our third quarter results to be less significant than that on our second quarter results.

As of both June 30, 2020 , and July 31, 2020 , there were less than 1% of the Company's domestic hotel system that had temporarily suspended operations due to governmental restriction or a franchisee’s election, compared to approximately 10% as of March 31, 2020.

Since early April, we have observed steadily increasing domestic occupancy levels, with second quarter domestic occupancy at 39.1% and third quarter domestic occupancy at 52.1% .

These increases in occupancy have led to lower relative RevPAR declines, with domestic RevPAR experiencing a decline of approximately 28.8% over the comparative prior year third quarter and 23.4% over the comparative prior year September monthly period.

The extent to which the COVID-19 pandemic will continue to impact the hospitality industry and our operations is uncertain and will depend largely on future developments, including the severity and duration of resurgences of the virus and the effectiveness of actions by government authorities and the public to contain the pandemic.

We continue to expect significant impact on our results of operations for the fourth quarter as well as the full year 2020.

As of both September 30, 2020 , and October 31, 2020, there were less than 1% of the Company's domestic hotel system that had temporarily suspended operations due to governmental restriction or a franchisee’s election, compared to approximately 10% as of March 31, 2020.

While the ultimate impact and duration of COVID-19 is uncertain and will depend on future developments, which are difficult to predict, the Company believes that it will continue to benefit in the long-term from its primarily franchise-only business model, which has historically provided a relatively stable earnings stream and low capital expenditure requirements.

Further, as of June 30, 2020 , the Company had approximately $725.6 million in cash and additional available borrowing capacity through its senior unsecured revolving credit facility, which was bolstered by a $250 million unsecured term loan (the "Term Loan") that the Company entered into on April 16, 2020 .

In July 2020, the Company issued $450 million aggregate principal amount of 3.700% senior unsecured notes due 2031 (the "2020 Senior Notes") and 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 from the 2020 Senior Notes offering to repay the Term Loan in full and fund the purchase price of the 2012 Senior Notes tendered.

Further, as of September 30, 2020 , the Company had approximately $792.0 million in cash and additional available borrowing capacity through its senior unsecured revolving credit facility.

Based on our business model, the financial mitigation measures described below, and information known at this time, the Company believes that cash flows from operations and available financing capacity are adequate to meet the expected future operating, investing and financing needs of the business.

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Implemented fee-deferral programs for domestic and international franchisees.

Suspended one-time finance charges, reputation management fees and guest relations handling fees.

Reduced one-time reputation management fees and guest relations handling fees.

Extended capital-intensive brand deadlines and created more flexible brand standard options to assist franchisees.

Advocated to expand the amount of and eligibility requirements for government relief SBA programs and other CARES Act benefits to help franchisees retain employees and service their debt.

Established a proactive, ongoing multi-channel franchisee outreach and education program that is actively helping thousands of hotel owners access this newly available capital.

Advocated to increase the benefits and eligibility requirements for government relief SBA programs and other CARES Act benefits to support franchisees in retaining employees and servicing debt.

Established a proactive, ongoing multi-channel franchisee outreach and education program that is actively assisting our franchisees in accessing newly available capital.

Revised its guest cancellation policy to provide travelers greater flexibility during these challenging times and deferred the expiration of loyalty points.

Implemented travel restrictions and work-from-home practices for the Company’s employees.

The Company has made a priority of working closely with its franchisees to drive business to their hotels across a wide variety of industries and government and emergency-management agencies.

Many of the Company's franchisees have committed their rooms inventory at discounted rates, or on a complimentary basis, to support their communities in dealing with the effects of the pandemic, opening their hotels for hospital overflows and providing temporary housing for first responders, the National Guard, healthcare workers, critical infrastructure workers and others in dire need.

In addition, to support local communities, the Company is working with its philanthropic partner, Operation Homefront, to provide complimentary lodging to service members and their families who have been displaced from their current housing.

The Company is also working with Serta, Inc.

to contribute to its “Stay Home, Send Beds” initiative, which is providing bed donations to help address nationwide shortages at hospitals and temporary medical facilities.

The Company made a priority of working closely with its franchisees to drive business to their hotels across a wide variety of industries and government and emergency-management agencies.

Many of the Company's franchisees committed their rooms inventory at discounted rates, or on a complimentary basis, to support their communities in dealing with the effects of the pandemic, opening their hotels for hospital overflows and providing temporary housing for first responders, the National Guard, healthcare workers, critical infrastructure workers and others in dire need.

In addition, the Company provided hotel rooms donations to Operation Homefront to help ill and injured service members that were displaced by the pandemic.

The Company teamed up with Serta, Inc.

to contribute to its “Stay Home, Send Beds” initiative, which provided bed donations to help address nationwide shortages at hospitals and temporary medical facilities.

Management and the Board of Directors have taken steps to adjust the Company’s cost structure and increase its financial flexibility, which include, but are not limited to, the following actions:

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Reduced global work force by more than 20% through a combination of layoffs and furloughs.

Introduced a hiring freeze except with respect to certain critical positions and suspended associates’ 401(k) match.

Introduced a hiring freeze except with respect to certain critical positions.

Suspended associates’ 401(k) match for the remainder of 2020.

Eliminated, reduced or deferred non-essential expenditures, discretionary capital expenditures and investments.

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Determined to suspend future, undeclared dividends for at least the remainder of 2020.

Entered into the Term Loan on a precautionary basis, enhancing the Company’s financial flexibility by increasing its borrowing capacity by $250 million .

Offered $450 million of 3.700% senior notes due 2031, using net proceeds to repay the Term Loan in full and fund the $183.4 million aggregate principal purchase price of the senior notes tendered in connection with the Tender Offer.

Entered into a $250 million unsecured term loan (the "Term Loan") on a precautionary basis, enhancing the Company’s financial flexibility by increasing its borrowing capacity.

Offered $450 million of 3.70% senior unsecured notes due 2031 (the "2020 Senior Notes"), using net proceeds to repay the Term Loan in full and fund the $197.8 million purchase price of the cash tender offer (the "Tender Offer") for approximately $183.4 million aggregate principal amount of the Company's 5.75% senior unsecured notes due in 2022 (the "2012 Senior Notes").

As disclosed above, domestic occupancy has been severely impacted.

However, approximately 90% of the Company’s domestic hotels are in suburban, small town and interstate locations and have to-date experienced less severe occupancy declines related to COVID-19 than hotels in urban centers or resorts.

Based on industry data, the Company's brands have been performing ahead of its upper-midscale, midscale and economy chain scale competitors, and the Company’s hotels have experienced relatively stronger same-store RevPAR share gains versus their local competition from mid-March to present.

Given the uncertainty as to the potential duration of the crisis and its severity, the Company does not expect material improvement in the industry until there is a sense that the spread of the virus has been contained, shelter-in-place orders have been lifted and economic forecasts begin to improve.

Based on industry data, the Company's brands have been

performing ahead of its upper-midscale, midscale and economy chain scale competitors, and the Company’s hotels have experienced relatively stronger same-store RevPAR share gains versus their local competition from mid-March to present.

Given the uncertainty as to the potential duration of the crisis, including a resurgence of the virus, and its severity, the Company does not expect material improvement in the industry until there is a sense that the spread of the virus has been contained, shelter-in-place orders have been lifted and economic forecasts begin to improve.

As the industry continues to recover, the Company believes it will continue to benefit from the expected faster rebound of leisure demand as a result of its higher share of leisure travel mix relative to competitors.

The Company's properties are also well distributed in drive-to markets, which we believe will lead in the demand recovery for the industry.

The Company's properties are also well distributed in drive-to markets, which the Company believes will lead in the demand recovery for the industry.

While the Company believes that the long-term fundamentals of the business remain strong, it will continue to adjust business contingency plans as the COVID-19 pandemic evolves.

For additional information, see Risk Factors in Part II, Item 1A of this Form 10-Q.

We are primarily a hotel franchisor with franchise agreements and owned hotels representing 7,118 hotels open comprising 597,018 rooms and 1,035 hotels under construction, awaiting conversion or approved for development comprising 85,129 rooms as of June 30, 2020 , located in 50 states, the District of Columbia and over 40 countries and territories outside the United States.

We are primarily a hotel franchisor with franchise agreements and owned hotels representing 7,126 hotels open comprising 596,455 rooms and 993 hotels under construction, awaiting conversion or approved for development comprising 81,747 rooms as of September 30, 2020 , located in 50 states, the District of Columbia and over 40 countries and territories outside the United States.

Our brand names include Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Clarion Pointe™, Ascend Hotel Collection®, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay Suites®, Suburban Extended Stay Hotel®, WoodSpring Suites®, Everhome™ Suites, and Cambria® Hotels (collectively, the "Choice brands").

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With a primary focus on hotel franchising, we benefit from the economies of scale inherent in the franchising business.

The fee and cost structure of our franchising business provides opportunities to improve operating results by increasing the number of franchised hotel rooms and effective royalty rates of our franchise contracts resulting in increased initial and relicensing fee revenue;

ongoing royalty fees and procurement services revenues.

In addition, our operating results can also be improved through our company-wide efforts related to improving property level performance and expanding the number of partnerships with travel related companies.

In addition, our operating results can also be improved

through our company-wide efforts related to improving property level performance and expanding the number of partnerships with travel related companies.

The principal factors that affect the Company’s results are:

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Our variable overhead costs associated with franchise system growth of our established brands have historically been less than incremental royalty fees generated from new franchises.

Accordingly, over the long-term, any continued growth of our

franchise business should enable us to realize benefits from the operating leverage in place and improve operating results.

The effects of the COVID-19 pandemic on our second quarter 2020 results and anticipated trends are discussed below under the heading "Operations Review."

Accordingly, over the long-term, any continued growth of our franchise business should enable us to realize benefits from the operating leverage in place and improve operating results.

The effects of the COVID-19 pandemic on our third quarter 2020 results and anticipated trends are discussed above under the heading "Impact of the COVID-19 Pandemic" and below under the heading "Operations Review."

We are required by our franchise agreements to use the marketing and reservation system fees we collect for system-wide marketing and reservation activities.

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These measures are an immediate priority in order to mitigate the financial impacts to our franchisees and the Company.

We believe these immediate measures support the Company's preparedness as the pandemic subsides and complement the strategic priorities we execute against to create value for our shareholders over the long-term.

We believe these immediate measures support the Company's preparedness and complement the strategic priorities we execute against to create value for our shareholders over the long-term.

These key long-term goals are as follows:

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Improving the performance of the hotels in our system, growing the system through additional franchise sales and improving franchise agreement pricing while maintaining a disciplined cost structure are the keys to profitable growth.

As disclosed above, the Company's hotels are presently experiencing significant declines in occupancy and RevPAR and there remains a subset of hotels with temporarily suspended operations resulting from the impacts of the COVID-19 pandemic, which will impact the profitability of the Company in the current year and an indeterminate period in the future.

As disclosed above, the Company's hotels are presently experiencing significant declines in occupancy and RevPAR and there remains a subset of hotels with temporarily suspended operations resulting from the impacts of the COVID-19 pandemic, both of which will impact the profitability of the Company in the current year and an indeterminate period in the future.

Maximizing Financial Returns and Creating Value for Shareholders.

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We maintain a capital structure intended to generate high financial returns and use our excess cash flow to provide returns to our shareholders primarily through share repurchases, dividends or investing in growth opportunities.

In light of uncertainty resulting from the COVID-19 pandemic, and as previously disclosed, we determined to suspend future, undeclared dividends for at least the remainder of 2020 and have temporarily suspended activity under the Company's share repurchase program.

In addition, under the Term Loan there are restrictions with respect to dividends and stock repurchases under certain circumstances.

In light of uncertainty resulting from the COVID-19 pandemic, and as previously disclosed, we determined to suspend future, undeclared

dividends for at least the remainder of 2020 and have temporarily suspended activity under the Company's share repurchase program.

Given our long-standing commitment to returning value to shareholders, we expect to consider resuming payment of a quarterly dividend and/or resuming activity under the share repurchase program at such time that conditions are appropriate.

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As a result, the Company generally excludes the financial impacts of this program from the analysis of its operations.

Due to the seasonal nature of the Company’s hotel franchising business or multi-year investments that are required to support franchise operations, in addition to incremental spend by the Company to support franchisees during the COVID-19 pandemic, quarterly or annual deficits and surpluses may be generated.

During the three and six months ended June 30, 2020 , marketing and reservation system expenses exceeded revenues by $9.6 million and $29.7 million , respectively.

During the three and six months ended June 30, 2019 , marketing and reservation system revenues exceeded expenses by $12.3 million and $2.6 million , respectively.

Due to the seasonal nature of the Company’s hotel franchising business and multi-year investments that are required to support franchise operations, in addition to incremental spend by the Company to support franchisees during the COVID-19 pandemic, quarterly or annual deficits and surpluses may be generated.

During the three and nine months ended September 30, 2020 , marketing and reservation system expenses exceeded revenues by $6.7 million and $36.4 million , respectively.

During the three months ended September 30, 2019 , marketing and reservation system expenses exceeded revenues by $1.4 million .

During the nine months ended September 30, 2019 , marketing and reservation system revenues exceeded expenses by $1.2 million .

Refer to MD&A heading "Operations Review" for additional analysis of our results.

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Calculation of Revenues, excluding marketing and reservation system activities

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

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Operations Review

Comparison of Operating Results for the Three-Month Periods Ended June 30, 2020 and 2019

Summarized financial results for the three months ended June 30, 2020 and 2019 are as follows:

Comparison of Operating Results for the Three-Month Periods Ended September 30, 2020 and 2019

Summarized financial results for the three months ended September 30, 2020 and 2019 are as follows:

(in thousands)

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Marketing and reservation system

Provision for credit losses

Total operating expenses

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Loss on extinguishment of debt

Other (gains) losses

Other gains, net

Equity in net loss of affiliates

Total other income and expenses, net

Income (loss) before income taxes

Income tax (benefit) expense

Net (loss) income

Income before income taxes

Income tax expense (benefit)

Results of Operations

The Company recorded income (loss) before income taxes of $(2.9) million for the three -month period ended June 30, 2020 , a $97.1 million decrease from the same period of the prior year.

The decrease in income (loss) before income taxes primarily reflects a $94.7 million decrease in operating income, a $2.5 million increase in equity in net loss of affiliates, and a $2.0 million increase in interest expense, partially offset by a $2.7 million increase in other (gains) losses.

Operating income decreased $94.7 million primarily due to a $56.2 million decrease in royalty revenues, a $22.0 million increase in the net deficit generated from marketing and reservation system activities, a $10.1 million decrease in procurement services revenues, a $8.9 million decrease in other revenues, a $7.8 million increase in the provision for credit losses, a $3.0 million increase in depreciation and amortization, and recognition of a $1.2 million loss on asset disposition, offset by a $10.9 million decrease in selling, general and administrative ("SG&A") expenses, and the second quarter 2019 recognition of a $4.6 million loss on sale of the SaaS for vacation rental reporting unit.

The Company recorded income before income taxes of $24.1 million for the three -month period ended September 30, 2020 , a $61.8 million decrease from the same period of the prior year.

The decrease in income before income taxes primarily reflects a $51.3 million decrease in operating income and a $16.0 million loss on extinguishment of debt in the three -month period ended September 30, 2020 , partially offset by a $4.7 million decrease in equity in net loss of affiliates and a $1.6 million increase in other gains.

Operating income decreased $51.3 million primarily due to a $34.0 million decrease in royalty revenues, a $6.2 million decrease in other revenues, a $5.3 million increase in the net deficit generated from marketing and reservation system activities, a $4.7 million decrease in procurement services revenues, recognition of a $4.3 million impairment of a long-lived asset in the three -month period ended September 30, 2020 , a $2.3 million decrease in owned hotels revenues in excess of expenses, and a $0.8 million increase in depreciation and amortization, partially offset by a $6.9 million decrease in selling, general and administrative ("SG&A") expenses.

The primary reasons for these fluctuations, including the impact of the COVID-19 pandemic, are described in more detail below.

Domestic royalty fees for the three months ended June 30, 2020 decreased $52.5 million to $48.3 million from $100.8 million for the three months ended June 30, 2019 , a decrease of 52% .

Domestic royalty fees for the three months ended September 30, 2020 decreased $31.4 million to $76.4 million from $107.8 million for the three months ended September 30, 2019 , a decrease of 29% .

The decrease in domestic royalties reflect a 28.8% decrease in domestic RevPAR.

System-wide RevPAR decreased due to a 13.4% decrease in average daily rates and a 1,130 basis point decrease in occupancy.

The decrease in domestic royalties is partially offset by an increase in the number of domestic franchised hotel rooms and a 10 basis point increase in the effective royalty rate from 4.84% for the three months ended June 30, 2019 to 4.94% for the three months ended June 30, 2020 .

The decrease in domestic royalties is partially offset by an increase in the number of domestic franchised hotel rooms and a 7 basis point increase in the effective royalty rate from 4.84% for the three months ended September 30, 2019 to 4.91% for the three months ended September 30, 2020 .

A summary of the Company's domestic franchised hotels operating information is as follows:

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Three Months Ended

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

Cambria Hotels

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Since early April, we have observed steadily increasing domestic occupancy levels, with weekly occupancy exceeding 50% during the final week of June 2020.

In July, domestic RevPAR declined approximately 33.3% over the comparative prior year monthly period.

There is uncertainty as to the potential duration of the COVID-19 pandemic and its severity, and thus corresponding uncertainty as to the duration and severity of the impact on our occupancy, which will continue to impact our future results.

Since early April, we have observed steadily increasing domestic occupancy levels, with second quarter domestic occupancy at 39.1% and third quarter domestic occupancy at 52.1% .

There is uncertainty as to the potential duration of the COVID-19 pandemic, including a resurgence, and its severity, and thus corresponding uncertainty as to the duration and severity of the impact on our occupancy, which we expect will continue to impact our future results.

During the first quarter of 2020, the Company revised its calculation of Occupancy.

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The revised ADR, Occupancy, and RevPAR are reflected in the table above for all periods noted.

Based on our previous calculation of ADR, Occupancy, and RevPAR, these

metrics for the three months ended June 30, 2020 would have been $66.61, 47.4%, and $31.60, respectively, versus three months ended June 30, 2019 of $83.57, 67.2%, and $56.17, respectively, with period over period declines of 20.2%, 1,979 bps, and 43.8%, respectively.

The number of total domestic rooms in our franchise system increased by 2.0% to 461,484 rooms as of June 30, 2020 from 452,375 as of June 30, 2019 .

The total number of domestic hotels in our franchise system increased by 0.6% to 5,917 as of June 30, 2020 from 5,879 as of June 30, 2019 .

A summary of domestic hotels and rooms in our franchise system at June 30, 2020 and 2019 by brand is as follows:

June 30, 2020

June 30, 2019

Based on our previous calculation of ADR, Occupancy, and RevPAR, these metrics for the three months ended September 30, 2020 would have been $74.85, 60.2%, and $45.02, respectively, versus three months ended September 30, 2019 of $86.47, 68.4%, and $59.12, respectively, with period over period declines of 13.4%, 1,202 bps, and 23.8%, respectively.

The number of total domestic rooms in our franchise system increased by 1.9% to 462,139 rooms as of September 30, 2020 from 453,439 as of September 30, 2019 .

The total number of domestic hotels in our franchise system increased by 0.7% to 5,934 as of September 30, 2020 from 5,893 as of September 30, 2019 .

A summary of domestic hotels and rooms in our franchise system at September 30, 2020 and 2019 by brand is as follows:

September 30, 2020

September 30, 2019

Cambria Hotels

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Total Domestic Franchises

As of both September 30, 2020 , and October 31, 2020 , there were less than 1% of the Company's domestic hotel system that had temporarily suspended operations due to governmental restriction or a franchisee’s election.

These temporarily suspended hotels are included in the summary table above of domestic hotels in our franchise system.

As of July 31, 2020 , greater than 99% of the Company’s domestic branded hotels are continuing to operate, however there is uncertainty as to the potential duration of the crisis and its severity, which will likely impact the number of hotels which temporarily suspend operations.

International royalty fees for the three months ended June 30, 2020 decreased $3.8 million to $1.8 million compared to the three months ended June 30, 2019 as a result of temporarily suspended operations and declines in RevPAR performance.

International rooms in our franchise system increased by 15,250 from 120,284 as of June 30, 2019 to 135,534 as of June 30, 2020 , with the total number of hotels in our franchise system increasing by 35 from 1,166 as of June 30, 2019 to 1,201 as of June 30, 2020 .

However, as of June 30, 2020 and July 31, 2020 , approximately 7% and 4% , respectively, of the Company's international branded hotels temporarily suspended operations due to governmental restriction or a franchisee’s election.

There is uncertainty as to the potential duration of the crisis and its severity, which will continue to impact the number of hotels which temporarily suspend operations.

As of October 31, 2020 , greater than 99% of the Company’s domestic branded hotels are continuing to operate.

International royalty fees for the three months ended September 30, 2020 decreased $2.5 million to $3.3 million compared to the three months ended September 30, 2019 as a result of temporarily suspended operations and declines in RevPAR performance.

International rooms in our franchise system increased by 13,029 from 121,287 as of September 30, 2019 to 134,316 as of September 30, 2020 , with the total number of hotels in our franchise system increasing by 11 from 1,181 as of September 30, 2019 to 1,192 as of September 30, 2020 .

However, as of September 30, 2020 and October 31, 2020 , approximately 3% and 5% , respectively, of the Company's international branded hotels temporarily suspended operations due to governmental restriction or a franchisee’s election.

There is uncertainty as to the potential duration of the crisis, including a resurgence, and its severity, which will continue to impact the number of domestic and international hotels which temporarily suspend operations.

Initial Franchise and Relicensing Fees

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relicensing fees include fees charged to new owners of a franchised property whenever an ownership change occurs and the property remains in the franchise system, as well as fees required to renew existing franchise agreements.

During the second quarter of 2020 , the Company awarded 93 domestic franchise agreements representing 6,793 rooms compared to 181 franchising agreements representing 14,301 rooms for the second quarter of 2019 .

Domestic franchise agreements awarded for new construction hotels totaled 34 contracts representing 2,936 rooms during the three months ended June 30, 2020 , compared to 60 contracts representing 5,100 rooms for the three months ended June 30, 2019 .

Conversion hotel awarded franchise agreements totaled 59 representing 3,857 rooms for the three months ended June 30, 2020 , compared to 121 agreements representing 9,201 rooms for the three months ended June 30, 2019 .

The Company awarded 35 domestic relicensing contracts during the three months ended June 30, 2020 , compared to 89 executed during the three months ended June 30, 2019 .

The Company awarded 10 domestic renewal agreements during the three months ended June 30, 2020 , compared to 10 awarded during the three months ended June 30, 2019 .

During the third quarter of 2020 , the Company awarded 81 domestic franchise agreements representing 6,573 rooms compared to 100 franchising agreements representing 7,468 rooms for the third quarter of 2019 .

Domestic franchise agreements awarded for new construction hotels totaled 21 contracts representing 1,805 rooms during the three months ended September 30, 2020 , compared to 37 contracts representing 3,086 rooms for the three months ended September 30, 2019 .

Conversion hotel awarded franchise agreements totaled 60 representing 4,768 rooms for the three months ended September 30, 2020 , compared to 63 agreements representing 4,382 rooms for the three months ended September 30, 2019 .

The Company awarded 54 domestic relicensing contracts during the three months ended September 30, 2020 , compared to 94 executed during the three months ended September 30, 2019 .

The Company awarded 5 domestic renewal agreements during the three months ended September 30, 2020 , compared to 7 awarded during the three months ended September 30, 2019 .

Initial franchise and relicensing fees are generally collected at the time the franchise agreement is awarded.

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Upon hotel opening, revenue is recognized ratably as services are provided over the enforceable period of the franchise license agreement.

Upon the termination of a franchise agreement, previously deferred initial and relicensing fees are recognized immediately in the period the agreement is terminated.

Initial franchise and relicensing fee revenue remained unchanged from $6.7 million for the three months ended June 30, 2019 to $6.7 million for the three months ended June 30, 2020 .

As of June 30, 2020 , the Company had 982 franchised hotels with 78,517 rooms under construction, awaiting conversion or approved for development in its domestic system as compared to 988 hotels and 78,613 rooms at June 30, 2019 .

The number of new construction franchised hotels in the Company's domestic pipeline decreased 2% to 741 at June 30, 2020 from 753 at June 30, 2019 .

termination of a franchise agreement, previously deferred initial and relicensing fees are recognized immediately in the period the agreement is terminated.

Initial franchise and relicensing fee revenue decreased from $6.7 million for the three months ended September 30, 2019 to $6.1 million for the three months ended September 30, 2020 .

As of September 30, 2020 , the Company had 945 franchised hotels with 76,155 rooms under construction, awaiting conversion or approved for development in its domestic system as compared to 975 hotels and 82,390 rooms at September 30, 2019 .

The number of new construction franchised hotels in the Company's domestic pipeline decreased 4% to 710 at September 30, 2020 from 741 at September 30, 2019 .

New construction hotels typically average 18 to 36 months to open after the franchise agreement is executed.

The number of conversion franchised hotels in the Company's domestic pipeline increased by 6 hotels or 3% from 235 hotels at June 30, 2019 to 241 hotels at June 30, 2020 .

The number of conversion franchised hotels in the Company's domestic pipeline increased by 1 hotel from 234 hotels at September 30, 2019 to 235 hotels at September 30, 2020 .

Conversion hotels typically open three to six months after the execution of a franchise agreement.

The Company had an additional 53 franchised hotels with 6,612 rooms under construction, awaiting conversion or approved for development in its international system as of June 30, 2020 compared to 123 hotels and 27,997 rooms at June 30, 2019 .

Fluctuations in the Company’s domestic pipeline are primarily due to the timing of hotel openings and the timing of signing new franchise agreements.

The Company had an additional 48 franchised hotels with 5,592 rooms under construction, awaiting conversion or approved for development in its international system as of September 30, 2020 compared to 94 hotels and 20,750 rooms at September 30, 2019 .

Fluctuations in the Company’s pipeline are primarily due to the timing of hotel openings and the timing of signing new franchise agreements.

While the Company's hotel pipeline provides a strong platform for growth, a hotel in the pipeline does not always result in an open and operating hotel due to various factors.

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Procurement Services:

Revenues decreased $10.1 million or 49% from $20.8 million for the three months ended June 30, 2019 to $10.7 million for the three months ended June 30, 2020 .

The decrease in revenues primarily reflects the cancellation of the Company's annual convention as a result of the COVID-19 pandemic and a decrease in fees affiliated with travel related partnerships.

Revenues decreased $4.7 million or 31.7% from $14.8 million for the three months ended September 30, 2019 to $10.1 million for the three months ended September 30, 2020 .

The decrease in revenues primarily reflects the decrease in fees affiliated with travel related partnerships.

Because of impacts from COVID-19, for at least the remainder of the year we expect lower occupancy at our franchised hotels and as a result we expect there to be fewer purchases made from qualified vendors and travel related partners, from which we earn a fee.

Other Revenues:

Other revenues declined $8.9 million from $11.3 million for the three months ended June 30, 2019 to $2.4 million in the same period of the current year.

The decline primarily represents the suspension of reputation management and guest relation charges to our franchisees.

Additionally, the SaaS for vacation rental reporting unit was sold on June 3, 2019 , which earned $2.3 million during the three months ended June 30, 2019.

Other revenues declined $6.2 million from $9.8 million for the three months ended September 30, 2019 to $3.6 million in the same period of the current year.

The decline primarily represents the reduction and, in some cases, suspension of reputation management, guest relation, and finance charges to our franchisees in addition to a decrease in termination fees.

Selling, General and Administrative Expenses:

The cost to operate the business is reflected in SG&A on the consolidated statements of income.

SG&A expenses were $36.1 million for the three months ended June 30, 2020 compared to $47.0 million for the three months ended June 30, 2019 , which decreased $10.9 million from the three months ended June 30, 2019 .

SG&A expenses for the three months ended June 30, 2020 and 2019 include approximately $0.5 million and $2.6 million , respectively, related to the Company's alternative growth initiatives and expenses related to operations of an office building leased to a third party.

The decrease of $2.1 million from the same period of the prior year is primarily due to decreased expenses of the SaaS for vacation rentals reporting unit, which was sold on June 3, 2019 .

Excluding SG&A expenses for alternative growth initiatives and office building operations, SG&A for the three months ended June 30, 2020 decreased $8.8 million to $35.6 million in the current year primarily due to implemented cost mitigation measures resulting from the COVID-19 pandemic, including cancellation of the annual convention, furloughs and layoffs of certain domestic and international positions and reduction of non-essential expenditures, partially offset by an increase in the Company's deferred compensation liabilities based on increases in the underlying investments.

SG&A expenses were $31.4 million for the three months ended September 30, 2020 , a decrease of $6.9 million from the three months ended September 30, 2019 .

SG&A expenses for the three months ended September 30, 2020 and 2019 include approximately $0.4 million and $1.5 million , respectively, related to the Company's alternative growth initiatives and expenses related to operations of an office building leased to a third party.

Excluding SG&A expenses for alternative growth initiatives and office building operations, SG&A for the three months ended September 30, 2020 decreased $5.8 million to $31.0 million in the current year primarily due to implemented cost mitigation measures resulting from the COVID-19 pandemic, including furloughs and layoffs of certain domestic and international positions and reduction of non-essential expenditures, partially offset by an increase in the Company's deferred compensation liabilities based on relative increases in the underlying investments and provisions for credit losses recorded in accordance with Topic 326.

Depreciation and amortization:

Depreciation and amortization expense for the three months ended June 30, 2020 increased $3.0 million to $6.4 million from the same period of the prior year primarily due to an additional $3.1 million in depreciation related to the Company's owned hotels acquired and opened during the third quarter of 2019.

Provision for credit losses :

Provision for credit losses during the three months ended June 30, 2020 increased to $7.8 million and represent provisions on Trade receivables and Notes receivables recorded in accordance with Topic 326 (see Note 1) with contemplation to economic and credit conditions resulting from the COVID-19 pandemic and estimates of other expected

credit losses.

The provision for Trade receivables have increased $5.0 million primarily due to the aging of customer receivables, while the provision for Notes receivable have increased $2.8 million based on re-assessment of our loan portfolio risk characteristics and provisioning on loan proceeds issued.

Loss on Asset Dispositions and Impairments and Loss on Sale of Business:

In the second quarter of 2020, the Company recognized a $1.2 million charge related to a prospective self-development project the Company is no longer pursing.

In the second quarter of 2019, the Company recorded a $4.6 million loss on sale of the SaaS for vacation rentals reporting unit.

Interest Expense:

The Company recorded interest expense of $13.1 million for the three months ended June 30, 2020 , an increase of $2.0 million from the three months ended June 30, 2019 .

The increase in interest expense is a result of increased borrowings in response to the COVID-19 pandemic.

We anticipate borrowings and associated interest expense will remain elevated relative to comparable periods for the remainder of 2020.

Other (Gains) Losses:

The Company recorded other net gains of $3.6 million for the three months ended June 30, 2020 , compared to other net gains of $0.9 million for the three months ended June 30, 2019 .

Depreciation and amortization expense for the three months ended September 30, 2020 increased $0.8 million to $6.4 million from the same period of the prior year primarily due to an additional $0.8 million in depreciation related to the Company's owned hotels acquired and opened during the third quarter of 2019.

Loss on Asset Dispositions and Impairments:

During the third quarter of 2020, the Company recognized a $4.3 million impairment charge related to the long-lived assets of a commercial office building owned by the Company.

Loss on Extinguishment of Debt:

During the third quarter of 2020, the Company recorded a loss on the extinguishment of debt of $16.0 million related to the Tender Offer and early pay off of the Term Loan.

Refer to the "Liquidity and Capital Resources" header for additional discussion.

The Company recorded other net gains of $1.7 million for the three months ended September 30, 2020 , compared to other net gains of $0.1 million for the three months ended September 30, 2019 .

The gains relate to increases in the Company's deferred compensation assets based on increases in the underlying investments.

Equity in Net Loss of Affiliates :

The Company recorded net losses of $3.5 million from its unconsolidated joint ventures for the three months ended June 30, 2020 , compared to net losses of $1.0 million for the three months ended June 30, 2019 .

The Company recorded net losses of $1.7 million from its unconsolidated joint ventures for the three months ended September 30, 2020 , compared to net losses of $6.4 million for the three months ended September 30, 2019 .

These investments relate to the Company's program to offer equity support to qualified franchisees to develop and operate Cambria Hotels in strategic markets.

We anticipate the results recognized from these investments for the remainder of 2020 will be significantly impacted by the COVID-19 pandemic.

The fluctuation is primarily attributable to the sale of an unconsolidated joint venture resulting in a loss of $6.0 million in the third quarter of 2019.

Income Tax (Benefit) Expense:

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 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.

The effective income tax rates were 39.4% and 11.3% for the three months ended September 30, 2020 and 2019 , respectively.

On January 1, 2018, the Company adopted 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.

Due to a decrease in the forecasted income of international entities resulting from adverse impacts of the COVID-19 pandemic, the Company recorded a valuation allowance of $5.1 million in the third quarter of 2020 reflecting a change in the anticipated realizability of this deferred tax asset.

The effective income tax rate for the three months ended September 30, 2020 was higher than the U.S.

federal income tax rate of 21.0% due to the establishment of a valuation allowance of $5.1 million and state income taxes, partially offset by the impact of foreign operations, a $1.5 million adjustment to our deferred taxes, and $0.7 million of excess tax benefits from share-based compensation.

The effective income tax rate for the three months ended September 30, 2019 was lower than the U.S.

federal income tax rate of 21.0% due to $12.2 million of tax credits recognized in the period, $0.3 million of excess tax benefits from share-based compensation and the impact of foreign operations, offset by state income taxes.

Operations Review

Comparison of Operating Results for the Six -Month Periods Ended June 30, 2020 and 2019

Summarized financial results for the six months ended June 30, 2020 and 2019 are as follows:

Comparison of Operating Results for the Nine -Month Periods Ended September 30, 2020 and 2019

Summarized financial results for the nine months ended September 30, 2020 and 2019 are as follows:

(In thousands)

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Marketing and reservation system

Provision for credit losses

Total operating expenses

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Loss on extinguishment of debt

Other (gains) losses

Other gains, net

Equity in net loss of affiliates

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Income before income taxes

Income tax (benefit) expense

Income tax expense (benefit)

Results of Operations

The Company recorded income before income taxes of $27.5 million for the six -month period ended June 30, 2020 , a $103.1 million decrease from the same period of the prior year.

The decrease in income before income taxes reflects a $93.4 million decrease in operating income, a $3.8 million decrease in other (gains) losses, a $2.2 million increase in interest expense, a $2.2 million increase in net loss of affiliates, and a $0.6 million in loss on extinguishment of debt.

Operating income decreased $93.4 million primarily due to a $66.3 million decrease in royalty revenues, $32.3 million reduction in the net surplus generated from marketing and reservation system activities, a $11.0 million decrease in other revenues, an $8.3 million decrease in procurement services revenues, a $5.9 million increase in depreciation and amortization, and recognition of $1.2 million loss on asset disposition;

partially offset by a $23.5 million decrease in SG&A expenses;

recognition of $15.0 million loss on impairment of long-lived assets and goodwill related to the Company's SaaS for vacation rentals reporting unit which was disposed of on June 3, 2019 ;

and a $2.5 million increase in owned hotels revenues in excess of expenses.

The Company recorded income before income taxes of $51.6 million for the nine -month period ended September 30, 2020 , a $165.0 million decrease from the same period of the prior year.

The decrease in income before income taxes reflects a $144.8 million decrease in operating income, a $16.6 million loss on extinguishment of debt in the nine -month period ended September 30, 2020 , a $2.5 million increase in interest expense, and a $2.2 million decrease in other gains, partially offset by a $2.4 million increase in net loss of affiliates,

Operating income decreased $144.8 million primarily due to a $100.3 million decrease in royalty revenues, a $37.5 million increase in the net deficit generated from marketing and reservation system activities, a $17.3 million decrease in other revenues, a $13.0 million decrease in procurement services revenues, a $6.7 million increase in depreciation and amortization, and recognition of $5.5 million loss on asset disposition and impairment during the nine -month period ended September 30, 2020 , partially offset by a $20.6 million decrease in SG&A expenses and recognition of $15.0 million loss on impairment of long-lived assets and goodwill related to the Company's SaaS for vacation rentals reporting unit which was disposed of in the second quarter of 2019.

The primary reasons for these fluctuations are described in more detail below.

Domestic royalty fees for the six months ended June 30, 2020 decreased $61.7 million to $114.7 million , a 35% decrease compared to the six months ended June 30, 2019 .

Domestic royalty fees for the nine months ended September 30, 2020 decreased $93.1 million to $191.1 million , a 33% decrease compared to the nine months ended September 30, 2019 .

The decrease in royalties reflect a 32.3% decrease in RevPAR.

System-wide RevPAR decreased due to a 1,340 basis point decrease in occupancy rates and a 12.5% decrease in average daily rates.

The decrease in domestic royalties is partially offset by a 2.0% increase in the number of domestic franchised hotel rooms and a 10 basis point increase in the effective royalty rate from 4.84% for the six months ended June 30, 2019 to 4.94% for the six months ended June 30, 2020 .

The decrease in domestic royalties is partially offset by a 1.9% increase in the number of domestic franchised hotel rooms and a 9 basis point increase in the effective royalty rate from 4.84% for the nine months ended September 30, 2019 to 4.93% for the nine months ended September 30, 2020 .

A summary of the Company's domestic franchised hotels operating information is as follows:

Six Months Ended

June 30, 2020

June 30, 2019

Nine Months Ended

September 30, 2020

September 30, 2019

Cambria Hotels

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Since early April, we have observed steadily increasing domestic occupancy levels, with weekly occupancy exceeding 50% during the final week of June 2020.

In July, domestic RevPAR declined approximately 33.3% over the comparative prior year monthly period.

Since early April, we have observed steadily increasing domestic occupancy levels, with second quarter domestic occupancy at 39.1% and third quarter domestic occupancy at 52.1% .

During the first quarter of 2020, the Company revised its calculation of Occupancy, ADR, and RevPAR.

The revised ADR, Occupancy, and RevPAR are reflected in the table above for all periods noted.

Based on our previous calculation of ADR, Occupancy, and RevPAR, these metrics for the six months ended June 30, 2020 would have been $70.59, 49.7%, and $35.10, respectively, versus six months ended June 30, 2019 of $80.49, 62.6%, and $50.36, respectively, with period over period declines of 12.3%, 1,283 bps, and 30.3%, respectively.

International royalty fees for the six months ended June 30, 2020 decreased $4.6 million to $5.8 million compared to the six months ended June 30, 2019 as a result of the temporarily suspended operations and declines in RevPAR performance.

There is uncertainty as to the potential duration of the crisis and its severity, which continues to impact the number of hotels which temporarily suspend operations.

Based on our previous calculation of ADR, Occupancy, and RevPAR, these metrics for the nine months ended September 30, 2020 would have been $72.24, 53.3%, and $38.49, respectively, versus nine months ended September 30, 2019 of $82.66, 64.6%, and $53.36, respectively, with period over period declines of 12.6%, 1,745 bps, and 27.9%, respectively.

International royalty fees for the nine months ended September 30, 2020 decreased $7.2 million to $9.1 million compared to the nine months ended September 30, 2019 as a result of the temporarily suspended operations and declines in RevPAR performance.

There is uncertainty as to the potential duration of the crisis, including a resurgence, and its severity, which continues to impact the number of hotels which temporarily suspend operations.

Initial Franchise and Relicensing Fees

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During the six months ended June 30, 2020 , the Company awarded 151 domestic franchise agreements representing 11,449 rooms compared to 260 franchise agreements representing 20,527 rooms for the six months ended June 30, 2019 .

Domestic franchise agreements awarded for new construction hotels totaled 50 representing 4,297 rooms during the six months ended June 30, 2020 compared to 92 franchise agreements representing 7,709 rooms for the six months ended June 30, 2019 .

Conversion hotel awarded franchise agreements totaled 101 representing 7,152 rooms for the six months ended June 30, 2020 compared to 168 franchise agreements representing 12,818 rooms for the six months ended June 30, 2019 .

The Company awarded 110 domestic relicensing contracts during the six months ended June 30, 2020 , compared to 192 executed during the six months ended June 30, 2019 .

The Company awarded 20 domestic renewal agreements during the six months ended June 30, 2020 , compared to 19 executed during the six months ended June 30, 2019 .

During the nine months ended September 30, 2020 , the Company awarded 232 domestic franchise agreements representing 18,022 rooms compared to 377 franchise agreements representing 34,341 rooms for the nine months ended September 30, 2019 .

Domestic franchise agreements awarded for new construction hotels totaled 71 representing 6,102 rooms during the nine months ended September 30, 2020 compared to 129 franchise agreements representing 10,795 rooms for the nine months ended September 30, 2019 .

Conversion hotel awarded franchise agreements totaled 161 representing 11,920 rooms for the nine months ended September 30, 2020 compared to 248 franchise agreements representing 23,546 rooms for the nine months ended September 30, 2019 .

The Company awarded 164 domestic relicensing contracts during the nine months ended September 30, 2020 , compared to 286 executed during the nine months ended September 30, 2019 .

The Company awarded 25 domestic renewal agreements during the nine months ended September 30, 2020 , compared to 26 executed during the nine months ended September 30, 2019 .

Initial franchise and relicensing fees are generally collected at the time the franchise agreement is awarded.

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Upon the termination of a franchise agreement, previously deferred initial and relicensing fees are recognized immediately in the period the agreement is terminated.

Initial franchise and relicensing fee revenue increased $0.5 million from $13.5 million during the six months ended June 30, 2019 to $14.0 million during the six months ended June 30, 2020 .

Initial franchise and relicensing fee revenue decreased $0.2 million from $20.2 million during the nine months ended September 30, 2019 to $20.0 million during nine months ended September 30, 2020 .

Given the uncertainty as to the potential duration of the COVID-19 pandemic and its severity, we anticipate a continued reduction in total new franchise agreements for the year.

Further, these factors create additional uncertainty with respect to the opening of new construction hotels, which are reliant on, amongst other things, access to liquidity, availability of construction labor, and local governmental approvals and entitlements, all of which may be constrained during the pendency of the pandemic.

Procurement Services:

Revenues decreased $8.3 million or 25% from $32.8 million for the six months ended June 30, 2019 to $24.5 million for the six months ended June 30, 2020 .

Revenues decreased $13.0 million or 27% from $47.6 million for the nine months ended September 30, 2019 to $34.6 million for the nine months ended September 30, 2020 .

Owned Hotels:

The Company acquired four operating hotels in the third quarter of 2019.

A fifth hotel previously under development by the Company opened in the third quarter of 2019.

Revenues of $11.5 million and expenses of $9.0 million represent fees earned from and costs incurred for the hotel operations during the six months ended June 30, 2020 .

Other Revenues:

Other revenues declined $17.3 million from $30.2 million for the nine months ended September 30, 2019 to $12.9 million in the same period of the current year.

Selling, General and Administrative Expenses:

The cost to operate the business is reflected in SG&A on the consolidated statements of income.

SG&A expenses were $61.9 million for the six months ended June 30, 2020 , a decrease of $23.5 million from the six months ended June 30, 2019 .

SG&A expenses for the six months ended June 30, 2020 and 2019 include approximately $1.5 million and $6.3 million , respectively, related to the Company's alternative growth initiatives and expenses related to the operations of an office building leased to a third party.

SG&A expenses were $104.2 million for the nine months ended September 30, 2020 , a decrease of $20.6 million from the nine months ended September 30, 2019 .

SG&A expenses for the nine months ended September 30, 2020 and 2019 include approximately $1.9 million and $7.8 million , respectively, related to the Company's alternative growth initiatives and expenses related to the operations of an office building leased to a third party.

The decrease of $5.9 million from the same period of the prior year is primarily due to the sale of the SaaS for vacation rentals reporting unit on June 3, 2019.

Excluding SG&A for alternative growth initiatives and office building operations, SG&A for the six months ended June 30, 2020 decreased $19.8 million or 25% to $60.4 million primarily due to implemented cost mitigation and cash preservation measures resulting from the COVID-19 pandemic, including cancellation of the annual convention;

Excluding SG&A for alternative growth initiatives and office building operations, SG&A for the nine months ended September 30, 2020 decreased $14.7 million to $102.3 million primarily due to implemented cost mitigation and cash preservation measures resulting from the COVID-19 pandemic, including cancellation of the annual convention;

furloughs and layoffs of certain domestic and international positions and reduction of non-essential expenditures;

and reductions in the Company's deferred compensation liabilities based on declines in the underlying investments.

and reductions in the Company's deferred compensation liabilities based on relative declines in the underlying investments;

partially offset by provisions for credit losses recorded in accordance with Topic 326.

Depreciation and amortization:

Depreciation and amortization expense for the six months ended June 30, 2020 increased $5.9 million to $12.9 million from the same period of the prior year primarily due to an additional $6.3 million in depreciation related to the Company's owned hotels acquired and opened during the third quarter of 2019.

Provision for credit losses :

Provision for credit losses during the six months ended June 30, 2020 increased $9.8 million to $10.9 million and represent provisions on Trade receivables and Notes receivables recorded in accordance with Topic 326 (see Note 1) with contemplation to economic and credit conditions resulting from the COVID-19 pandemic and estimates of other expected credit losses.

The provision for Trade receivables have increased $6.9 million primarily due to the aging of customer receivables, while the provision for Notes receivable have increased $2.9 million based on re-assessment of our loan portfolio risk characteristics and provisioning on loan proceeds issued.

Depreciation and amortization expense for the nine months ended September 30, 2020 increased $6.7 million to $19.3 million from the same period of the prior year primarily due to an additional $7.1 million in depreciation related to the Company's owned hotels acquired and opened during the third quarter of 2019.

Impairment of Goodwill, Loss on Asset Dispositions and Impairments, and Loss on Sale of Business:

In the second quarter of 2020, the Company recognized a $1.2 million charge related to a prospective self-development project the Company is no longer pursing.

For the six months ended June 30, 2019 , the Company recognized a $15.0 million loss on impairment of long-lived assets and goodwill related to the Company's SaaS for vacation rentals reporting unit which was disposed of on June 3, 2019 .

For the nine months ended September 30, 2020 , the Company recognized a $1.2 million charge related to a prospective self-development project the Company is no longer pursing and a $4.3 million impairment charge related to the long-lived assets of a commercial office building owned by the Company.

For the nine months ended September 30, 2019 , the Company recognized a $15.0 million loss on impairment of long-lived assets and goodwill related to the Company's SaaS for vacation rentals reporting unit which was disposed of in the second quarter of 2019.

Interest Expense:

The Company recorded interest expense of $24.5 million for the six months ended June 30, 2020, an increase of $2.2 million from the six months ended June 30, 2019.

The increase in interest expense is a result of increased borrowings in response to the COVID-19 pandemic.

The Company recorded interest expense of $37.2 million for the nine months ended September 30, 2020 , an increase of $2.5 million from the nine months ended September 30, 2019 .

The increase in interest expense is a result of increased borrowings over the course of 2020 in response to the COVID-19 pandemic.

We anticipate borrowings and associated interest expense will remain elevated relative to comparable periods for the remainder of 2020.

Other (Gains) Losses :

Other (gains) losses decreased from a $3.1 million gain for the six months ended June 30, 2019 to $0.7 million loss for same period of the current year.

The losses relate to reductions in the Company's deferred compensation assets based on declines in the underlying investments.

Loss on Extinguishment of Debt:

During the first quarter of 2020, the Company recorded a loss on the extinguishment of debt of $0.6 million related to the early pay off of a construction loan in the amount of $33.1 million, inclusive of accrued and unpaid interest.

During the third quarter of 2020, the Company recorded a loss on the extinguishment of debt of $16.0 million related to the Tender Offer and early pay off of the Term Loan.

Refer to the "Liquidity and Capital Resources" header for additional discussion.

Other Gains :

The Company recorded other net gains of $1.0 million for the nine months ended September 30, 2020 , compared to other net gains of $3.2 million for the nine months ended September 30, 2019 .

The gains relate to increases in the Company's deferred compensation assets based on increases in the underlying investments.

Equity in Net Loss of Affiliates :

The Company recorded net losses of $5.4 million from its unconsolidated joint ventures for the six months ended June 30, 2020 compared to net losses of $3.2 million for the six months ended June 30, 2019 .

The Company recorded net losses of $7.2 million from its unconsolidated joint ventures for the nine months ended September 30, 2020 compared to net losses of $9.6 million for the nine months ended September 30, 2019 .

These investments relate to the Company's program to offer equity support to qualified franchisees to develop and operate Cambria Hotels in strategic markets.

We anticipate the results recognized from these investments for the remainder of 2020 will be significantly impacted by the COVID-19 pandemic.

The fluctuation is primarily attributable to the sale of an unconsolidated joint venture resulting in a loss of $6.0 million in the third quarter of 2019, partially offset by increased losses of operating joint venture hotels.

We anticipate the results recognized from these investments in the fourth quarter of 2020 will continue to be significantly impacted by the COVID-19 pandemic.

Income Tax (Benefit) Expense:

The effective income tax rates were (92.3)% and 20.0% for the six months ended June 30, 2020 and 2019 , respectively.

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.

The effective income tax rates were (30.8)% and 16.6% for the nine months ended September 30, 2020 and 2019 , respectively.

On January 1, 2018, the Company adopted 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 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.

The effective income tax rate for the nine months ended September 30, 2020 was lower than the U.S.

federal income tax rate of 21.0% due to the impacts of ASU-2016 and the corresponding valuation allowance, $3.4 million of excess tax benefits from share-based compensation, an adjustment to our deferred taxes, 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 nine months ended September 30, 2019 was lower than the U.S.

federal income tax rate of 21.0% due to $12.2 million of tax credits recognized in the period, $3.3 million of excess tax benefits from share-based compensation and the impact of foreign operations, partially offset by state income taxes.

Liquidity and Capital Resources

In response to the COVID-19 pandemic, we have taken steps to adjust the company’s cost structure and increase its financial flexibility and liquidity.

At June 30, 2020 , the Company had approximately $725.6 million in cash and additional available borrowing capacity through its senior unsecured revolving credit facility, which was bolstered by the $250 million Term Loan as entered in to by the Company on April 16, 2020 .

In July 2020, the Company issued $450 million aggregate principal 2020 Senior Notes and announced the early tender results of the Tender Offer for the purchase of $183.4 million aggregate principal amount of the Company's 2012 Senior Notes.

The Company used the net proceeds from the 2020 Senior Notes offering to repay the Term Loan in full and fund the purchase price of the 2012 Senior Notes tendered.

At September 30, 2020 , the Company had approximately $792.0 million in cash and additional available borrowing capacity through its senior unsecured revolving credit facility,

In April 2020, the Company entered into the $250 million Term Loan.

In July 2020, the Company issued the $450 million 2020 Senior Notes and announced the Tender Offer for the purchase of approximately $183.4 million aggregate principal amount of the Company's 2012 Senior Notes.

The Company used the net proceeds from the 2020 Senior Notes offering to repay the Term Loan in full and fund the $197.8 million purchase price of the 2012 Senior Notes tendered, inclusive of the aggregate principal, an early tender premium, settlement fees, and accrued interest paid.

In September 2020, the Company utilized excess cash on hand to pay down the senior unsecured revolving credit facility balance in full.

To preserve capital, we determined to suspend future, undeclared dividends for at least the remainder of 2020 and have temporarily suspended activity under our share repurchase program as well as limited discretionary spending and investments until such time as we determine conditions are appropriate to resume any such activity.

Based on our business model, the financial mitigation measures taken, and information known at this time, the Company believes that cash flows from operations and available financing capacity are adequate to meet the expected future operating, investing and financing needs of the business.

As of June 30, 2020 , we were in compliance with the financial covenants of our credit agreements and expect to remain in such compliance.

As of September 30, 2020 , we were in compliance with the financial covenants of our credit agreements and expect to remain in such compliance.

Operating Activities

During the six months ended June 30, 2020 and 2019 , net cash provided by operating activities totaled $1.5 million and $97.7 million , respectively.

Operating cash flows decreased $96.2 million primarily due to a decrease in operating income as driven by a reduction in royalty fees and the net surplus generated from marketing and reservation system activities, excluding certain non-cash charges, and timing of working capital items.

During the nine months ended September 30, 2020 and 2019 , net cash provided by operating activities totaled $69.7 million and $191.0 million , respectively.

Operating cash flows decreased $121.3 million primarily due to a decrease in operating income as driven by a reduction in royalty fees and the net deficit generated from marketing and reservation system activities, excluding certain non-cash charges, and timing of working capital items.

In conjunction with brand and development programs, we make certain payments to franchisees as an incentive to enter into new franchise agreements or perform designated improvements to properties under existing franchise agreements.

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If the franchisee exits our franchise system or is not operating their franchise in accordance with our quality or credit standards, the franchisee must repay the unamortized incentive payment plus interest.

During the six months ended June 30, 2020 and 2019 , the Company's net advances for these purposes totaled $12.6 million and $19.1 million , respectively.

During the nine months ended September 30, 2020 and 2019 , the Company's net advances for these purposes totaled $17.0 million and $25.6 million , respectively.

The timing and amount of these cash flows is dependent on various factors including the implementation of various development and brand incentive programs, the level of franchise sales, and the ability of our franchisees to complete construction or convert their hotels to one of the Company’s brands.

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.

At September 30, 2020 , the Company had commitments to extend an additional $290.0 million for these purposes provided the conditions of the payment are met by its franchisees.

The Company’s franchise agreements require the payment of marketing and reservation system fees.

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Conversely, to the extent expenditures incurred exceed revenues collected, the Company has the contractual enforceable right to recover such advances in future periods through additional fee assessments or reduced spending.

During the six months ended June 30, 2020 , marketing and reservation system expenses exceeded revenues by $29.7 million .

During the six months ended June 30, 2019 marketing and reservation system revenues exceeded expenses by $2.5 million .

During the nine months ended September 30, 2020 , marketing and reservation system expenses exceeded revenues by $36.4 million .

During the nine months ended September 30, 2019 marketing and reservation system revenues exceeded expenses by $1.2 million .

Investing Activities

Cash utilized for investing activities totaled $29.5 million and $45.3 million for the six months ended June 30, 2020 and 2019 , respectively.

The increase in cash utilized for investing activities for the six months ended June 30, 2020 primarily reflects the following items:

During the six months ended June 30, 2020 and 2019 , the Company invested $3.0 million and $13.7 million , respectively, in joint ventures accounted for under the equity method of accounting.

In addition, the Company received distributions from these joint ventures totaling $3.1 million and $7.5 million for the six months ended June 30, 2020 and 2019 , respectively.

Cash utilized for investing activities totaled $30.5 million and $220.2 million for the nine months ended September 30, 2020 and 2019 , respectively.

The decrease in cash utilized for investing activities for the nine months ended September 30, 2020 primarily reflects the following items:

During the nine months ended September 30, 2020 and 2019 , the Company invested $4.6 million and $17.3 million , respectively, in joint ventures accounted for under the equity method of accounting.

In addition, the Company received distributions from these joint ventures totaling $3.4 million and $9.8 million for the nine months ended September 30, 2020 and 2019 , respectively.

The Company's investment in these joint ventures primarily relates to ventures that support the Company's efforts to promote the growth of our Cambria Hotels brand.

To the extent existing unconsolidated joint ventures proceed to the hotel construction phase, the Company is committed to make capital contributions totaling $8.8 million to support these efforts.

During the six months ended June 30, 2020 and 2019 , capital expenditures in property and equipment totaled $21.1 million and $38.2 million , respectively.

The decrease in capital expenditures primarily reflects the Company's investment in improvements to an office building in 2019 that was converted to a Cambria Hotel.

During the nine months ended September 30, 2020 and 2019 , capital expenditures in property and equipment totaled $32.2 million and $46.1 million , respectively.

The decrease in capital expenditures primarily reflects the Company's 2019 improvements to a historic building that was converted to a Cambria Hotel.

The hotel opened in the third quarter of 2019.

During the nine months ended September 30, 2020 , the Company realized proceeds of $9.2 million from the sale of state historic rehabilitation tax credits earned from the improvements made to this building.

The proceeds of $9.2 million were applied to lower the basis of the owned hotel property and equipment.

The Company provides financing to franchisees for hotel development efforts and other purposes in the form of notes receivable.

These loans bear interest and are expected to be repaid in accordance with the terms of the loan arrangements.

During the six months ended June 30, 2020 , the Company advanced and received repayments totaling $7.7 million and $0.1 million for these purposes, respectively.

For the six months ended June 30, 2019 , the Company advanced and received

repayments totaling $4.9 million and $5.4 million for these purposes, respectively.

At June 30, 2020 , the Company had commitments to extend an additional $2.2 million for these purposes provided certain conditions are met by its franchisees.

During the six months ended June 30, 2019 , the Company realized proceeds of $10.6 million from the sale of one parcel of land.

The Company did not have any sale of land parcels during the six months ended June 30, 2020 .

During the six months ended June 30, 2019 , the Company sold the SaaS for vacation rentals reporting unit and made payments, net of sales proceeds, of $10.8 million for net costs incurred to complete the disposition.

During the nine months ended September 30, 2020 , the Company advanced and received repayments totaling $9.8 million and $5.1 million for these purposes, respectively.

For the nine months ended September 30, 2019 , the Company advanced and received repayments totaling $10.8 million and $10.5 million for these purposes, respectively.

At September 30, 2020 , the Company had commitments to extend an additional $1.0 million for these purposes provided certain conditions are met by its franchisees.

During the nine months ended September 30, 2019 , the Company realized proceeds of $10.6 million from the sale of one parcel of land.

The Company did not sell any land parcels during the nine months ended September 30, 2020 .

During the nine months ended September 30, 2019 , the Company sold the SaaS for vacation rentals reporting unit and made payments, net of sales proceeds, of $10.8 million for net costs incurred to complete the disposition.

During the nine months ended September 30, 2019 , the Company held a 40% ownership interest of a joint venture that owned five Cambria Hotels recorded as an investment in unconsolidated entities of $40.0 million.

On July 23, 2019, the Company redeemed the remaining 60% ownership interest in four of the hotels for approximately $169.0 million , net of cash acquired, and sold its 40% ownership interest in the fifth hotel for approximately $8.9 million .

The transaction was funded with cash and borrowings under the Company's revolving credit facility.

From time to time, our board of directors authorizes specific transactions and general programs which permit us to provide financing, investment and guaranties, and similar credit support to qualified franchisees, as well as to acquire, develop, and resell real estate and hotels to incent franchise development.

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With respect to our lending, hotel ownership and joint venture investments, we generally expect to recycle these loans and investments within a five year period.

At June 30, 2020 , the Company had approximately $579.3 million outstanding pursuant to these financial support activities.

At September 30, 2020 , the Company had approximately $566.8 million outstanding pursuant to these financial support activities.

Financing Activities

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On July 2, 2019, the Company exercised a one-year extension option on the Restated Credit Agreement, extending the maturity date from August 20, 2023 to August 20, 2024.

On August 12, 2020, the Company executed an additional one-year extension on the Restated Credit Agreement for $525 million of the $600 million total capacity.

The extended maturity date is August 20, 2025.

There are no subsidiary guarantors under the Restated Credit Agreement.

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On February 18, 2020, the Company entered into the First Amendment to the Amended and Restated Senior Unsecured Credit Agreement (the “Amendment”) among the Company, Deutsche Bank AG New York Branch, as administrative agent (the “Administrative Agent”) and the lenders party thereto.

The Amendment amended the Restated Credit Agreement.

The Amendment, among other things, removes the springing guarantee and other provisions and references in the Restated Credit Agreement related to the potential existence of subsidiary guarantors.

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The Restated Credit Agreement includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Company under the Restated Credit Agreement to be immediately due and payable.

At June 30, 2020 , the Company maintained a total leverage ratio of 3.69 x and was in compliance with all financial covenants under the Restated Credit Agreement.

The Company increased borrowings on its senior unsecured revolving credit facility by $170.3 million in the six months ended June 30, 2020 , primarily in response to the COVID-19 pandemic.

The additional borrowings that were not otherwise utilized for operational purposes during the quarter are being held as cash on the Company’s consolidated balance sheet.

These borrowings have resulted in an increase to our gross leverage ratio as used for financial covenants of our credit agreements in comparison to historical periods.

The Company also entered in to the Term Loan on April 16, 2020 , the proceeds of which were used to reduce borrowings on the Company’s senior unsecured revolving credit facility and thus did not alter our gross leverage ratio.

At September 30, 2020 , the Company maintained a total leverage ratio of 3.54 x and was in compliance with all financial covenants under the Restated Credit Agreement.

The Company decreased borrowings on its senior unsecured revolving credit facility by $18.2 million in the nine months ended September 30, 2020 , utilizing excess cash on hand to pay down the balance in full.

The proceeds of the Restated Credit Agreement are generally expected to be used for general corporate purposes, including working capital, debt repayment, stock repurchases, dividends, investments and other permitted uses set forth in the Restated Credit Agreement.

However, in light of uncertainty resulting from the COVID-19 pandemic, and as previously discussed, we determined to suspend future, undeclared dividends for at least the remainder of 2020 and have temporarily suspended activity under our share repurchase program.

In addition, under the Term Loan there are restrictions with respect to dividends and stock repurchases under certain circumstances.

To preserve financial flexibility and liquidity during the COVID-19 pandemic, on April 16, 2020, the Company entered into a Credit Agreement, which provides for the $250 million 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.

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The proceeds of the Term Loan were utilized to reduce borrowings on the Company’s senior unsecured revolving credit facility.

The Term Loan was subsequently paid off in full in July 2020 from the proceeds of the 2020 Senior Notes.

The Term Loan was subsequently paid off in full in July 2020 utilizing the proceeds of the 2020 Senior Notes.

In combination with the Tender Offer, the Company recorded a loss on extinguishment of debt of $16.0 million in the third quarter of 2020.

Senior Unsecured Notes Due 2031

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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.

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 “2020 Notes Par Call Date”), the redemption price will be equal to the greater of (a) 100% of the principal amount of the notes to be redeemed, or (b) the sum of the present values of the remaining scheduled principal and interest payments that would have been payable had the 2020 Senior Notes matured on the 2020 Notes Par Call Date, discounted to the redemption date on a semi-annual basis at the applicable Treasury Rate plus 50 basis points, plus accrued and unpaid interest.

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If the Company redeems the 2019 Senior Notes on or after the 2019 Notes Par Call Date, the redemption price will equal 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest.

Additionally, at the option of the holders of the 2019 Senior Notes, the Company may be required to repurchase all or a portion of the 2019 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, at the option of the holders of the 2019 Senior Notes, the Company may be required to repurchase all or a portion of the 2019 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.

Senior Unsecured Notes due 2022

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The Tender Offer settled on July 24, 2020 for $197.8 million , including an early tender premium, settlement fees, and accrued interest paid.

In combination with the early pay off of the Term Loan, the Company recorded a loss on extinguishment of debt of $16.0 million in the third quarter of 2020.

Fixed Rate Collateralized Mortgage

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In conjunction with the court award, the Company also assumed the $9.5 million mortgage on the property with a fixed interest rate of 7.26%.

The mortgage is collateralized by the office building, requires monthly payments of principal and interest, and matures in December 2020 with a balloon payment due of $6.9 million.

The mortgage is collateralized by the

office building, requires monthly payments of principal and interest, and matures in December 2020 with a balloon payment due of $6.9 million.

At the time of acquisition, the Company determined that the fixed interest rate of 7.26% exceeded market interest rates and therefore the Company increased the carrying value of the debt by $1.2 million to record the debt at fair value.

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In accordance with these agreements, the governmental entities agreed to advance approximately $4.4 million to the Company to offset a portion of the corporate headquarters relocation and tenant improvement costs in consideration of the employment of permanent, full-time employees within the jurisdictions.

At June 30, 2020 , the Company had been fully advanced the amounts due pursuant to these agreements.

At September 30, 2020 , the Company had been fully advanced the amounts due pursuant to these agreements.

These advances bear interest at a rate of 3% per annum.

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The Company accrues interest on the portion of the advances that it expects to repay.

The Company was in compliance with all applicable current performance conditions as of June 30, 2020 .

The Company was in compliance with all applicable current performance conditions as of September 30, 2020 .

Construction Loan Commitment

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In 2012, the Company elected to pay a special cash dividend totaling approximately $600 million.

During the six months ended June 30, 2020 , the Company maintained the payment of a quarterly dividend on its common shares outstanding of $0.225 per share, which remained unchanged from the previous quarterly declaration, and paid cash dividends totaling $25.2 million .

During the nine months ended September 30, 2020 , the Company paid cash dividends totaling $25.3 million .

The most recent dividend declaration from the Company's board of directors was on February 28, 2020 in the amount of $0.225 per share and paid on April 16, 2020 .

In light of uncertainty resulting from the COVID-19 pandemic, and as previously disclosed, we determined to suspend future, undeclared dividends for at least the remainder of 2020.

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In 1998, we instituted a share repurchase program which has generated substantial value for our shareholders.

During the six months ended June 30, 2020 , the Company repurchased 0.5 million shares of its common stock under the share repurchase program at a total cost of $43.3 million .

Through June 30, 2020 , the Company had repurchased 51.6 million shares of its common stock (including 33.0 million prior to the two-for-one stock split effected in October 2005) under the program at a total cost of $1.5 billion .

During the nine months ended September 30, 2020 , the Company repurchased 0.5 million shares of its common stock under the share repurchase program at a total cost of $43.3 million .

Through September 30, 2020 , the Company had repurchased 51.6 million shares of its common stock (including 33.0 million prior to the two-for-one stock split effected in October 2005) under the program at a total cost of $1.5 billion .

Considering the effect of the two-for-one stock split, the Company has repurchased 84.6 million shares at an average price of $17.55 per share.

As of June 30, 2020 , the Company had 3.4 million shares remaining under the current share repurchase authorization.

As of September 30, 2020 , the Company had 3.4 million shares remaining under the current share repurchase authorization.

However, in light of uncertainty resulting from the COVID-19 pandemic, and as previously disclosed, we have temporarily suspended activity under our share repurchase program.

During the six months ended June 30, 2020 , the Company redeemed 115,525 shares of common stock at a total cost of approximately $11.2 million 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.

During the nine months ended September 30, 2020 , the Company redeemed 123,029 shares of common stock at a total cost of approximately $11.9 million 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.

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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.

As of September 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 our guaranty.

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the success of our mitigation efforts in response to the COVID-19 pandemic;

the performance of our brands and categories in any recovery from the COVID-19 pandemic disruption;

the performance of our brands and categories in any recovery from

the COVID-19 pandemic disruption;

the timing and amount of future dividends and share repurchases;

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operating risks common in the travel, lodging or franchising industries;

changes to the

desirability of our brands as viewed by hotel operators and customers;

changes to the desirability of our brands as viewed by hotel operators and customers;

changes to the terms or termination of our contracts with franchisees and our relationships with our franchisees;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis