CHOICE HOTELS INTERNATIONAL INC /DE 10-Q

ITEM 1. FINANCIAL STATEMENTS CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 REVENUES Royalty fees $ 79,666 $ 113,688 $ 200,157 $ 300,468 Initial franchise and relicensing fees 6,071 6,741 20,031 20,223 Procurement services 10,115 14,814 34,609 47,590 Marketing and reservation system 107,141 157,024 297,203 439,553 Owned hotels 4,201 8,710 15,731 8,710 Other 3,577 9,755 12,948 30,192 Total revenues 210,771 310,732 580,679 846,736 OPERATING EXPENSES Selling, general and administrative 31,413 38,308 104,212 124,802 Depreciation and amortization 6,382 5,568 19,309 12,589 Marketing and reservation system 113,808 158,430 333,564 438,390 Owned hotels 3,812 6,014 12,822 6,014 Total operating expenses 155,415 208,320 469,907 581,795 Impairment of goodwill — — — ( 3,097 ) Loss on asset dispositions and impairments ( 4,290 ) 33 ( 5,516 ) ( 7,271 ) Loss on sale of business — ( 25 ) — ( 4,666 ) Gain on sale of assets, net — — — 100 Operating income 51,066 102,420 105,256 250,007 OTHER INCOME AND EXPENSES, NET Interest expense 12,691 12,431 37,153 34,735 Interest income ( 1,744 ) ( 2,220 ) ( 6,277 ) ( 7,617 ) Loss on extinguishment of debt 15,958 — 16,565 — Other gains, net ( 1,664 ) ( 115 ) ( 972 ) ( 3,219 ) Equity in net loss of affiliates 1,731 6,400 7,172 9,551 Total other income and expenses, net 26,972 16,496 53,641 33,450 Income before income taxes 24,094 85,924 51,615 216,557 Income tax expense (benefit) 9,594 9,685 ( 15,907 ) 35,848 Net income $ 14,500 $ 76,239 $ 67,522 $ 180,709 Basic earnings per share $ 0.26 $ 1.37 $ 1.22 $ 3.25 Diluted earnings per share $ 0.26 $ 1.36 $ 1.21 $ 3.23 Cash dividends declared per share $ — $ 0.215 $ 0.225 $ 0.645 The accompanying notes are an integral part of these consolidated financial statements. 3 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Net income $ 14,500 $ 76,239 $ 67,522 $ 180,709 Other comprehensive income (loss), net of tax: Amortization of loss on cash flow hedge — 215 — 646 Foreign currency translation adjustment 240 ( 224 ) ( 237 ) ( 883 ) Other comprehensive income (loss), net of tax 240 ( 9 ) ( 237 ) ( 237 ) Comprehensive income $ 14,740 $ 76,230 $ 67,285 $ 180,472 The accompanying notes are an integral part of these consolidated financial statements. 4 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) September 30, 2020 December 31, 2019 ASSETS Current assets Cash and cash equivalents $ 191,967 $ 33,766 Receivables (net of allowance for credit losses of $44,228 and $18,482, respectively) 175,375 141,566 Income taxes receivable 4,470 11,126 Notes receivable 28,860 26,265 Less: Allowance for notes receivable credit losses ( 3,252 ) ( 861 ) Other current assets 18,150 24,727 Total current assets 415,570 236,589 Property and equipment, at cost, net 339,000 351,502 Operating lease right-of-use assets 19,774 24,088 Goodwill 159,196 159,196 Intangible assets, net 290,913 290,421 Notes receivable 110,852 106,749 Less: Allowance for notes receivable losses ( 13,043 ) ( 3,695 ) Investments, employee benefit plans, at fair value 26,454 24,978 Investments in unconsolidated entities 72,571 78,655 Deferred income taxes 54,240 20,747 Other assets 94,619 97,442 Total assets $ 1,570,146 $ 1,386,672 LIABILITIES AND SHAREHOLDERS’ DEFICIT Current liabilities Accounts payable $ 80,191 $ 73,449 Accrued expenses and other current liabilities 67,699 90,364 Deferred revenue 51,487 71,594 Current portion of long-term debt 6,977 7,511 Liability for guest loyalty program 46,066 82,970 Total current liabilities 252,420 325,888 Long-term debt 1,058,309 844,102 Long-term deferred revenue 122,285 112,662 Deferred compensation and retirement plan obligations 31,039 29,949 Income taxes payable 23,394 26,147 Operating lease liabilities 15,037 21,270 Liability for guest loyalty program 79,777 46,698 Other liabilities 9,289 3,467 Total liabilities 1,591,550 1,410,183 Commitments and Contingencies Common stock, $0.01 par value; 160,000,000 shares authorized; 95,065,638 shares issued at September 30, 2020 and December 31, 2019; 55,458,248 and 55,702,628 shares outstanding at September 30, 2020 and December 31, 2019, respectively 951 951 Additional paid-in-capital 228,521 231,160 Accumulated other comprehensive loss ( 4,787 ) ( 4,550 ) Treasury stock, at cost; 39,607,390 and 39,363,010 shares at September 30, 2020 and December 31, 2019, respectively ( 1,262,724 ) ( 1,219,905 ) Retained earnings 1,016,635 968,833 Total shareholders’ deficit ( 21,404 ) ( 23,511 ) Total liabilities and shareholders’ deficit $ 1,570,146 $ 1,386,672 The accompanying notes are an integral part of these consolidated financial statements. 5 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Nine Months Ended September 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 67,522 $ 180,709 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,309 12,589 Depreciation and amortization – marketing and reservation system 14,994 12,355 Franchise agreement acquisition cost amortization 8,343 7,537 Gain on disposal of assets — ( 2,181 ) Loss on sale of business — 4,666 Loss on asset disposition and impairments 5,516 7,271 Impairment of goodwill — 3,097 Loss on extinguishment of debt 16,565 — Non-cash stock compensation and other charges 4,748 12,433 Non-cash interest and other income ( 465 ) ( 2,615 ) Deferred income taxes ( 31,411 ) 3,268 Equity in net losses from unconsolidated joint ventures, less distributions received 7,320 12,234 Franchise agreement acquisition costs, net of reimbursements ( 16,960 ) ( 25,592 ) Change in working capital and other, net of acquisition ( 25,801 ) ( 34,794 ) Net cash provided by operating activities 69,680 190,977 CASH FLOWS FROM INVESTING ACTIVITIES: Investment in property and equipment ( 32,176 ) ( 46,135 ) Investment in intangible assets ( 1,212 ) ( 3,659 ) Proceeds from sales of assets — 10,585 Payment on business disposition, net — ( 10,783 ) Asset acquisition, net of cash acquired — ( 168,954 ) Proceeds from sale of unconsolidated joint venture — 8,937 Contributions to equity method investments ( 4,620 ) ( 17,329 ) Distributions from equity method investments 3,362 9,841 Purchases of investments, employee benefit plans ( 2,254 ) ( 2,748 ) Proceeds from sales of investments, employee benefit plans 2,372 2,197 Issuance of notes receivable ( 9,845 ) ( 10,767 ) Collections of notes receivable 5,113 10,491 Proceeds from sale of tax credits 9,197 — Other items, net ( 473 ) ( 1,842 ) Net cash used in investing activities ( 30,536 ) ( 220,166 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings pursuant to revolving credit facilities ( 18,200 ) 97,800 Proceeds from issuance of Term Loan 249,500 — Proceeds from issuance of 2020 Senior Notes 447,723 — Principal payments on long-term debt ( 466,915 ) ( 371 ) Payments to extinguish long-term debt ( 14,347 ) — Purchase of treasury stock ( 55,158 ) ( 44,770 ) Dividends paid ( 25,274 ) ( 36,103 ) Debt issuance costs ( 4,620 ) ( 300 ) Proceeds from issuance of long-term debt — 23,863 Payments on transfer of interest in notes receivable — ( 24,409 ) Proceeds from exercise of stock options 6,615 18,519 Net cash provided by financing activities 119,324 34,229 Net change in cash and cash equivalents 158,468 5,040 Effect of foreign exchange rate changes on cash and cash equivalents ( 267 ) ( 113 ) Cash and cash equivalents at beginning of period 33,766 26,642 Cash and cash equivalents at end of period $ 191,967 $ 31,569 6 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS) (UNAUDITED) Supplemental disclosure of cash flow information: Cash payments during the period for: Income taxes, net of refunds $ 41 $ 25,681 Interest, net of capitalized interest $ 37,338 $ 42,169 Non-cash investing and financing activities: Dividends declared but not paid $ — $ 11,978 Investment in property and equipment acquired in accounts payable $ 757 $ 1,575 The accompanying notes are an integral part of these consolidated financial statements. 7 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) Common Stock - Shares Outstanding Common Stock - Par Value Additional Paid-in- Capital Accumulated Other Comprehensive Income (Loss) Treasury Stock Retained Earnings Total Balance as of December 31, 2018 55,679,207 $ 951 $ 213,170 $ ( 5,446 ) $ ( 1,187,625 ) $ 795,178 $ ( 183,772 ) Net income — — — — — 30,081 30,081 Other comprehensive income (loss) — — — 8 — — 8 Other (1) — — — — — ( 614 ) ( 614 ) Share based payment activity 408,545 — 3,214 — 9,706 — 12,920 Dividends declared ($0.215 per share) — — — — — ( 12,149 ) ( 12,149 ) Treasury purchases ( 414,077 ) — — — ( 31,951 ) — ( 31,951 ) Balance as of March 31, 2019 55,673,675 $ 951 $ 216,384 $ ( 5,438 ) $ ( 1,209,870 ) $ 812,496 $ ( 185,477 ) Net income — — — — — 74,389 74,389 Other comprehensive income (loss) — — — ( 236 ) — — ( 236 ) Share based payment activity 151,856 — 6,010 — 5,102 — 11,112 Dividends declared ($0.215 per share) — — — — — ( 11,962 ) ( 11,962 ) Treasury purchases ( 129,175 ) — — — ( 10,486 ) — ( 10,486 ) Balance as of June 30, 2019 55,696,356 $ 951 $ 222,394 $ ( 5,674 ) $ ( 1,215,254 ) $ 874,923 $ ( 122,660 ) Net income — — — — — 76,239 76,239 Other comprehensive income (loss) — — — ( 9 ) — — ( 9 ) Other (2) — — ( 2,250 ) — — — ( 2,250 ) Share based payment activity 46,116 — 4,835 — 1,418 — 6,253 Dividends declared ($0.215 per share) — — — — — ( 11,975 ) ( 11,975 ) Treasury purchases ( 26,695 ) — — — ( 2,333 ) — ( 2,333 ) Balance as of September 30, 2019 55,715,777 $ 951 $ 224,979 $ ( 5,683 ) $ ( 1,216,169 ) $ 939,187 $ ( 56,735 ) 8 Table of Contents Common Stock - Shares Outstanding Common Stock - Par Value Additional Paid-in- Capital Accumulated Other Comprehensive Income (Loss) Treasury Stock Retained Earnings Total Balance as of December 31, 2019 55,702,628 $ 951 $ 231,160 $ ( 4,550 ) $ ( 1,219,905 ) $ 968,833 $ ( 23,511 ) Cumulative-effect adjustment (3) — — — — — ( 6,831 ) ( 6,831 ) Net income — — — — — 55,463 55,463 Other comprehensive income (loss) — — — ( 664 ) — — ( 664 ) Share based payment activity 294,826 — ( 9,607 ) — 8,089 — ( 1,518 ) Dividends declared ($0.225 per share) (4) — — — — — ( 12,721 ) ( 12,721 ) Treasury purchases ( 657,031 ) — — — ( 54,072 ) — ( 54,072 ) Balance as of March 31, 2020 55,340,423 $ 951 $ 221,553 $ ( 5,214 ) $ ( 1,265,888 ) $ 1,004,744 $ ( 43,854 ) Net income — — — — — ( 2,441 ) ( 2,441 ) Other comprehensive income (loss) — — — 187 — — 187 Share based payment activity (4) 29,997 — 2,166 — 1,825 ( 171 ) 3,820 Dividends declared (4) — — — — — — — Treasury purchases ( 6,525 ) — — — ( 464 ) — ( 464 ) Balance as of June 30, 2020 55,363,895 $ 951 $ 223,719 $ ( 5,027 ) $ ( 1,264,527 ) $ 1,002,132 $ ( 42,752 ) Net income — — — — — 14,500 14,500 Other comprehensive income (loss) — — — 240 — — 240 Share based payment activity (4) 101,857 — 4,802 — 1,803 3 6,608 Dividends declared (4) — — — — — — — Treasury purchases ( 7,504 ) — — — — — — Balance as of September 30, 2020 55,458,248 $ 951 $ 228,521 $ ( 4,787 ) $ ( 1,262,724 ) $ 1,016,635 $ ( 21,404 ) (1) Impact of adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Update (“ASU”) No. 2014-09, Revenue From Contracts with Customers (Topic 606) and subsequent amendments to the initial guidance ("Topic 606") related to a foreign joint venture accounted for as an equity method investment. (2) Impact of transaction resulting in an increase in ownership of a consolidated joint venture for the construction and operation of a Cambria Hotel. (3) Reflects the cumulative effect of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which was adopted on January 1, 2020. Refer to Note 1 for additional details. (4) During the fourth quarter of 2019, the Company's board of directors announced a 5 % increase to the quarterly dividend rate to $ 0.225 per share from $ 0.215 per share, beginning with the dividend payable in the first quarter of 2020. On February 28, 2020 , the Company’s board of directors declared a quarterly cash dividend of $ 0.225 per share of common stock. The dividend was payable on April 16, 2020 to shareholders of record on April 2, 2020. Subsequent to the payment of the dividend, in light of uncertainty resulting from the COVID-19 pandemic, we suspended future, undeclared dividends for at least the remainder of 2020. In the second and third quarters of 2020, dividends were paid to certain shareholders upon vesting of certain performance-based stock grants which are captured in Share based payment activity. The accompanying notes are an integral part of these consolidated financial statements. 9 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1 . Basis of Presentation and Significant Accounting Policies Basis of Presentation The accompanying unaudited consolidated financial statements of Choice Hotels International, Inc. and its subsidiaries (together the "Company") have been prepared by the Company in accordance with United States of America generally accepted accounting principles ("GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). These unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present the Company's financial position and results of operations. Except as otherwise disclosed, all adjustments are of a normal recurring nature. Certain prior year amounts in our Consolidated Statements of Income have been reclassified in order to maintain comparability with current year presentation. Certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP have been omitted. The Company believes the disclosures made are adequate to make the information presented not misleading. The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2019 and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 2, 2020 . Interim results are not necessarily indicative of the entire year results. All inter-company transactions and balances between Choice Hotels International, Inc. and its subsidiaries have been eliminated in consolidation. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Summary of Significant Accounting Policies The Company’s significant accounting policies are detailed in the “Summary of Significant Accounting Policies” section of Note 1 in the Annual Report on Form 10-K for the year ended December 31, 2019 . The significant accounting policies that changed in 2020 are set forth below. Recently Adopted Accounting Standards In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) and issued subsequent amendments to the initial guidance at various points thereafter ("Topic 326"). Under legacy standards, we recognized an impairment of receivables when it was probable that a loss had been incurred. Topic 326 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts (which includes losses that may be incurred in future periods), and enhanced disclosures to provide insight to significant estimates and judgments used in estimating credit losses. The Company adopted Topic 326 on January 1, 2020 using the modified retrospective approach resulting in a cumulative-effect adjustment of $ 6.8 million (inclusive of deferred taxes) recorded in retained earnings as of the date of adoption. The scope and provisions of Topic 326 impact the allowance for the Company's Notes and Trade receivables. During the three and nine months ended September 30, 2020 , the Company recorded provisions for credit losses of $ 3.7 million and $ 14.6 million , respectively, with contemplation to economic and credit conditions resulting from the COVID-19 pandemic and estimates of other expected credit losses. Refer to Note 3 for further details on the adoption of Topic 326 and the impact to the Company's accounting policies for Notes receivable. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 modifies disclosure requirements on fair value measurements. The Company adopted ASU 2018-13 on a retrospective basis on January 1, 2020, with limited modifications to its fair value footnote disclosure. Refer to Note 7 . In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) : Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract 10 Table of Contents ("ASU 2018-15"). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted ASU 2018-15 on a prospective basis on January 1, 2020. As the majority of the Company's hosting arrangements are service contracts, the capitalization and subsequent amortization of implementation costs incurred after adoption are expected to impact the timing, but not classification, of expense recognition. Recently Issued Accounting Standard In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 enhances and simplifies various aspects of the income tax accounting guidance in Accounting Standards Codification ("ASC") 740, Income Taxes. The guidance is effective for annual reporting periods beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted. T he Company is evaluating the effect of adopting ASU 2019-12, but does not expect adoption will have a material impact on the consolidated financial statements and disclosures . 2 . Revenue Contract Liabilities Contract liabilities relate to (i) advance consideration received, such as initial franchise and relicensing fees paid when a franchise agreement is awarded and system implementation fees paid at time of installation, for services considered to be part of the brand intellectual property performance obligation and (ii) amounts received when Choice Privileges points are issued, but for which revenue is not yet recognized since the related points have not been redeemed. Initial and relicensing fees are charged when (i) new hotels enter the franchise system, (ii) there is a change of ownership, or (iii) existing franchise agreements are extended. These revenues are recognized as revenue ratably as services are provided over the enforceable period of the franchise agreement. System implementation fees charged to franchisees are also deferred and recognized as revenue over the enforceable period of the franchise agreement. The enforceable period is the period from hotel opening to the first date the franchisee or the Company can terminate the franchise agreement without incurring a significant penalty. Deferred revenues from initial and relicensing fees and system implementation fees will typically be recognized over a five - to ten -year period, unless the franchise agreement is terminated and the hotel exits the franchise system whereby remaining deferred amounts will be recognized to revenue in the period of termination. Loyalty points represent a performance obligation attributable to usage of the points, and thus revenues are recognized at the point in time when the loyalty points are redeemed by members for benefits. The estimated fair value of future redemptions is reflected in current and non-current Liability for guest loyalty program in the consolidated balance sheets. The amount of the loyalty program fees in excess of the point liability represents current and non-current deferred revenue, which is recognized to revenue as points are redeemed including an estimate of future forfeitures. The anticipated redemption pattern of the points is the basis for current and non-current designation of each liability, which was adjusted in the first quarter of 2020 to reflect an anticipated longer issuance to redemption period in light of impacts from the COVID-19 pandemic. Loyalty points are typically redeemed within three years of issuance. Significant changes in the contract liabilities balances during the period December 31, 2019 to September 30, 2020 are as follows: (in thousands) Balance as of December 31, 2019 $ 163,847 Increases to the contract liability balance due to cash received 50,719 Revenue recognized in the period ( 56,061 ) Balance as of September 30, 2020 $ 158,505 Remaining Performance Obligations The aggregate amount of transaction price allocated to unsatisfied or partially unsatisfied performance obligations is $ 158.5 million as of September 30, 2020 . This amount represents fixed transaction price that will be recognized as revenue in future periods, which is captured in the consolidated balance sheet as current and non-current deferred revenue. Based on practical expedient elections permitted by Topic 606, the Company does not disclose the value of unsatisfied performance obligations for (i) variable consideration subject to the sales or usage-based royalty constraint or comprising a component of a series (including franchise, partnership, qualified vendor, and software as a service ("SaaS") agreements), (ii) variable consideration for which we recognize revenue at the amount to which we have the right to invoice for services performed, or (iii) contracts with an expected original duration of one year or less. Disaggregation of Revenue Three Months Ended Three Months Ended September 30, 2020 September 30, 2019 (in thousands) Over time Point in time Total Over time Point in time Total Royalty fees $ 79,666 $ — $ 79,666 $ 113,688 $ — $ 113,688 Initial franchise and relicensing fees 6,071 — 6,071 6,741 — 6,741 Procurement services 9,620 495 10,115 14,084 730 14,814 Marketing and reservation system 93,327 13,814 107,141 146,263 10,761 157,024 Owned hotels 3,498 595 4,093 7,460 1,201 8,661 Other 3,317 — 3,317 9,494 — 9,494 Total Topic 606 revenues $ 195,499 $ 14,904 210,403 $ 297,730 $ 12,692 310,422 Non-Topic 606 revenues 368 310 Total revenues $ 210,771 $ 310,732 Nine Months Ended Nine Months Ended September 30, 2020 September 30, 2019 (in thousands) Over time Point in time Total Over time Point in time Total Royalty fees $ 200,157 $ — $ 200,157 $ 300,468 $ — $ 300,468 Initial franchise and relicensing fees 20,031 — 20,031 20,223 — 20,223 Procurement services 33,069 1,540 34,609 45,219 2,371 47,590 Marketing and reservation system 247,092 50,111 297,203 380,544 59,009 439,553 Owned hotels 13,159 2,248 15,407 7,460 1,201 8,661 Other 12,167 — 12,167 29,249 141 29,390 Total Topic 606 revenues $ 525,675 $ 53,899 579,574 $ 783,163 $ 62,722 845,885 Non-Topic 606 revenues 1,105 851 Total revenues $ 580,679 $ 846,736 Non-Topic 606 revenues primarily represent revenue from leasing and are presented in Owned hotels and Other revenues in the consolidated statements of income. As presented in Note 11 , the Corporate & Other segment amounts represent $ 6.4 million and $ 10.2 million for the three months ended September 30, 2020 and 2019 , respectively, and $ 21.8 million and $ 17.6 million for the nine months ended September 30, 2020 and 2019 , respectively, and are included in the Over time column of Other revenues and the Owned Hotels and Non-Topic 606 revenues rows. The remaining revenues relate to the Hotel Franchising segment. Royalty fees and Marketing and reservation system revenues are presented net of intersegment revenues of $ 0.3 million and $ 0.8 million for the three months ended September 30, 2020 and 2019, respectively, and $ 1.2 million and $ 0.8 million for the nine months ended September 30, 2020 and 2019, respectively, as described in Note 11 . 3 . Notes Receivable and Allowance for Credit Losses The Company has provided financing in the form of notes receivable loans to franchisees to support the development of properties in strategic markets. As of September 30, 2020 and December 31, 2019 , the Company had $ 139.7 million and $ 133.0 million , respectively, in notes receivable loans outstanding. 11 Table of Contents The Company has developed a systematic methodology to determine its allowance for credit losses across our portfolio of notes receivable loans. The Company monitors the risk and performance of our portfolio by the level of security in collateral (i.e., senior, subordinated or unsecured). As each of the Company’s notes receivable loans has unique risk characteristics, the Company deploys its methodology to calculate allowances for credit losses at the individual notes receivable loan level. The Company primarily utilizes a discounted cash flow ("DCF") approach to measure the credit allowance, influenced by the key economic variables of each note receivable loan. The Company identified the key economic variables for these loans to be loan-to-cost ("LTC") or loan-to-value ("LTV") ratios and debt service coverage ratio ("DSCR"). The LTC or LTV ratio represents the loan principal relative to the project cost or value and is an indication of the ability to be re-paid principal at loan maturity. The DSCR represents borrower net operating income as a percentage of the interest and principal payments incurred (i.e., debt service) on all debt of the borrower and is an indication of the ability of the borrower to timely pay amounts due during the term of the loan. The LTC or LTV ratios and DSCR are considered during loan underwriting as indications of risk and, accordingly, we believe these factors are the most representative risk indicators for calculating the allowance for credit loss. Loans with higher LTC or LTV ratios and lower DSCR ratios generally are representative of loans with greater risk and, accordingly, have higher credit allowances as a percentage of loan principal. Conversely, loans with lower LTC or LTV ratios and higher DSCR ratios generally are representative of loans with lesser risk and, accordingly, have lower credit allowances as a percentage of loan principal. The following table shows the composition of the Company's notes receivable balances based on the level of security credit quality indicator: (in thousands) September 30, 2020 December 31, 2019 Senior $ 105,592 $ 98,545 Subordinated 32,667 32,153 Unsecured 1,453 2,316 Total notes receivable 139,712 133,014 Total allowance for notes receivable credit losses 16,295 4,556 Total notes receivable, net of allowance $ 123,417 $ 128,458 Current portion, net of allowance $ 25,608 $ 25,404 Long-term portion, net of allowance $ 97,809 $ 103,054 Amortized cost basis by year of origination and level of security credit quality indicator are as follows: (in thousands) 2020 2019 2018 Prior Total Senior $ — $ 28,297 $ 15,432 $ 61,863 $ 105,592 Subordinated — 2,439 10,981 19,247 32,667 Unsecured — — 537 916 1,453 Total notes receivable $ — $ 30,736 $ 26,950 $ 82,026 $ 139,712 As disclosed in Note 1 , Topic 326 required a cumulative-effect adjustment to the consolidated balance sheet as of the beginning of the first reporting period in which the guidance was effective. As of the adoption date of January 1, 2020, the Company established a credit allowance on its notes receivable loans of $ 12.9 million , an increase from a previous loan allowance of $ 4.6 million as of December 31, 2019. The cumulative-effect adjustment of adopting Topic 326 of $ 6.8 million , net of tax impact, is recorded in the consolidated balance sheets in the Retained earnings line item. 12 Table of Contents The following table summarizes the activity related to the Company’s notes receivable allowance for credit losses, including the impacts of adopting Topic 326. The provisions recorded in the nine months ended September 30, 2020 reflect the increased likelihood of adverse outcomes on loans to borrowers with contemplation to impacts of the COVID-19 pandemic and estimates of other expected credit losses. (in thousands) September 30, 2020 December 31, 2019 Beginning balance $ 4,556 $ 4,685 Reserves established from adoption of Topic 326 8,348 — Provision for credit losses 4,302 — Write-offs ( 911 ) ( 129 ) Ending balance $ 16,295 $ 4,556 The Company considers loans to be past due and in default when payments are not made when due. Although the Company considers loans to be in default if payments are not received on the due date, the Company does not suspend the accrual of interest until those payments are more than 30 days past due. The Company applies payments received for loans on non-accrual status first to interest and then to principal. The Company does not resume interest accrual until all delinquent payments are received. The amortized cost basis of notes receivable on non-accrual status was $ 28.9 million and $ 1.7 million at September 30, 2020 and December 31, 2019 , respectively. The Company has identified loans totaling approximately $ 13.1 million and $ 16.3 million , respectively, with stated interest rates that are less than market rate, representing a total discount of $ 1.0 million and $ 1.3 million as of September 30, 2020 and December 31, 2019 , respectively. These discounts are reflected as a reduction of the outstanding loan amounts and are amortized over the life of the related loan. Past due balances of notes receivable by credit quality indicators are as follows: (in thousands) 30-89 days Past Due > 90 days Past Due Total Past Due Current Total Notes Receivable As of September 30, 2020 Senior $ — $ 15,432 $ 15,432 $ 90,160 $ 105,592 Subordinated — 2,209 2,209 30,458 32,667 Unsecured — — — 1,453 1,453 $ — $ 17,641 $ 17,641 $ 122,071 $ 139,712 As of December 31, 2019 Senior $ — $ — $ — $ 98,545 $ 98,545 Subordinated — — — 32,153 32,153 Unsecured — — — 2,316 2,316 $ — $ — $ — $ 133,014 $ 133,014 The Company evaluated its off-balance-sheet credit exposure for loan commitments and determined the likelihood of having to perform is remote as of September 30, 2020 . Refer to Note 12 . Variable Interest through Notes Issued The Company has issued notes receivables to certain entities that have created variable interests in these borrowers totaling $ 121.5 million and $ 126.5 million as of September 30, 2020 and December 31, 2019 , respectively. The Company has determined that it is not the primary beneficiary of these variable interest entities ("VIEs"). These loans have stated fixed and/or variable interest amounts. 4 . Investments in Unconsolidated Entities The Company maintains a portfolio of investments owned through noncontrolling interests in equity method investments with one or more partners. The Company has equity method investments in joint ventures that represent VIEs totaling $ 71.9 million and $ 74.4 million on the consolidated balance sheets at September 30, 2020 and December 31, 2019 , respectively. These investments relate to the Company's program to offer equity support to qualified franchisees to develop and operate Cambria Hotels in strategic markets. Based on an analysis of who has the power to direct the activities that most significantly impact these entities performance and who has an obligation to absorb losses of these entities or a right to receive benefits from these entities that could potentially be significant to the entity, the Company determined that it is not the primary beneficiary of any of these VIEs. The Company based its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and the relevant development, operating management and financial agreements. Although the Company is not the primary beneficiary of these VIEs, it does exercise significant influence through its equity ownership and as a result the Company's investment in these entities is accounted for under the equity method. For the three months ended September 30, 2020 and 2019 , the Company recognized losses totaling $ 2.3 million and $ 6.9 million , respectively, from these investments. For the nine months ended September 30, 2020 and 2019 , the Company recognized losses totaling $ 6.9 million and $ 10.9 million , respectively, from these investments. The Company's maximum exposure to losses related to its investments in VIEs is limited to its equity investments as well as certain limited payment guaranties described in Note 12 of these financial statements. 5 . Debt Debt consists of the following: September 30, 2020 December 31, 2019 (in thousands) $400 million senior unsecured notes due 2022 with an effective interest rate of 6.0%, less deferred issuance costs of $0.9 million and $2.3 million at September 30, 2020 and December 31, 2019, respectively $ 215,701 $ 397,680 $400 million senior unsecured notes due 2029 with an effective interest rate of 3.88%, less a discount and deferred issuance costs of $5.5 million and $6.0 million at September 30, 2020 and December 31, 2019, respectively 394,485 394,039 $600 million senior unsecured revolving credit facility with an effective interest rate of 2.76%, less deferred issuance costs of $2.7 million at December 31, 2019 (1) — 15,502 $450 million senior unsecured notes due 2031 with an effective interest rate of 3.86%, less a discount and deferred issuance costs of $6.3 million at September 30, 2020 443,707 — Construction loan with an effective interest rate of 6.23%, less deferred issuance costs of $0.6 million at December 31, 2019. — 32,465 Fixed rate collateralized mortgage with an effective interest rate of 4.57%, plus a fair value adjustment of $34 thousand and $0.2 million at September 30, 2020 and December 31, 2019, respectively 6,977 7,511 Economic development loans with an effective interest rate of 3.0% at September 30, 2020 and December 31, 2019, respectively 4,416 4,416 Total debt $ 1,065,286 $ 851,613 Current portion of long-term debt $ 6,977 $ 7,511 Long-term debt $ 1,058,309 $ 844,102 (1) In September 2020, the Company utilized excess cash on hand to pay down its senior unsecured revolving credit facility balance in full. As there are no outstanding borrowings at September 30, 2020 , deferred issuance costs of $ 2.5 million for the senior unsecured revolving credit facility are presented in non-current Other Assets in the Consolidated Balance Sheets. In April 2020, the Company entered into a $ 250 million unsecured term loan (the "Term Loan") with a scheduled maturity date of April 15, 2021 . In July 2020, the Company issued $ 450 million aggregate principal amount of 3.70 % 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 5.75 % 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 $ 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. As a result of the early redemption of the 2012 Senior Notes and the early payoff of the Term Loan, the Company recognized a total charge of $ 16.0 million loss on extinguishment of debt. On February 18, 2020, the Company entered into the First Amendment (the "Amendment") to the Amended and Restated Senior Unsecured Credit Agreement (the “Credit Agreement”) among the Company, Deutsche Bank AG New York Branch, as administrative agent and the lenders party thereto. Prior to the Amendment, the Credit Agreement provided that if certain subsidiaries of the Company were to incur certain recourse debt or become obligors in respect of certain recourse debt of the Company or certain of its other subsidiaries, those obligated subsidiaries were required to guarantee the Company’s obligations under the unsecured revolving credit facility provided pursuant to the Restated Credit Agreement (the “springing guarantee”). The Amendment, among other things, removes the springing guarantee and other provisions and references in the Credit Agreement related to the potential existence of subsidiary guarantors. On March 5, 2020 , the Company paid off the construction loan in the amount $ 33.1 million inclusive of accrued and unpaid interest and recorded a loss on extinguishment of debt of $ 0.6 million . On August 12, 2020, the Company executed a one-year extension on the senior unsecured credit facility for $ 525 million of the $ 600 million total capacity in exchange for a fee of $ 0.3 million . The extended maturity date is August 20, 2025. Refer to Note 12 and the Liquidity and Capital Resources header of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information. 6 . Accumulated Other Comprehensive Loss The following represents the changes in accumulated other comprehensive loss, net of tax, by component for the nine months ended September 30, 2020 and 2019 : (in thousands) Loss on Cash Flow Hedge Foreign Currency Items Total Balance as of December 31, 2019 $ — $ ( 4,550 ) $ ( 4,550 ) Other comprehensive loss before reclassification — ( 237 ) ( 237 ) Net current period other comprehensive income (loss) — ( 237 ) ( 237 ) Balance as of September 30, 2020 $ — $ ( 4,787 ) $ ( 4,787 ) (in thousands) Loss on Cash Flow Hedge Foreign Currency Items Total Balance as of December 31, 2018 $ ( 1,436 ) $ ( 4,010 ) $ ( 5,446 ) Other comprehensive loss before reclassification — ( 883 ) ( 883 ) Amounts reclassified from accumulated other comprehensive loss 646 — 646 Net current period other comprehensive income (loss) 646 ( 883 ) ( 237 ) Balance as of September 30, 2019 $ ( 790 ) $ ( 4,893 ) $ ( 5,683 ) During the three and nine ended September 30, 2019 , $ 0.2 million and $ 0.6 million , respectively, was reclassified from accumulated other comprehensive loss to Interest expense in the Company's Consolidated Statements of Income with reference to a cash flow hedge loss on an interest rate contract. There was no income tax expense or benefit. There were no amounts reclassified during the three and nine months ended September 30, 2020 , as the debt related to the Interest rate contract was paid off in December 2019. 7 . Fair Value Measurements The Company estimates the fair value of its financial instruments utilizing a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The following summarizes the three levels of inputs, as well as the assets that the Company values using those levels of inputs. Level 1 : Quoted prices in active markets for identical assets and liabilities. The Company’s Level 1 assets consist of marketable securities (primarily mutual funds) held in the Deferred Compensation Plan. Level 2 : Observable inputs, other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable. The Company’s Level 2 assets consist of money market funds held in the Company's Deferred Compensation Plan. Level 3 : Unobservable inputs, supported by little or no market data available, where the reporting entity is required to develop its own assumptions to determine the fair value of the instrument. The Company does not currently have any assets recorded at fair value whose fair value was determined using Level 3 inputs and there were no transfers of Level 3 assets during the three and nine months ended September 30, 2020 . As of September 30, 2020 and December 31, 2019 , the Company had the following assets recorded in the consolidated balance sheets measured at fair value on a recurring basis: Fair Value Measurements at Reporting Date Using (in thousands) Total Level 1 Level 2 Level 3 As of September 30, 2020 Mutual funds (1) $ 25,157 $ 25,157 $ — $ — Money market funds (1) 2,817 — 2,817 — Total $ 27,974 $ 25,157 $ 2,817 $ — As of December 31, 2019 Mutual funds (1) $ 24,927 $ 24,927 $ — $ — Money market funds (1) 2,192 — 2,192 — Total $ 27,119 $ 24,927 $ 2,192 $ — (1) Included in Investments, employee benefit plans, at fair value and Other current assets on the consolidated balance sheets. Other financial instruments disclosure The Company believes that the fair value of its current assets and current liabilities approximate their reported carrying amounts due to the short-term nature of these items. In addition, the interest rates of the Company's senior unsecured revolving credit facility adjust frequently based on current market rates; accordingly its carrying amount approximates fair value. The Company estimates the fair value of notes receivable, which approximate their carrying value, utilizing an analysis of future cash flows and credit worthiness for similar types of arrangements. Based upon the availability of market data, the notes receivable have been classified as Level 3 inputs. The primary sensitivity in these calculations is based on the selection of appropriate interest and discount rates. For further information on notes receivable, refer to Note 3 . The fair values of the Company's $ 400 million 2012 Senior Notes, $ 400 million senior unsecured notes due 2029 and $ 450 million 2020 Senior Notes are classified as Level 2, as the significant inputs are observable in an active market. At December 31, 2019 , the $ 400 million 2012 Senior Notes had an approximate fair value of $ 432.0 million . On July 23, 2020, the Company purchased approximately $ 183.4 million aggregate principal amount of the 2012 Senior Notes. At September 30, 2020 , the $ 216.6 million remaining 2012 Senior Notes had an approximate fair value of $ 231.7 million . At September 30, 2020 and December 31, 2019 , the $ 400.0 million senior unsecured notes due 2029 had an approximate fair value of $ 426.8 million and $ 403.4 million , respectively. At September 30, 2020 , the $ 450 million 2020 Senior Notes had an approximate fair value of $ 474.7 million . Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. Settlement of such fair value amounts may not be possible and may not be a prudent management decision. 8 . Income Taxes The effective income tax rates were 39.4 % and 11.3 % for the three months ended September 30, 2020 and 2019 , respectively. 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, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other than Inventory ("ASU 2016-16"), which provides guidance on recognition of current income tax consequences for inter-company asset transfers (other than inventory) at the time of transfer. On January 1, 2020 , the Company completed a reorganization of its foreign legal entity structure that resulted in a $ 30.6 million tax benefit. In accordance with ASU 2016-16, the Company recorded the $ 30.6 million benefit and a corresponding deferred tax asset in the first quarter of 2020. 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 13 Table of Contents 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. 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. 9 . Share-Based Compensation and Capital Stock The components of the Company’s pretax share-based compensation activity and associated income tax benefit are as follows for the three and nine months ended September 30, 2020 and 2019 : Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2020 2019 2020 2019 Stock options $ 497 $ 541 $ 1,478 $ 1,667 Restricted stock 2,206 1,954 6,249 6,100 Performance vested restricted stock units 675 1,510 ( 4,836 ) 3,998 Total share-based compensation expense $ 3,378 $ 4,005 $ 2,891 $ 11,765 Income tax benefit $ 805 $ 964 $ 689 $ 2,831 Refer to the discussion of Performance Vested Restricted Stock Units (“PVRSUs”) leveraging for unvested grants below. A summary of stock-based award activity as of and changes during the nine months ended September 30, 2020 are presented below: Stock Options Restricted Stock Performance Vested Restricted Stock Units Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Outstanding at January 1, 2020 873,895 $ 61.69 312,097 $ 75.23 330,716 $ 70.03 Granted 158,620 91.28 155,269 89.91 170,471 134.26 Performance-Based Leveraging (1) — — — — 30,116 61.31 Exercised/Vested ( 131,800 ) 50.82 ( 120,052 ) 69.40 ( 176,471 ) 58.68 Expired — — — — ( 16,117 ) 60.50 Forfeited ( 3,696 ) 91.28 ( 36,860 ) 81.98 ( 16,963 ) 82.25 Outstanding at September 30, 2020 897,019 $ 68.40 2.5 years 310,454 $ 84.03 321,752 $ 109.25 Options exercisable at September 30, 2020 557,664 $ 58.71 2.5 years (1) PVRSUs outstanding have been increased by 30,116 units due to the Company exceeding the targeted performance conditions contained in PVRSUs granted in prior periods which vested in the nine months ended September 30, 2020 . 14 Table of Contents The stock options granted by the Company had an exercise price equal to the market price of the Company's common stock on the date of grant. The fair value of the options granted was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions: 2020 Grants Risk-free interest rate 0.99 % Expected volatility 20.88 % Expected life of stock option 5.9 years Dividend yield 0.99 % Requisite service period 4 years Contractual life 10 years Weighted average fair value of options granted (per option) $ 17.25 The fair value of restricted stock grants is measured by the market price of the Company's common stock on the date of grant. Restricted stock awards generally vest ratably over the service period beginning with the first anniversary of the grant date. Vesting service period of shares granted during the nine months ended September 30, 2020 range from 12 to 48 months . The Company grants two types of PVRSU awards: PVRSUs with performance conditions based on internal performance metrics and PVRSUs with market conditions based on the Company's total shareholder return ("TSR") relative to a predetermined peer group. The vesting of PVRSU stock awards is contingent upon the Company achieving internal performance or TSR targets over a specified period and the employees' continued employment for a service period. These performance and market conditions affect the number of shares that will ultimately vest. During the three months ended September 30, 2020 , PVRSU awards granted had a service period of 31 months with award vesting ranges between 0 % and 200 % of the initial units granted. The fair value of PVRSUs based on internal performance metrics is measured by the market price of the Company's common stock on the date of award grant. Compensation expense is recognized ratably over the requisite service period based on the Company's estimate of the achievement of the performance conditions. Management monitors current results and forecasts of the relevant internal performance metrics and, as necessary, adjusts the performance-based leveraging of unvested PVRSUs. During the nine months ended September 30, 2020 , the Company reduced the leveraging factor for 230,647 unvested PVRSUs granted in the current and prior periods to 0 % , based on management's estimate of achievement of performance targets with contemplation to impacts from the COVID-19 pandemic. The fair value of TSR PVRSUs are estimated using a Monte Carlo simulation method as of the date of award grant. Compensation expense is recognized ratably over the requisite service period, regardless of whether the market conditions are achieved and the awards ultimately vest. Share Repurchases and Redemptions There were no purchases of common stock under the share repurchase program during the three months ended September 30, 2020 . The Company purchased 548,031 shares of common stock under the share repurchase program at a total cost of $ 43.3 million during the nine months ended September 30, 2020 . During the three and nine months ended September 30, 2020 , the Company redeemed 7,504 and 123,029 shares of common stock at a total cost of approximately $ 0.7 million and $ 11.9 million , respectively, from employees to satisfy the option exercise price and statutory minimum tax-withholding requirements related to the exercising of stock options and vesting of performance vested restricted stock units and restricted stock grants. These redemptions were outside the share repurchase program. In light of uncertainty resulting from the COVID-19 pandemic, the Company has temporarily suspended activity under the share repurchase program. Refer to the Liquidity and Capital Resources header of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information. 15 Table of Contents 10 . Earnings Per Share The computation of basic and diluted earnings per common share is as follows: Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except per share amounts) 2020 2019 2020 2019 Numerator: Net income $ 14,500 $ 76,239 $ 67,522 $ 180,709 Income allocated to participating securities ( 78 ) ( 463 ) ( 378 ) ( 1,104 ) Net income available to common shareholders $ 14,422 $ 75,776 $ 67,144 $ 179,605 Denominator: Weighted average common shares outstanding – basic 55,106 55,366 55,167 55,346 Basic earnings per share $ 0.26 $ 1.37 $ 1.22 $ 3.25 Numerator: Net income $ 14,500 $ 76,239 $ 67,522 $ 180,709 Income allocated to participating securities ( 78 ) ( 461 ) ( 377 ) ( 1,100 ) Net income available to common shareholders $ 14,422 $ 75,778 $ 67,145 $ 179,609 Denominator: Weighted average common shares outstanding – basic 55,106 55,366 55,167 55,346 Diluted effect of stock options and PVRSUs 304 260 273 269 Weighted average common shares outstanding – diluted 55,410 55,626 55,440 55,615 Diluted earnings per share $ 0.26 $ 1.36 $ 1.21 $ 3.23 The Company's unvested restricted shares contain rights to receive nonforfeitable dividends, and thus are participating securities requiring the two-class method of computing earnings per share ("EPS"). The calculation of EPS for common stock shown above excludes the income attributable to the unvested restricted share awards from the numerator and excludes the dilutive impact of those awards from the denominator. As of both September 30, 2020 and 2019 , the Company had 0.9 million outstanding stock options. Stock options are included in the diluted EPS calculation using the treasury stock method and average market prices during the period, unless the stock options would be anti-dilutive. For both the three and nine months ended September 30, 2020 , 0.2 million anti-dilutive stock options were excluded from the diluted EPS calculation. For the three months ended September 30, 2019 , no anti-dilutive stock options were excluded from the diluted EPS calculation. For the nine months ended September 30, 2019 , 0.2 million anti-dilutive stock options were excluded from the diluted EPS calculation. PVRSUs are also included in the diluted EPS calculation when the performance conditions have been met at the reporting date. However, at September 30, 2020 and 2019 , PVRSUs totaling 233,713 and 314,795 , respectively, were excluded from the computation since the performance conditions had not been met. 11 . Reportable Segment Information Hotel Franchising: Hotel Franchising includes the Company's hotel franchising operations consisting of its fourteen brands. The fourteen brands are aggregated within this segment considering their similar economic characteristics, types of customers, distribution channels and regulatory business environments. Revenues from the hotel franchising business include royalty fees, initial franchise and relicensing fees, marketing and reservation system fees, procurement services revenue and other hotel franchising related revenue. The Company is obligated under its hotel franchise agreements to provide marketing and reservation services appropriate for the operation of its systems. These services do not represent separate reportable segments as their operations are directly related to the Company's hotel franchising business. The revenues received from franchisees that are used to pay for part of the Company's ongoing operations are included in hotel franchising revenues and are offset by the related expenses paid for marketing and reservation activities to calculate hotel franchising operating income. 16 Table of Contents The Company evaluates its hotel franchising segment based primarily on the results of the segment without allocating corporate expenses, income taxes or indirect general and administrative expenses, which are included in the Corporate & Other column. Corporate & Other revenues include owned hotel revenues and rental income related to a commercial office building owned by the Company, as well as revenues related to the Company's SaaS technology solutions divisions which provide cloud-based property management software to non-franchised hoteliers. Equity in earnings or losses from hotel franchising related joint ventures is allocated to the Company's hotel franchising segment. The Company does not allocate interest expense, interest income, other gains and losses or income taxes to its segments. Intersegment revenue adjustment is from the elimination of Hotel Franchising revenue which include royalty and marketing and reservation system fees charged to our owned hotels against franchise fee expense recognized by our owned hotels in Corporate & Other operating income (loss). Our President and Chief Executive Officer, who is our chief operating decision maker, does not use assets by operating segment when assessing performance or making operating segment resource allocations and therefore assets by segment are not disclosed below. The following table presents the financial information for the Company's segments: Three Months Ended September 30, 2020 Three Months Ended September 30, 2019 (in thousands) Hotel Franchising Corporate & Other Intersegment Eliminations Consolidated Hotel Franchising Corporate & Other Intersegment Eliminations Consolidated Revenues $ 204,717 $ 6,368 $ ( 314 ) $ 210,771 $ 301,280 $ 10,209 $ ( 757 ) $ 310,732 Operating income (loss) $ 70,940 $ ( 19,874 ) $ — $ 51,066 $ 116,227 $ ( 13,807 ) $ — $ 102,420 Income (loss) before income taxes $ 69,208 $ ( 45,114 ) $ — $ 24,094 $ 109,828 $ ( 23,904 ) $ — $ 85,924 Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019 (in thousands) Hotel Franchising Corporate & Other Intersegment Eliminations Consolidated Hotel Franchising Corporate & Other Intersegment Eliminations Consolidated Revenues $ 560,082 $ 21,785 $ ( 1,188 ) $ 580,679 $ 829,901 $ 17,592 $ ( 757 ) $ 846,736 Operating income (loss) $ 154,770 $ ( 49,514 ) $ — $ 105,256 $ 306,020 $ ( 56,013 ) $ — $ 250,007 Income (loss) before income taxes $ 147,598 $ ( 95,983 ) $ — $ 51,615 $ 296,469 $ ( 79,912 ) $ — $ 216,557 12 . Commitments and Contingencies The Company is not a party to any litigation other than litigation in the ordinary course of business. The Company's management and legal counsel do not expect that the ultimate outcome of any of its currently ongoing legal proceedings, individually or collectively, will have a material adverse effect on the Company's financial position, results of operations or cash flows. Contingencies The Company entered into various limited payment guaranties with regards to the Company’s VIEs supporting the VIE’s efforts to develop and own hotels franchised under the Company’s brands. Under these limited payment guaranties, the Company has agreed to guarantee a portion of the outstanding debt until certain conditions are met such as (a) the loan matures, (b) certain debt covenants are achieved, (c) the maximum amount guaranteed by the Company is paid in full or (d) the Company, through its affiliates, ceases to be a member of the VIE. The maximum exposure of principal incidental to these limited payment guaranties is $ 5.7 million , plus unpaid expenses and accrued unpaid interest. As of 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 the guaranty. 17 Table of Contents Commitments The Company has the following commitments outstanding at September 30, 2020 : • The Company provides financing in the form of franchise agreement acquisition payments to franchisees for property improvements, hotel development efforts and other purposes. These payments are typically made at commencement of construction or hotel opening, in accordance with agreed upon provisions in individual franchise agreements. At 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. • 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 their efforts to construct Cambria hotels. • The Company committed to provide financing in the form of mezzanine loans or credit facilities to franchisees for Choice brand development efforts. In the third quarter of 2020, the Company has committed to provide an aggregate of approximately $ 1.0 million , upon certain conditions being met. As of September 30, 2020 , no amounts have been disbursed. • In March 2018, the Company entered into a construction loan agreement for the rehabilitation and development of a former office building into a hotel through a consolidated joint venture with a commercial lender, which is secured by the building. The construction loan can be drawn up to $ 34.9 million . On March 5, 2020 , the Company paid off the construction loan in the amount $ 33.1 million inclusive of accrued and unpaid interest and recorded a loss on extinguishment of debt of $ 0.6 million . • The Company’s franchise agreements require the payment of franchise fees, which include marketing and reservation system fees. In accordance with terms of our franchise agreements, the Company is obligated to use the marketing and reservation system revenues it collects from the current franchisees comprising its various hotel brands to provide marketing and reservation services appropriate to support the operation of the overall system. To the extent revenues collected exceed expenditures incurred, the Company has a commitment to the franchisee system to make expenditures in future years. Conversely, to the extent expenditures incurred exceed revenues collected, the Company has the contractual enforceable right to assess and collect such amounts. In the ordinary course of business, the Company enters into numerous agreements that contain standard indemnities whereby the Company indemnifies another party for breaches of representations and warranties. Such indemnifications are granted under various agreements, including those governing (i) purchases or sales of assets or businesses, (ii) leases of real estate, (iii) licensing of trademarks, (iv) access to credit facilities, (v) issuances of debt or equity securities, and (vi) certain operating agreements. The indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords in lease contracts, (iii) franchisees in licensing agreements, (iv) financial institutions in credit facility arrangements, (v) underwriters in debt or equity security issuances and (vi) parties under certain operating agreements. In addition, these parties are also generally indemnified against any third party claim resulting from the transaction that is contemplated in the underlying agreement. While some of these indemnities extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under these indemnities, nor is the Company able to develop an estimate of the maximum potential amount of future payments to be made under these indemnifications as the triggering events are not subject to predictability. With respect to certain of the aforementioned indemnities, such as indemnifications of landlords against third party claims for the use of real estate property leased by the Company, the Company maintains insurance coverage that mitigates potential liability. 13 . Transactions with Unconsolidated Joint Ventures The Company has a management fee arrangement for marketing services with a joint venture partner. For the three months ended September 30, 2020 and 2019 , fees earned and payroll costs reimbursed under this arrangement totaled $ 0.5 million and $ 0.8 million , respectively. For the nine months ended September 30, 2020 and 2019 , fees earned and payroll costs reimbursed under this arrangement totaled $ 0.9 million and $ 1.7 million , respectively. The Company has entered into franchise agreements with certain of the unconsolidated joint ventures discussed in Note 4 . Pursuant to these franchise agreements, for the three months ended September 30, 2020 and 2019 , the Company recorded royalty and marketing reservation system fees of approximately $ 3.6 million and $ 7.4 million , respectively. For the nine months ended September 30, 2020 and 2019 , the Company recorded royalty and marketing reservation system fees of 18 Table of Contents approximately $ 10.4 million and $ 19.0 million , respectively. The Company recorded $ 2.4 million and $ 1.4 million as a receivable due from these joint ventures as of September 30, 2020 and December 31, 2019 , respectively. 14 . Impairment of Long-Lived Assets On December 30, 2014, a court awarded the Company title to a commercial office building as settlement of a portion of an outstanding loan receivable for which the building was pledged as collateral. At the time of settlement, a single tenant fully occupied the building. The initial lease term expiration is in December 2020 and the tenant has extension options for up to 30 years . The tenant has recently provided notice that the lease renewal options will not be exercised. Management identified this as a triggering event requiring the interim reevaluation of the commercial office building's long-lived assets, comprised of $ 11.1 million in property and equipment and $ 0.2 million in intangible assets. Recoverability of the long-lived asset group is assessed based on net, undiscounted expected cash flows of the asset group. We have prepared undiscounted expected cash flows aligned with Management’s present long-term strategy for the building and concluded the undiscounted expected cash flows are less than the carrying amount of the asset group. An impairment charge was recorded for the excess of the carrying value over the fair value of the asset group. To estimate the fair value of the long-lived asset group, the Company utilized a combination of market and income approach valuation methods. The Company recognized a non-cash pretax long-lived asset group impairment charge in the amount of $ 4.3 million . The results of the commercial office building are included in the Corporate & Other segment in Note 11 . The impairment charge does not have an impact on the Company's liquidity or compliance with financial covenants under existing debt arrangements.