CHOICE HOTELS INTERNATIONAL INC /DE 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the consolidated financial condition and results of operations of Choice Hotels International, Inc. and its subsidiaries (together the "Company", "we", "us", or "our") contained in this report. MD&A is provided as a supplement to — and should be read in conjunction with — our consolidated financial statements and the accompanying notes. Impact of the COVID-19 Pandemic The evolving spread of COVID-19 has caused significant disruptions to the global economy and the hospitality industry, including in the United States, where more than 80% of our franchised hotels are located. The COVID-19 pandemic has led governments and other authorities and businesses around the world to impose or recommend measures intended to control its spread, including temporary closures of many businesses, "shelter in place" orders, travel restrictions, cancellation of events including sporting events, conferences and meetings, social distancing measures and other governmental regulations. As a result, the COVID-19 pandemic and its consequences have dramatically reduced travel and demand for hotel rooms, which has had a material adverse impact on the hospitality industry and the Company both financially and operationally. The development of effective vaccines and initial distribution efforts are significant and positive developments. However, the extent to which the COVID-19 pandemic will continue to impact the hospitality industry and our operations remains uncertain and will depend largely on future developments, including the rate and pace of vaccination in the broader population, the severity and duration of resurgences or variants of the virus, and the effectiveness of actions by government authorities and the public to contain the pandemic. The impacts of COVID-19 on the Company's business were first experienced toward the end of the first quarter of 2020, with domestic occupancy levels ranging between 25.5% and 32.5% in the last ten days of March resulting in significant decreases in revenue per available room ("RevPAR"). Lower occupancy and RevPAR trends continued into the second quarter of 2020, with domestic RevPAR experiencing a decline of approximately 60.1% from the comparative prior year April. These trends have steadily improved, albeit remained significantly impacted, in the third and fourth quarters, with domestic RevPAR experiencing a decline of approximately 28.8% over the comparative prior year third quarter and 25.1% over the comparative prior year fourth quarter. For the reasons cited above, we expect significant impact on our results of operations to continue in 2021. As of March 31, 2020, approximately 10% of the Company's domestic hotel system that had temporarily suspended operations due to governmental restriction or a franchisee’s election, compared to less than 1% as of both December 31, 2020 and January 31, 2021. 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 December 31, 2020, the Company had approximately $834.8 million in cash and additional 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. In response to the COVID-19 pandemic, we have implemented measures to focus on the safety of our customers, employees, franchisees and their staff, while at the same time seeking to mitigate the impact on franchisees' and our Company's financial position and operations. The duration of these measures cannot be predicted at this time. These measures include, but are not limited to, the following: • Implemented fee-deferral programs for domestic and international franchisees. • 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 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 the Company's guest cancellation policy to provide travelers greater flexibility during these challenging times. • Implemented travel restrictions and work-from-home practices for the Company’s employees. 41 Table of Contents 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 room donations to Operation Homefront to help ill and injured service members that were displaced by the pandemic. The Company also 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. Since the onset of the pandemic, 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: • Reduced the compensation of the Board of Directors, chief executive officer, and other executive officers. • Reduced global workforce by approximately 18% since December 31, 2019 through a combination of layoffs and furloughs. • Introduced a hiring freeze, except with respect to certain critical positions. • Suspended associates’ 401(k) match through the end of 2020. • Eliminated, reduced or deferred non-essential expenditures, discretionary capital expenditures and investments. We are actively working with vendors to achieve relief on fees or timing of fee payment. • Temporarily suspended activity under the Company’s share repurchase program. • Determined to temporarily suspend future, undeclared dividends while the COVID-19 pandemic is significantly impacting travel. • 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 of the Company's branded hotels has been severely impacted. However, approximately 90% of the Company’s domestic hotels are in suburban, small town and interstate locations and have 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 through the end of 2020. Given the uncertainty as to the potential duration of the crisis, including a potential 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 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 I, Item 1A of this Form 10-K. Overview We are primarily a hotel franchisor with franchise agreements and owned hotels representing 7,147 hotels open comprising 597,977 rooms and 1,022 hotels under construction, awaiting conversion or approved for development comprising 86,264 rooms as of December 31, 2020, located in 50 states, the District of Columbia and more than 40 countries and territories outside the United States. Our brand names include Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Clarion Pointe TM , 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"). On January 27, 2020, we announced the launch of Everhome Suites, a new-construction midscale extended-stay brand offering. We expect to open the first Everhome Suites hotel in 2021. The Company's primary segment is the hotel franchising business, which represents approximately 96% of the Company's total revenues. The Company's domestic operations are conducted through direct franchising relationships and the ownership of five Cambria hotels, while its international franchise operations are conducted through a combination of direct franchising and 42 Table of Contents master franchising or master development (collectively, "master franchising") relationships. Master franchising relationships are governed by master franchising agreements which generally provide the master franchisee with the right to use our brands and sub-license the use of our brands in a specific geographic region, usually for a fee. Our business strategy is to conduct direct franchising in those international markets where both franchising is an accepted business model and we believe our brands can achieve significant scale. We typically elect to enter into master franchise agreements in those markets where direct franchising is currently not a prevalent or viable business model. When entering into master franchising relationships, we strive to select partners that have professional hotel and asset management capabilities together with the financial capacity to invest in building the Choice brands in their respective markets. Master franchising relationships typically provide lower revenues to the Company as the master franchisees are responsible for managing certain necessary services (such as training, quality assurance, reservations and marketing) to support the franchised hotels in the master franchise area and, therefore, retain a larger percentage of the hotel franchise fees to cover their expenses. In certain circumstances, the Company has and may continue to make equity investments in our master franchisees. As a result of master franchise relationships and international market conditions, our revenues are primarily concentrated in the United States. Therefore, our description of our business is primarily focused on the domestic operations, which encompasses the United States and Caribbean countries and territories. Our Company generates revenues, income and cash flows primarily from our franchising operations and the initial, relicensing and continuing royalty fees attributable to our franchise agreements. Revenues are also generated from five owned hotels, partnerships with qualified vendors and travel partners that provide value-added solutions to our platform of guests, hotels, and other sources. Historically, the hotel industry has been seasonal in nature. For most hotels, demand is ordinarily lower in November through February than during the remainder of the year. Our principal source of revenues is franchise fees based on the gross room revenues or number of rooms of our franchised properties. The Company’s franchise fees, as well as its owned hotels revenues, normally reflect the industry’s seasonality and historically have been lower in the first and fourth quarters than in the second and third quarters. However, as a result of the COVID-19 pandemic, historical trends may not be reliable to predict future performance. 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. The principal factors that affect the Company’s results are: the number and relative mix of hotel rooms in the various hotel lodging price categories; growth in the number of hotel rooms owned and under franchise; occupancy and room rates achieved by the hotels in our system; the effective royalty rate achieved on our franchise agreements; the level of franchise sales and relicensing activity; the number of qualified vendor arrangements and travel related partnerships and the level of engagement with these partners by our franchisees and guests; and our ability to manage costs. The number of rooms in our hotel system and the occupancy and room rates at those properties significantly affect the Company’s results because our fees are based upon room revenues or the number of rooms at owned and franchised hotels. All of these factors have been and we expect will continue to be materially disrupted by the COVID-19 pandemic. The key industry standard for measuring hotel-operating performance is RevPAR, which is calculated by multiplying the percentage of occupied rooms by the average daily room rate realized. 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 annual 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. These expenditures, which include advertising costs and costs to maintain our central reservations and property management systems, enhance awareness and consumer preference for our brands and deliver guests to our franchisees. Greater awareness and preference promotes long-term growth in business delivery to our franchisees and increases the desirability of our brands to hotel owners and developers, which ultimately increases franchise fees earned by the Company. While we continue to actively manage and eliminate certain discretionary marketing and reservation system expenditures, as a result of lower occupancy and therefore, lower marketing and reservation system fees generated, we realized marketing and reservation expenditures in excess of fees in 2020. As a result of the COVID-19 pandemic, we expect significant impact to our marketing and reservation fees generated to continue in 2021. 43 Table of Contents Our Company articulates its mission as a commitment to our franchisees’ profitability by providing our franchisees with hotel franchises that strive to generate the highest return on investment of any hotel franchise. We have developed an operating system dedicated to our franchisees’ success that focuses on delivering guests to hotels and reducing hotel operating costs. As discussed above, the Company has taken numerous measures to combat the significant impact of the COVID-19 pandemic on our business. These measures have been and remain 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 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: Profitable Growth. Our success is dependent on improving the performance of our hotels, increasing our system size by selling additional hotel franchises with a focus on revenue-intense chain scales and markets, improving our effective royalty rate, expanding our qualified vendor programs and travel related partnerships and maintaining a disciplined cost structure. As noted above, we have introduced several temporary measures designed to assist franchisees during the COVID-19 pandemic. We attempt to improve our revenues and overall profitability by providing a variety of products and services designed to increase business delivery and/or reduce operating and development costs. These products and services include national marketing campaigns, maintaining a guest loyalty program, a central reservation system, property and yield management programs and systems, revenue management services, quality assurance standards, qualified vendor relationships and expanding our partnerships with other travel related companies that provide services to our franchisees and guests. We believe that healthy brands, which deliver a compelling return on investment, will enable us to sell additional hotel franchises and raise royalty rates. We have multiple brands that meet the needs of many types of guests, and can be developed at various price points and applied to both new and existing hotels. This ensures that we have brands suitable for creating growth in a variety of market conditions. Improving the performance of the hotels in our system, strategically 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 have and are presently continuing to experience 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. These declines and suspended operations have impacted the profitability of the Company in 2020 and will impact the Company for as long as the COVID-19 pandemic is significantly impacting travel. Maximizing Financial Returns and Creating Value for Shareholders. Our capital allocation decisions, including capital structure and uses of capital, are intended to maximize our return on invested capital and create value for our shareholders. We believe our historically strong and predictable cash flows create a strong financial position that provides us a competitive advantage. 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 and investing in growth opportunities. In light of uncertainty resulting from the COVID-19 pandemic, we determined to suspend future, undeclared dividends 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. We currently have no estimated time frame for when these may occur. The Company also allocates capital to financing, investment and guaranty support to incent franchise development for certain brands in strategic markets; hotel ownership; and exploring growth opportunities in business areas that are adjacent or complementary to our core hotel franchising business, which leverage our core competencies and are additive to our franchising business model. The timing and amount of these investments are subject to market and other conditions. In light of uncertainty resulting from the COVID-19 pandemic and to preserve liquidity, we have limited significant discretionary investments and intend to continue to do so until such time as we determine conditions are appropriate to resume any such activity. We believe our growth investments and strategic priorities, when properly implemented, will enhance our profitability, maximize our financial returns and continue to generate value for our shareholders. The ultimate measure of our success will be reflected in the items below. Results of Operations: Royalty fees, operating income, net income and diluted earnings per share ("EPS") represent key measurements of our financial performance. These measurements are primarily driven by the operations of our hotel franchise system and therefore, our analysis of the Company's operations is primarily focused on the size, performance and potential growth of the hotel franchise system, as well as our variable overhead costs. Our discussion of results excludes the Company’s marketing and reservation system revenues and expenses. The Company's franchise agreements require the payment of marketing and reservation system fees to be used exclusively by the Company for expenses associated with providing franchise services such as central reservation systems, national marketing, and media advertising. The Company is obligated to expend the marketing and reservation system fees it collects from franchisees in accordance with the franchise agreements. Furthermore, franchisees are required to reimburse the Company for any deficits 44 Table of Contents generated by these marketing and reservation system activities. Over time, the Company expects cumulative revenues and expenses to break even and therefore, no income or loss will be generated from marketing and reservation system activities. 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 and the multi-year investments required to support franchise operations, in addition to the Company's incremental spend to support franchisees and lower marketing and reservation system fees due to the impacts of the COVID-19 pandemic, quarterly and/or annual deficits and surpluses may be generated. During the years ended December 31, 2020, and 2019, marketing and reservation system expenses exceeded revenues by $44.3 million and $1.7 million, respectively. During the year ended December 31, 2018, marketing and reservation system revenues exceeded expenses by $9.4 million. Refer to MD&A heading "Operations Review" for additional analysis of our results. Liquidity and Capital Resources: Historically, the Company has generated significant cash flows from operations . Since our business has not historically required significant reinvestment of capital, we typically utilize cash in ways that management believes provide the greatest returns to our shareholders which include share repurchases and dividends. However, in light of uncertainty resulting from the COVID-19 pandemic, we do not intend to declare dividends and we have temporarily suspended activity under the share repurchase program for as long as the pandemic significantly impacts travel. We believe the Company’s cash flow from operations and available financing capacity is sufficient to meet the expected future operating, investing and financing needs of the business. Refer to MD&A heading "Liquidity and Capital Resources" for additional analysis. Inflation: Inflation has been moderate in recent years and has not had a significant impact on our business. We are monitoring the implications of governmental assistance programs related to COVID-19 on future inflation trends and any resulting impacts on our business. Non-GAAP Financial Statement Measurements The Company utilizes certain measures which do not conform to generally accepted accounting principles accepted in the United States ("GAAP") when analyzing and discussing its results with the investment community. This information should not be considered as an alternative to any measure of performance as promulgated under GAAP. The Company’s calculation of these measurements may be different from the calculations used by other companies and therefore, comparability may be limited. We have included a reconciliation of these measures to the comparable GAAP measurement below as well as our reasons for reporting these non-GAAP measures. Revenues, excluding marketing and reservation system activities: The Company utilizes revenues, excluding marketing and reservation system activities, rather than total revenues when analyzing the performance of the business. Marketing and reservation activities are excluded since the Company is contractually required by its franchise agreements to utilize the fees collected specifically for system-wide marketing and reservation activities. This non-GAAP measure is a commonly used measure of performance in our industry and facilitates comparisons between the Company and its competitors. Calculation of Revenues, excluding marketing and reservation system activities Year Ended December 31, (in thousands) 2020 2019 2018 Total revenues $ 774,072 $ 1,114,820 $ 1,041,304 Adjustments: Marketing and reservation system revenues (402,568) (577,426) (543,677) Revenues, excluding marketing and reservation system activities $ 371,504 $ 537,394 $ 497,627 45 Table of Contents Operations Review Comparison of 2020 and 2019 Operating Results Summarized financial results for the years ended December 31, 2020 and 2019 are as follows: December 31, (in thousands) 2020 2019 REVENUES Royalty fees $ 263,308 $ 388,151 Initial franchise and relicensing fees 25,906 27,489 Procurement services 45,242 61,429 Marketing and reservation system 402,568 577,426 Owned hotels 20,168 20,282 Other 16,880 40,043 Total revenues 774,072 1,114,820 OPERATING EXPENSES Selling, general and administrative 148,524 168,833 Depreciation and amortization 25,831 18,828 Marketing and reservation system 446,847 579,139 Owned hotels 16,066 14,448 Total operating expenses 637,268 781,248 Impairment of goodwill — (3,097) Impairment of long-lived assets (14,751) (7,259) Loss on sale of business — (4,674) Gain on sale of assets, net — 100 Operating income 122,053 318,642 OTHER INCOME AND EXPENSES, NET Interest expense 49,028 46,807 Interest income (7,688) (9,996) Loss on extinguishment of debt 16,565 7,188 Other (gain) loss (4,147) (4,862) Equity in net loss of affiliates 15,289 9,576 Total other income and expenses, net 69,047 48,713 Income before income taxes 53,006 269,929 Income tax (benefit) expense (22,381) 47,051 Net income $ 75,387 $ 222,878 46 Table of Contents Results of Operations The Company recorded income before income taxes of $53.0 million for the year ended December 31, 2020, a $216.9 million decrease from the same period of the prior year. The decrease in income before income taxes primarily reflects a $196.5 million decrease in operating income, a $9.4 million increase in the loss on the extinguishment of debt, a $5.7 million increase in equity in net loss of affiliates, a $2.2 million increase in interest expense, and a $2.3 million decrease in interest income. Operating income decreased $196.5 million primarily due to a $124.9 million decrease in royalty revenues, a $42.5 million decrease in the net deficit generated from marketing and reservation system activities, a $23.1 million decrease in other revenue, a $16.2 million decrease in procurement services revenues, the recognition of $14.8 million in impairments of long-lived assets in 2020, a $7.0 million increase in depreciation and amortization, partially offset by a $20.3 million decrease in selling, general and administrative (“SG&A”) expenses and a recognition of a $15.0 million loss on sale and impairment of long-lived assets and goodwill in 2019 related to the Company's software as a service ("SaaS") for vacation rentals reporting unit which was disposed of in the second quarter of 2019. The primary reasons for these fluctuations, including the impact of the COVID-19 pandemic, are described in more detail below. Royalty Fees Domestic royalty fees for the year ended December 31, 2020 decreased $115.4 million to $251.2 million from $366.6 million for the year ended December 31, 2019, a decrease of 31%. The decrease in domestic royalties reflect a 30.7% decrease in domestic RevPAR. System-wide RevPAR decreased due to a 12.5% decrease in average daily rates and a 1,210 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 an 8 basis point increase in the effective royalty rate from 4.86% for the year ended December 31, 2019 to 4.94% for the year ended December 31, 2020. A summary of the Company’s domestic franchised hotels operating information for the years ending December 31, 2020 and 2019 is as follows: 2020 2019 Change Average Daily Rate Occupancy RevPAR Average Daily Rate Occupancy RevPAR Average Daily Rate Occupancy RevPAR Comfort $ 83.72 46.1 % $ 38.58 $ 95.84 62.2 % $ 59.66 (12.6) % (1,610) bps (35.3) % Sleep 75.92 46.2 % 35.08 85.28 61.1 % 52.09 (11.0) % (1,490) bps (32.7) % Quality 72.13 41.8 % 30.16 80.11 54.1 % 43.33 (10.0) % (1,230) bps (30.4) % Clarion 73.37 32.9 % 24.15 84.73 49.5 % 41.90 (13.4) % (1,660) bps (42.4) % Econo Lodge 59.12 40.9 % 24.16 63.75 47.7 % 30.44 (7.3) % (680) bps (20.6) % Rodeway 59.48 43.6 % 25.94 64.25 49.0 % 31.48 (7.4) % (540) bps (17.6) % WoodSpring 46.16 71.5 % 33.02 47.10 75.3 % 35.46 (2.0) % (380) bps (6.9) % MainStay 77.14 55.6 % 42.86 84.85 64.0 % 54.32 (9.1) % (840) bps (21.1) % Suburban 51.44 63.6 % 32.73 57.25 66.9 % 38.30 (10.1) % (330) bps (14.5) % Cambria Hotels 112.30 38.2 % 42.87 145.45 67.5 % 98.12 (22.8) % (2,930) bps (56.3) % Ascend Hotel Collection 116.52 43.4 % 50.59 125.16 61.2 % 76.57 (6.9) % (1,780) bps (33.9) % Total $ 71.63 45.6 % $ 32.70 $ 81.83 57.7 % $ 47.18 (12.5) % (1,210) bps (30.7) % The impacts of COVID-19 on the Company's business were first experienced at end of the first quarter of 2020, with domestic occupancy levels ranging between 25.5% and 32.5% in the last ten days of March resulting in significant decreases in RevPAR. Lower occupancy and RevPAR trends continued into the second quarter of 2020, with domestic RevPAR experiencing a decline of approximately 60.1% from the comparative prior year April. These trends have steadily improved, albeit remained significantly impacted, in the third and fourth quarters, with domestic RevPAR experiencing a decline of approximately 28.8% over the comparative prior year third quarter and 25.1% over the comparative prior year fourth quarter. For the reasons cited above, we expect significant impact on our results of operations to continue in 2021. During the first quarter of 2020, the Company revised its calculation of Occupancy. Historically, Occupancy has excluded rooms unavailable to our guests for operational reasons, as reported by our franchisees. With the onset of the COVID-19 pandemic resulting in reduced travel and lesser demand, our franchisees began closing greater portions of inventory as compared to previous periods. To provide a more representative depiction of system occupancy and with reference to industry 47 Table of Contents standards for RevPAR reporting for partially closed hotels during the COVID-19 pandemic, we have revised our Occupancy calculation to be reflective of full room availability for open hotels. Additionally, the Company made minor revisions to the calculation of Average Daily Rate ("ADR") with respect to complimentary rooms. 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 year ended December 31, 2020 would have been $71.13, 53.0%, and $37.68, respectively, versus the year ended December 31, 2019 of $81.42, 62.9%, and $51.19, respectively, with period over period declines of 12.6%, 990 basis points, and 26.4%, respectively. The number of total domestic rooms online increased by 0.4% to 464,682 rooms as of December 31, 2020 from 462,973 as of December 31, 2019. The total number of domestic hotels online increased by 0.2% to 5,967 as of December 31, 2020 from 5,955 as of December 31, 2019. A summary of domestic hotels and rooms in our franchise system at December 31, 2020 and 2019 by brand is as follows: December 31, 2020 December 31, 2019 Variance Hotels Rooms Hotels Rooms Hotels % Rooms % Comfort 1,648 129,711 1,616 127,000 32 2.0 % 2,711 2.1 % Sleep 408 28,790 402 28,361 6 1.5 % 429 1.5 % Quality 1,697 128,807 1,688 129,232 9 0.5 % (425) (0.3) % Clarion 183 22,072 178 22,498 5 2.8 % (426) (1.9) % Econo Lodge 777 47,023 807 48,538 (30) (3.7) % (1,515) (3.1) % Rodeway 559 31,828 600 34,727 (41) (6.8) % (2,899) (8.3) % WoodSpring 291 35,020 270 32,479 21 7.8 % 2,541 7.8 % MainStay 90 6,374 73 4,636 17 23.3 % 1,738 37.5 % Suburban 66 6,470 60 6,082 6 10.0 % 388 6.4 % Cambria Hotels 54 7,697 50 7,277 4 8.0 % 420 5.8 % Ascend Hotel Collection 194 20,890 211 22,143 (17) (8.1) % (1,253) (5.7) % Total Domestic Franchises 5,967 464,682 5,955 462,973 12 0.2 % 1,709 0.4 % As of both December 31, 2020, and January 31, 2021, 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. International royalty fees for the year ended December 31, 2020 decreased $9.4 million to $12.2 million compared to the year ended December 31, 2019 as a result of temporarily suspended operations and declines in RevPAR performance resulting from impacts of the pandemic. International rooms online increased by 5,371 from 127,924 as of December 31, 2019 to 133,295 as of December 31, 2020, while hotels online decreased by 18 from 1,198 as of December 31, 2019 to 1,180 as of December 31, 2020. International rooms grew at a faster pace than the number of hotels due to a focus on new entrants with higher per unit room counts than currently in the Company's international franchised hotel portfolio. As of both December 31, 2020 and January 31, 2021, approximately 5% 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 pandemic, including a resurgence or increase in prevalence in variants as well as the timing of vaccinations around the world, and its severity, which we expect will continue to impact the number of domestic and international hotels that temporarily suspend operations. Initial Franchise and Relicensing Fees Initial franchise fees are fees paid to the Company when a franchisee executes a franchise agreement; 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 year ended December 31, 2020, the Company awarded 427 franchise agreements representing 35,308 rooms compared to 684 franchise agreements representing 59,641 rooms for the year ended December 31, 2019. Domestic franchise agreements awarded for new construction hotels totaled 126 representing 11,847 rooms during the year ended December 31, 2020 compared to 269 contracts representing 22,814 rooms for the year ended December 31, 2019. Conversion hotel awarded 48 Table of Contents franchise agreements totaled 301 representing 23,461 rooms for the year ended December 31, 2020 compared to 415 agreements representing 36,827 rooms for the year ended December 31, 2019. The Company awarded 204 domestic relicensing contracts during the year ended December 31, 2020 compared to 403 executed during the year ended December 31, 2019. The Company awarded 38 domestic renewal agreements during the year ended December 31, 2020 compared to 42 during the year ended December 31, 2019. Initial franchise and relicensing fees are generally collected at the time the franchise agreement is awarded. However, the recognition of revenue is deferred until the hotel is open or the franchise agreement is terminated. 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 decreased $1.6 million from $27.5 million to $25.9 million during the years ended December 31, 2019 and 2020, respectively. As of December 31, 2020, the Company had 966 franchised hotels with 79,470 rooms under construction, awaiting conversion or approved for development in its domestic system as compared to 1,052 hotels and 84,950 rooms at December 31, 2019. The number of new construction franchised hotels in the Company’s domestic pipeline decreased 8% to 727 at December 31, 2020 from 794 at December 31, 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 decreased by 19 hotels or 7% from December 31, 2019 to 239 hotels at December 31, 2020. Conversion hotels typically open three to six months after the execution of a franchise agreement. The Company had an additional 56 franchised hotels with 6,794 rooms under construction, awaiting conversion or approved for development in its international system as of December 31, 2020 compared to 83 hotels and 15,918 rooms at December 31, 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. Given the uncertainty as to the potential duration of the COVID-19 pandemic and its severity, there is 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 duration of the pandemic. Procurement Services: Revenues decreased $16.2 million from $61.4 million for the year ended December 31, 2019 to $45.2 million for the year ended December 31, 2020. The decrease in revenues primarily reflects the cancellation of the Company's 2020 annual convention as a result of the COVID-19 pandemic and a decrease in fees affiliated with travel-related partnerships. The Company has also announced the cancellation of the 2021 annual convention, which the Company expects will adversely impact procurement services revenue in 2021. Further, due to anticipated lower occupancy at our franchised hotels in 2021, we anticipate fewer purchases made from qualified vendors and travel-related partners in 2021, from which we earn a fee. Other Revenues: Other revenues decreased $23.1 million from $40.0 million the year ended December 31, 2019 to $16.9 million for the year ended December 31, 2020. 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 $148.5 million for the year ended December 31, 2020, a decrease of $20.3 million from December 31, 2019. SG&A expenses for the years end December 31, 2020 and 2019 include approximately $2.3 million and $9.9 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 from prior year is primarily due to the sale of the SaaS for vacation rentals reporting unit on June 3, 2019. Excluding the SG&A for alternative growth initiatives and office building operations, SG&A for the year end December 31, 2020 decreased $12.8 million from $158.9 million in the prior year to $146.3 million in the current year primarily due to implemented cost mitigation measures as a result of the COVID-19 pandemic, including furloughs and layoffs of certain domestic and international positions and a reduction of discretionary expenditures, partially offset by operational restructuring charges and provisions for credit losses recorded in accordance with Topic 326. Depreciation and Amortization: Depreciation and amortization expense for the year ended December 31, 2020 increased $7.0 million to $25.8 million for the same period of the prior year primarily due to an additional $7.4 million in depreciation from a full year of operations for the Company's owned hotels acquired or opened during the third quarter of 2019. Impairment of Long-lived assets and Goodwill, and Loss on Sale of Business: For the year ended December 31, 2020, the Company recognized a $1.2 million charge related to a prospective self-development project the Company is no longer pursing, 49 Table of Contents a $4.3 million impairment charge related to the long-lived assets of a commercial office building owned by the Company, and a $9.2 million impairment charge related to a parcel of real estate. For the year ended December 31, 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 $49.0 million for the year ended December 31, 2020, an increase of $2.2 million from the year ended December 31, 2019. The increase in interest expense is a result of increased borrowings over the course of 2020 in response to the COVID-19 pandemic. Interest Income: Interest income decreased $2.3 million to $7.7 million in the current year primarily due to certain loans being in non-accrual status during 2020 resulting from impacts of the COVID-19 pandemic. The notes receivable relate to the Company’s program to incent development of its Cambria Hotel brand in new markets. 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. For the year ended December 31, 2019, the Company recorded a loss on extinguishment of debt of $7.2 million for the early redemption of the Company's unsecured senior notes in the principal amount of $250 million which were due in August 2020. The loss on extinguishment represents a $6.3 million make-whole premium to redeem the notes prior to maturity and the acceleration of unamortized deferred financing fees and underwriting discounts. Refer to Item 7. Liquidity and Capital Resources and Note 12 to our consolidated financial statements for additional information. Equity in Net Loss of Affiliates: The Company recorded net losses of $15.3 million from its unconsolidated joint ventures during the year ended December 31, 2020 compared to net losses of $9.6 million for the year ended December 31, 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. The year-over-year fluctuation is primarily attributable to increased losses of operating joint venture hotels as impacted by the COVID-19 pandemic and recognition of $7.3 million of impairment charges during the fourth quarter of 2020 related to four separate unconsolidated joint ventures. This fluctuation is partially offset by the recognition of a loss of $6.0 million in the third quarter of 2019 related to the sale of an unconsolidated joint venture. Refer to Note 8 to our consolidated financial statements for additional information. We anticipate the results recognized from these investments will continue to be significantly impacted by the COVID-19 pandemic during 2021. Income Tax (Benefit) Expense : The Company's effective income tax rates were (42.2)% and 17.4% for the years ended December 31, 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 intercompany 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. In accordance with ASU 2016-16, the Company recorded a $34.6 million tax benefit and a corresponding deferred tax asset due to the reorganization. As of December 31, 2020, the balance of this deferred tax asset is $30.2 million, net of current year amortization utilization. Due to a decrease in the forecasted international income resulting from adverse impacts of the COVID-19 pandemic, the Company recorded a valuation allowance of $5.7 million reflecting a change in the anticipated realizability of this deferred tax asset. The effective income tax rate for the year ended December 31, 2020 was lower than the U.S. federal income tax rate of 21.0% due to the impact of our international reorganization under ASU 2016-16 (partially offset by the related valuation allowance), tax credits recognized during the year of $3.0 million, $4.2 million of excess tax benefits from share-based compensation, and the impact of foreign operations, partially offset by the impact of state income taxes and a change in estimated uncertain tax positions. The effective income tax rate for the year ended December 31, 2019 was lower than the U.S. federal income tax rate of 21% due to tax credits recognized during the year of $11.6 million, $4.4 million of excess tax benefits from share-based compensation and the impact of foreign operations, partially offset by the impact of state income taxes. Refer to Choice Hotels International, Inc. 2019 10-K Annual Report "Comparison of 2019 and 2018 Operating Results" under Item 7. Management's Discussion and Analysis for details regarding changes between 2019 and 2018. 50 Table of Contents 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 December 31, 2020, the Company had approximately $834.8 million in cash and 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, which remains undrawn upon as of December 31, 2020. To preserve capital, we determined to suspend future, undeclared dividends while the COVID-19 pandemic is significantly impacting travel 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 December 31, 2020, we were in compliance with the financial covenants of our credit agreements and expect to remain in such compliance. Operating Activities During the years ended December 31, 2020 and 2019, net cash provided by operating activities totaled $110.1 million and $270.6 million, respectively. Operating cash flows decreased $160.5 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 ("franchise agreement acquisition costs"). If the franchisee remains in the franchise system in good standing over the term specified in the incentive agreement, the Company forgives the incentive ratably. 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 years ended December 31, 2020, 2019 and 2018, the Company's net advances for these purposes totaled $36.5 million, $38.9 million, and $52.9 million, respectively. The timing and amount of these cash flows are 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 December 31, 2020, the Company had commitments to extend an additional $304.6 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. In accordance with the terms of our franchise agreements, the Company is obligated to use these marketing and reservation system fees to provide marketing and reservation services. 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 recover such advances in future periods through additional fee assessments or reduced spending. During the years ended 2020 and 2019, marketing and reservation system expenses exceeded revenues by $44.2 million and $1.7 million, respectively. During the year ended 2018, marketing and reservation system revenues exceeded expenses by $9.4 million. Investing Activities Cash utilized for investing activities totaled $24.5 million, $251.2 million and $321.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. The decrease in cash utilized for investing activities from 2019 to 2020 primarily reflects the following items: During the year ended December 31, 2020, 2019 and 2018, the Company invested $5.5 million, $27.8 million, and $9.6 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, $10.2 million, and $1.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company's investment in these joint ventures primarily relates to ventures that support the Company's efforts to promote growth of our Cambria Hotels brand. To the extent unconsolidated joint ventures proceed to 51 Table of Contents the hotel construction phase, the Company is committed to make additional capital contributions totaling $8.4 million to support these efforts. During the year ended December 31, 2020, the Company received sales proceeds of $7.4 million from a sale of an unconsolidated joint venture. Prior to July 23, 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. During the year ended December 31, 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. During the years ended December 31, 2020, 2019 and 2018, capital expenditures in property and equipment totaled $33.6 million, $57.3 million, and $47.7 million, respectively. The decrease in capital expenditures during 2020 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 year ended December 31, 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, which 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 years ended December 31, 2020, 2019 and 2018, the Company advanced $9.8 million, $20.7 million, and $36.0 million for these purposes, respectively. In addition, the Company received repayments totaling $6.5 million, $14.2 million, and $5.0 million for these purposes, respectively. At December 31, 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 years ended December 31, 2019 and 2018, the Company realized proceeds of $10.6 million and $3.1 million from the sale of one parcel of land in each period. The Company did not sell any land parcels during the year ended December 31, 2020. During the year ended December 31, 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. There were no business dispositions during the years ended December 31, 2020 and December 31, 2018. 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. Since 2006, we have engaged in these financial support activities to encourage acceleration of the growth of our Cambria Hotels brand, primarily in strategic markets and locations. Over the next three to five years, we expect to continue to deploy capital in support of this brand and expect our outstanding investment not to exceed $725 million over that time period. The deployment and annual pace of future financial support activities will depend upon market and other conditions, including among others, our franchise sales results, the environment for new construction hotel development and the hotel lending environment, and our assessment of the ongoing impacts of the COVID-19 pandemic. Our support of the Cambria Hotels brand’s growth is expected to be primarily in the form of franchise agreement acquisition costs, joint venture investments, hotel ownership, senior mortgage loans, development loans, mezzanine lending, and through the operation of a land-banking program. 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 December 31, 2020, the Company had approximately $538.2 million outstanding pursuant to these financial support activities. Financing Activities Financing cash flows relate primarily to the Company’s borrowings, open market treasury stock repurchases, acquisition of shares in connection with the exercise or vesting of equity awards, and dividends. Debt Restated Senior Unsecured Credit Facility On August 20, 2018, the Company entered into the Restated Senior Unsecured Credit Agreement (the "Restated Credit Agreement"), which amended and restated the Company’s existing senior unsecured revolving credit agreement, dated July 21, 2015. The Restated Credit Agreement provides for a $600 million unsecured credit facility with a maturity date of August 20, 2023, subject to optional one-year extensions that can be requested by the Company prior to each of the first, second and third anniversaries of the closing date of the Restated Credit Agreement. The effectiveness of such extensions are subject to the 52 Table of Contents consent of the lenders under the Restated Credit Agreement and certain customary conditions. The Restated Credit Agreement also provides that up to $35 million of borrowings under the Restated Credit Agreement may be used for alternative currency loans and up to $25 million of borrowings under the Restated Credit Agreement may be used for swingline loans. The Company may from time to time designate one or more wholly owned subsidiaries of the Company as additional borrowers under the Restated Credit Agreement, subject to the consent of the lenders and certain customary conditions. 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 exercised an additional one-year extension on the Restated Credit Agreement 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. There are no subsidiary guarantors under the Restated Credit Agreement. However, if certain subsidiaries of the Company subsequently incur certain recourse debt or become obligors in respect of certain recourse debt of the Company or certain of its other subsidiaries, the Restated Credit Agreement requires such obligated subsidiaries to guarantee the Company’s obligations under the Restated Credit Agreement (the "springing guarantee"). In the event that these subsidiary guarantees are triggered under the Restated Credit Agreement, the same subsidiary guarantees would be required under the Company’s $400 million senior unsecured notes due 2022 and certain hedging and bank product arrangements, if any, with lenders that are parties to the Restated Credit Agreement. 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 and the lenders party thereto. 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. The Company may at any time prior to the final maturity date increase the amount of the Restated Credit Agreement or add one or more term loan facilities under the Restated Credit Agreement by up to an additional $250 million in the aggregate to the extent that any one or more lenders commit to being a lender for the additional amount of such term loan facility and certain other customary conditions are met. The Restated Credit Agreement provides that the Company may elect to have borrowings bear interest at a rate equal to (i) LIBOR plus a margin ranging from 90 to 150 basis points or (ii) a base rate plus a margin ranging from 0 to 50 basis points, in each case, with the margin determined according to the Company’s senior unsecured long-term debt rating or under circumstances as set forth in the Restated Credit Agreement, the Company’s total leverage ratio in the event that such total leverage ratio is less than 2.5 to 1.0. The Restated Credit Agreement requires the Company to pay a fee on the total commitments, calculated on the basis of the actual daily amount of the commitments (regardless of usage) times a percentage per annum ranging from 0.075% to 0.25% (depending on the Company’s senior unsecured long-term debt rating or under circumstances as set forth in the Restated Credit Agreement, the Company’s total leverage ratio in the event that such total leverage ratio is less than 2.5 to 1.0). The Restated Credit Agreement requires that the Company and its restricted subsidiaries comply with various covenants, including with respect to restrictions on liens, incurring indebtedness, making investments and effecting mergers and/or asset sales. With respect to dividends, the Company may not declare or make any payment if there is an existing event of default or if the payment would create an event of default. The Restated Credit Agreement imposes financial maintenance covenants requiring the Company to maintain a consolidated fixed charge coverage ratio of at least 2.5 to 1.0 and a total leverage ratio of not more than 4.5 to 1.0 or, on up to two nonconsecutive occasions, 5.5 to 1.0 for up to three consecutive quarters following a material acquisition commencing with the fiscal quarter in which such material acquisition occurred. The Company maintains an Investment Grade Rating, as defined in the Restated Credit Agreement, and therefore is not currently required to comply with the consolidated fixed charge coverage ratio covenant. 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 December 31, 2020, the Company maintained a total leverage ratio of 3.90x and was in compliance with all financial covenants under the Restated Credit Agreement. During the year ended December 31, 2020, the Company utilized excess cash on hand to pay down the senior unsecured revolving credit facility balance in full. Debt issuance costs incurred in connection with the Restated Credit Agreement are amortized on a straight-line basis, which is not materially different than the effective interest method, through maturity. Amortization of these costs is included in interest expense in the consolidated statements of income. 53 Table of Contents 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, we determined to suspend future, undeclared dividends while the pandemic is significantly impacting travel and have temporarily suspended activity under our share repurchase program. Term Loan To preserve financial flexibility and liquidity during the COVID-19 pandemic, on April 16, 2020, the Company entered into a credit agreement (the "Credit Agreement"), which provided for the $250 million Term Loan (the "Term Loan") with a scheduled maturity date of April 15, 2021, subject to an optional one-year extension if requested by the Company prior to the initial maturity date. The effectiveness of such extension was subject to the consent of the lenders under the Credit Agreement and certain customary conditions. The Term Loan and all accrued but unpaid interest thereon was required to be repaid in full on the maturity date. Upon the occurrence of certain asset sales, debt issuances and equity issuances, subject to the exceptions set forth in the Credit Agreement, the Company was required to make certain mandatory principal prepayments of the Term Loan in an amount equal to 100% of the net cash proceeds of such transactions. The Credit Agreement provided that the Company may elect to have the Term Loan bear interest at a rate equal to (i) LIBOR (subject to a floor of 1.00%) plus a margin ranging from 200 to 275 basis points or (ii) a base rate plus a margin ranging from 100 to 175 basis points, in each case, with the margin determined according to the Company’s senior unsecured long-term debt rating. The Credit Agreement required that the Company and its restricted subsidiaries comply with various covenants, including with respect to restrictions on liens, incurring indebtedness, making investments and effecting mergers and/or asset sales. With respect to dividends and stock repurchases, the Company could not declare or make any payment, subject to certain exceptions set forth in the Credit Agreement, if (i) there is an existing event of default or if the payment would create an event of default or (ii) (x) the Company’s total leverage ratio exceeds 4.0 to 1.0 or (y) liquidity (defined in the Credit Agreement as the Company’s unrestricted cash and cash equivalents plus undrawn amounts under the Company’s existing senior unsecured revolving credit facility) is less than $250 million, in each case, both before or immediately after giving effect to such payment. The Credit Agreement imposed financial maintenance covenants requiring the Company to maintain a consolidated fixed charge coverage ratio of at least 2.5 to 1.0 and a total leverage ratio of not more than 4.5 to 1.0. If the Company maintained an Investment Grade Rating, as defined in the Credit Agreement, then the Company would not need to comply with the consolidated fixed charge coverage ratio covenant. The Credit Agreement included 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 Credit Agreement to be immediately due and payable. 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 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 On July 23, 2020, the Company issued unsecured senior notes in the principal amount of $450 million (the "2020 Senior Notes") bearing a coupon of 3.70%. The 2020 Senior Notes will mature on January 15, 2031, with interest to be paid semi-annually on January 15th and July 15th beginning January 15, 2021. The Company used the net proceeds of the 2020 Senior Notes, after deducting underwriting discounts, commissions and other offering expenses, to repay the Term Loan in full and fund the purchase price of the 2012 Senior Notes tendered and accepted by the Company for purchase pursuant to the tender offer (discussed below under "Senior Unsecured Notes due 2022"). Interest on the 2020 Senior Notes is payable semi-annually on January 15th and July 15th of each year, commencing on January 15, 2021. The interest rate payable on the 2020 Senior Notes will be subject to adjustment based on certain rating events. The Company may redeem the 2020 Senior Notes, in whole or in part, at its option at the applicable redemption price before maturity. If the Company redeems the 2020 Senior Notes prior to October 15, 2030 (three months prior to the maturity date) (the “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 54 Table of Contents date on a semi-annual basis at the applicable Treasury Rate plus 50 basis points, plus accrued and unpaid interest. If the Company redeems the 2020 Senior Notes on or after the 2020 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 2020 Senior Notes, the Company may be required to repurchase all or a portion of the 2020 Senior Notes of a holder upon the occurrence of a change of control event at a price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest, to the date of repurchase. Senior Unsecured Notes Due 2029 On November 27, 2019, the Company issued unsecured senior notes in the principal amount of $400 million (the "2019 Senior Notes") at a discount of $2.4 million, bearing a coupon of 3.70% with an effective rate of 3.88%. The 2019 Senior Notes will mature on December 1, 2029, with interest to be paid semi-annually on December 1 st and June 1 st . The Company used the net proceeds of this offering, after deducting underwriting discounts, commissions and other offering expenses, to repay previously outstanding senior notes in the principal amount of $250 million due August 28, 2020, and for working capital and other general corporate purposes. The Company may redeem the 2019 Senior Notes, in whole or in part, at its option at the applicable redemption price before maturity. If the Company redeems the 2019 Senior Notes prior to September 1, 2029 (three months prior to the maturity date) (the “2019 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 2019 Senior Notes matured on the 2019 Notes Par Call Date, discounted to the redemption date on a semi-annual basis at the applicable Treasury Rate plus 30 basis points, plus accrued and unpaid interest. 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. Senior Unsecured Notes Due 2022 On June 27, 2012 the Company issued unsecured senior notes with a principal amount of $400 million (the "2012 Senior Notes") at par, bearing a coupon of 5.75% with an effective rate of 6.00%. The 2012 Senior Notes will mature on July 1, 2022, with interest to be paid semi-annually on January 1 st and July 1 st . The Company utilized the net proceeds of this offering, after deducting underwriting discounts, commissions and other offering expenses, together with borrowings under the Company's senior unsecured senior credit facility, to pay a special cash dividend to stockholders totaling approximately $600.7 million paid on August 23, 2012. The Company may redeem the 2012 Senior Notes at its option at a redemption price equal to the greater of (a) 100% of the principal amount of the notes to be redeemed and (b) the sum of the present values of the remaining scheduled principal and interest payments from the redemption date to the date of maturity discounted to the redemption date on a semi-annual basis at the Treasury Rate, plus 50 basis points. Additionally, at the option of the holders of the 2012 Senior Notes, the Company may be required to repurchase all or a portion of the 2012 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. On July 9, 2020, the Company commenced the tender offer (the "Tender Offer") to purchase up to $160.0 million aggregate principal amount of the Company’s 2012 Senior Notes subject to increase or decrease. The Tender Offer was subsequently upsized to $180.0 million aggregate principal amount of the 2012 Notes. On July 23, 2020, the Company amended the Tender Offer by increasing the aggregate principal maximum tender amount from $180.0 million to $183.4 million. 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. Construction Loan In March 2018, the Company entered into a construction loan agreement for the rehabilitation and development of a former office building into a Cambria Hotel through a consolidating joint venture with a commercial lender, which is secured by the building. The construction loan can be drawn up to $34.9 million. The construction was completed and the hotel opened in the third quarter of 2019, resulting in the satisfaction of the completion guaranty. On March 5, 2020, the Company paid off the construction loan in the amount of $33.1 million inclusive of accrued and unpaid interest and recorded a loss on extinguishment of debt of $0.6 million. 55 Table of Contents Fixed Rate Collateralized Mortgage On December 30, 2014, a court awarded the Company title to an office building as settlement for a portion of an outstanding loan receivable for which the building was pledged as collateral. 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 was collateralized by the office building, required 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. The fair value adjustment was amortized over the remaining term of the mortgage utilizing the effective interest method. The mortgage principal and outstanding interest was paid off in the amount of $6.9 million at maturity in December 2020. Economic Development Loans The Company entered into economic development agreements with various governmental entities in conjunction with the relocation of its corporate headquarters in April 2013. 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 December 31, 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. Repayment of the advances is contingent upon the Company achieving certain performance conditions. Performance conditions are measured annually on December 31 st and primarily relate to maintaining certain levels of employment within the various jurisdictions. If the Company fails to meet an annual performance condition, the Company may be required to repay a portion or all of the advances including accrued interest by April 30 th following the measurement date. Any outstanding advances at the expiration of the Company's ten year corporate headquarters lease in 2023 will be forgiven in full. The advances will be included in long-term debt in the Company's consolidated balance sheets until the Company determines that the future performance conditions will be met over the entire term of the agreement and the Company will not be required to repay the advances. The Company accrues interest on the portion of the advances that it expects to repay. On December 28, 2020, the Company reached an agreement to amend the performance conditions and waive any defaults associated with employment levels until April 1, 2021. The Company was in compliance with all applicable current performance conditions in accordance with the amended terms of the agreement as of December 31, 2020. Transfer of Interest In a prior year, the Company transferred $24.4 million of a $50.1 million outstanding note receivable with a maturity date of November 30, 2019 to a third party. Under the agreement, the counter party had the right to require the Company to purchase the outstanding interest in the note in certain circumstances, including if the Company declares a default against the borrower and enters into foreclosure proceedings. In February 2019, in connection with the Company's restructuring negotiations with the borrower, the Company mutually agreed with the counter party to repurchase the $24.4 million previously transferred prior to the maturity date. At both December 31, 2020 and 2019, there were no remaining balances on the consolidated balance sheets pursuant to this transfer. Dividends The Company commenced paying quarterly dividends in 2004. In 2012, the Company elected to pay a special cash dividend totaling approximately $600 million. During the year ended December 31, 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, we determined to suspend future, undeclared dividends while the pandemic is significantly impacting travel. Prior to suspension of dividends in 2020, the Company paid a quarterly dividend on its common stock of $0.225 per share. The Company may not declare or make any payment if there is an existing event of default under the Restated Credit Agreement or if the payment would create an event of default. Share Repurchases In 1998, we instituted a share repurchase program which has generated substantial value for our shareholders. During the year ended December 31, 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 December 31, 2020, the Company 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 56 Table of Contents 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 December 31, 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, we have temporarily suspended activity under our share repurchase program. During 2020, the Company redeemed 125,996 shares of common stock at a total cost of $12.2 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 2019 and 2018, the Company redeemed 79,603 and 92,366 shares of common stock at a total cost of $6.5 million and $7.4 million, respectively. These redemptions were outside the 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 the repurchase of the Company's stock in the future, at such time that conditions are appropriate. We currently have no estimated time frame for when this may occur. The following table summarizes our contractual obligations as of December 31, 2020: Payment due by period (in thousands) Total Less than 1 year 1-3 years 3-5 years More than 5 years Long-term debt (1) $ 1,401,830 $ 41,121 $ 296,340 $ 62,900 $ 1,001,469 Purchase obligations (2) 388,740 98,509 176,342 56,727 57,162 Operating lease obligations 24,417 11,237 13,129 51 — Other long-term liabilities (3) 36,698 — 6,910 3,562 26,226 Total contractual obligations $ 1,851,685 $ 150,867 $ 492,721 $ 123,240 $ 1,084,857 (1) Long-term debt includes principal as well as interest payments. Assumes forward estimates of LIBOR rates as of December 31, 2020 for our variable interest rate debt. (2) Purchase obligations include commitments to provide franchise agreement acquisition payments and loan financing, provided certain conditions are met, in addition to joint venture financing. (3) Other long-term liabilities primarily consist of deferred compensation plan liabilities. The total amount of unrecognized tax positions and the related interest and penalties totaled $10.7 million at December 31, 2020. Due to the uncertainty with respect to the timing of payments in individual years in connection with these tax liabilities, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, we have not included these amounts in the contractual obligations table above. Refer to Note 15 to our consolidated financial statements. 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. Off Balance Sheet Arrangements The Company has entered into various limited payment guaranties with regards to the Company’s variable interest entities ("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. The Company believes the likelihood of having to perform under the aforementioned limited payment guaranties was remote as of December 31, 2020 and December 31, 2019. 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. Refer to Note 23 to our consolidated financial statements for further discussion of our off-balance sheet arrangements. Critical Accounting Policies Our accounting policies comply with principles generally accepted in the United States. We have described below those policies that we believe are critical and require the use of complex judgment or significant estimates in their application. Additional discussion of these policies is included in Note 1 to our consolidated financial statements. 57 Table of Contents Revenue Recognition Revenues are primarily derived from franchise agreements with third-party hotel owners. Franchise fees include the following: • Royalty fees . Royalty fees are earned in exchange for a license to brand intellectual property typically based on a percentage of gross room revenues. These fees are billed and collected monthly and revenues are recognized in the same period that the underlying gross room revenues are earned by the Company’s franchisees. • Initial franchise and relicensing fees . 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 fees are recognized as revenue ratably as services are provided over the enforceable period of the franchise agreement. The enforceable period is the period from hotel opening to the first point the franchisee or the Company can terminate the franchise agreement without incurring a significant penalty. Deferred revenues from initial and relicensing 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. • Other revenue. Other revenue is a combination of miscellaneous non-marketing and reservation system fees, inclusive of quality assurance non-compliance and franchisee training fees, and is recognized in the period the designated transaction or event has occurred. • Marketing and reservation system revenues . The Company’s franchise agreements require the payment of marketing and reservation system fees. The Company is obligated to use these marketing and reservation system fees to provide marketing and reservation services such as advertising, providing a centralized reservation and property management system, providing reservation and revenue management services, and performing certain franchise services to support the operation of the overall franchise system. These services are comprised of multiple fees including the following: ▪ Fees based on a percentage of gross room revenues are recognized in the period the gross room revenue was earned, based on the underlying hotel’s sales or usage. ▪ Fees based on the occurrence of a designated transaction or event are recognized in the period the transaction or event occurred. ▪ System implementation fees charged to franchisees are deferred and recognized as revenue over the term of the franchise agreement. ▪ Marketing and reservation system activities also include revenues generated from the Company’s guest loyalty program. The revenue recognition of this program is discussed in Choice Privileges Loyalty Program below . Marketing and reservation system expenses are those expenses incurred to facilitate the delivery of marketing and reservation system services, including direct expenses and an allocation of costs for certain administrative activities required to carry out marketing and reservation services. Marketing and reservation system expenses are recognized as services are incurred or goods are received, and as such may not equal marketing and reservation system revenues in a specific period but are expected to equal revenues earned from franchisees over time. The Company’s franchise agreements provide the Company the right to advance monies to the franchise system when the needs of the system surpass the balances currently available and recover such advances in future periods through additional fee assessments or reduced spending. The deficit generated during the year ended December 31, 2020 of $44.3 million is a result of lower marketing and reservation fees generated and incremental spend by the Company to support franchisees during the COVID-19 pandemic. Sales commissions earned by Company personnel upon execution of a franchise agreement (“franchise sales commissions”) meet the requirement to be capitalized as an incremental cost of obtaining a contract with a customer. Capitalized franchise sales commission are amortized on a straight-line basis over the estimated benefit period of the arrangement, unless the franchise agreement is terminated and the hotel exits the system whereby remaining capitalized amounts will be expensed in the period of termination. We make certain payments to customers as an incentive to enter into new franchise agreements (“franchise agreement acquisition cost”). We capitalize such payments as intangible assets. These intangibles are amortized on a straight-line basis over the estimated benefit period of the arrangement as an offset to royalty fees and marketing and reservation system fees. Impairments from hotel terminations are recorded within the SG&A expenses and marketing and reservation system expenses. 58 Table of Contents The Company also earns revenues on contracts incidental to the support of operations for franchised hotels, including purchasing operations: • Procurement services revenues. The Company generates procurement services revenues from qualified vendors. Procurement services revenues are generally based on marketing services provided by the Company on behalf of the qualified vendors to hotel owners and guests. The Company provides these services in exchange for either fixed consideration or a percentage of revenues earned by the qualified vendor pertaining to purchases by the Company’s franchisees or guests. Fixed consideration is allocated and recognized ratably to each period over the term of the agreement. Variable consideration is recognized in the period when sales to franchisees or guests from vendors are known or cash payment has been remitted. Qualified vendor revenues are recognized within Procurement services revenue. • Other revenues. The Company is party to other non-hotel franchising agreements that generate revenue primarily through SaaS arrangements. SaaS agreements typically include fixed consideration for installment and other initiation fees paid at contract onset, and variable consideration for recurring subscription revenue paid monthly. Fixed consideration is allocated and recognized ratably to each period over the term of the agreement. Variable consideration is determined at the conclusion of each period, and recognized in the current period. Owned Hotels The Company owned five hotels at December 31, 2020 and December 31, 2019, from which the Company derives revenues. As a hotel owner, the Company has performance obligations to provide accommodations to hotel guests and in return the Company earns a nightly fee for an agreed upon period that is generally payable at the time the hotel guest checks out of the hotel. The Company typically satisfies the performance obligations over the length of the stay and recognizes the revenue on a daily basis, as the hotel rooms are occupied and services are rendered. Other ancillary goods and services at owned hotels are purchased independently of the hotel stay at standalone selling prices and are considered separate performance obligations, which are satisfied at the point in time when the related good or service is provided to the guest. These primarily consist of food and beverage, incidentals and parking fees. Choice Privileges Loyalty Program Choice Privileges is the Company’s frequent guest loyalty program, which enables members to earn points based on their spending levels with the Company’s franchises. The points, which the Company accumulates and tracks on the members’ behalf, may be redeemed for free accommodations or other benefits (e.g., gift cards to participating retailers). The Company collects from franchisees a percentage of loyalty program members’ gross room revenue from completed stays to operate the program. At such time points are redeemed for free accommodations or other benefits, the Company reimburses franchisees or third parties based on a rate derived in accordance with the franchise or vendor agreement. Loyalty point revenues are recognized at the point in time when the loyalty points are redeemed by members for benefits. The transaction price is variable and determined in the period when the loyalty points are earned and the underlying gross room revenues are known. No loyalty program revenues are recognized at the time the loyalty points are issued. The Company is an agent in coordinating delivery of the services between the loyalty program member and franchisee or third party, and as a result, revenues are recognized net of the cost of redemptions. The estimated fair value of future redemptions is reflected in current and non-current Liability for guest loyalty program in our consolidated balance sheets. The liability for guest loyalty program is developed based on an estimate of the eventual redemption rates and point values using various actuarial methods. These significant judgments determine the required point liability attributable to outstanding points, which is relieved as redemption costs are processed. 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 (“breakage”). 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 program point redemption revenues are recognized within marketing and reservation system revenue in the consolidated statements of income. Changes in the estimates used in developing the breakage rate or other expected future program operations could result in material changes to the liability for guest loyalty program and deferred revenues. The Company maintains various agreements with third-party partners, including the co-branding of the Choice Privileges credit card. The agreements typically provide for use of the Company’s marks, limited access to the Company’s distribution channels, and sale of Choice Privileges points, in exchange for fees primarily comprising variable consideration paid each month. Choice Privileges members can earn points through participation in the partner’s program. Partner agreements include multiple performance obligations. The primary performance obligations are brand intellectual property and material rights for free or 59 Table of Contents discounted goods or services to hotel guests. Allocation of fixed and variable consideration to the performance obligations is based on standalone selling price as estimated based on market and income methods, which represent significant judgments. The amounts allocated to brand intellectual property are recognized on a gross basis over time using the output measure of time elapsed, primarily within Procurement services revenue. The amounts allocated to material rights for free or discounted goods or services to hotel guests are recognized to revenue as points are redeemed including an estimate of breakage, primarily within Marketing and reservation system revenue. Valuation of Long-Lived Assets, Intangibles, and Goodwill The Company evaluates the potential impairment of property and equipment and other long-lived assets, including franchise rights and other intangible assets with definite lives, annually or earlier upon the occurrence of an event or when other circumstances indicate that the Company may not be able to recover the carrying value of the asset. When indicators of impairment are present, recoverability is assessed based on undiscounted expected cash flows. If the undiscounted expected cash flows are less than the carrying amount of the assets, an impairment charge is recorded for the excess of the carrying value over the fair value of the asset. The fair value of intangibles and long lived assets are estimated primarily using undiscounted cash flow analyses. Significant management judgment is involved in evaluating indicators of impairment and developing any required projections to test for recoverability or estimate the fair value of an asset. Furthermore, if management uses different projections or if different conditions occur in future periods, future-operating results could be materially impacted. The Company did not identify any indicators of impairment of long-lived assets from the Hotel Franchising reporting unit during the years ended December 31, 2020, 2019 and 2018, other than impairments on franchise sales commission assets and franchise agreement acquisition cost intangibles resulting from terminations of franchisees from the Choice system. During 2019, the Company recognized impairments of long-lived assets attributable to the SaaS for vacation rentals reporting unit, as discussed further below. During 2020, the Company recognized impairments attributable to a the long-lived assets of a commercial office building and a real estate parcel. • 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 was in December 2020 and the tenant had extension options for up to 30 years. Prior to initial lease term expiration, the tenant provided notice that the lease renewal options would not be exercised. Management identified this as a triggering event requiring the interim reevaluation of the commercial office building's long-lived assets. The long-lived asset group had a carrying value prior to recoverability evaluation of $11.1 million in property and equipment and $0.2 million in intangible assets as of September 30, 2020. During the third quarter of 2020, recoverability of the long-lived asset group was assessed based on undiscounted expected cash flows of the asset group aligned with management’s present long-term strategy for the building, and management concluded the undiscounted expected cash flows were 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 during the third quarter of 2020. • The Company purchases real estate as part of its program to incent franchise development in strategic markets for the Cambria brand. The real estate is classified in other assets to the extent it is not presently under active construction. During the third quarter of 2018, the Company purchased the remaining membership interests in a VIE previously accounted for under the equity method of accounting. The VIE held a real estate parcel and the purchase was accounted for an asset acquisition. The financial results of the 100% owned entity have been consolidated in the Company's financial statements since August 2018. The real estate parcel represents a long-lived asset group with a carrying value prior to recoverability evaluation of $29.5 million in other assets as of December 31, 2020. Based on the impact of the COVID-19 pandemic, the Company’s assessment of the highest and best use of the real estate parcel changed and therefore, the recoverability of the long-lived asset group was re-assessed based on undiscounted expected cash flows of the asset group from a sale, which were less than the carrying value 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 market approach valuation methods. The Company recognized a non-cash pre-tax long-lived asset group impairment charge in the amount of $9.2 million during the fourth quarter of 2020. The Company evaluates the impairment of goodwill and intangible assets with indefinite lives annually as of December 31 or earlier upon the occurrence of substantive unfavorable changes in economic conditions, industry trends, costs, cash flows, or ongoing declines in market capitalization that indicate that the Company may not be able to recover the carrying amount of the 60 Table of Contents asset. In evaluating these assets for impairment, the Company may elect to first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit or the indefinite lived intangible asset is less than its carrying amount. If the conclusion is that it is not more likely than not that the fair value of the asset is less than its carrying value, then no further testing is required. If the conclusion is that it is more likely than not that the fair value of the asset is less than its carrying value, then a quantitative impairment test is performed whereby the carrying value is compared to the fair value of the asset and an impairment charge is recognized for any excess. The Company may elect to forgo the qualitative assessment and move directly to the quantitative impairment tests for goodwill and indefinite-lived intangibles. The Company determines the fair value of its reporting units and indefinite-lived intangibles using income and market methods. Goodwill is allocated to the Company's reporting units, which are determined by the availability of discrete financial information relied upon by segment management. As of December 31, 2020, the Company's goodwill is allocated to the Hotel Franchising reporting unit. The Company performed the qualitative impairment analysis for the Hotel Franchising reporting unit, concluding that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount. As such, no impairment was recorded and a quantitative test was not required. Historically, goodwill has been partially allocated to the SaaS for vacation rentals reporting unit. The Company performed the quantitative test for the SaaS for vacation rentals reporting unit during the fourth quarter of 2018 and first quarter of 2019 determining that the carrying value of the reporting unit exceeded the fair value. As a result, the Company recognized a goodwill impairment of $4.3 million and $3.1 million in the fourth quarter of 2018 and first quarter of 2019, respectively. In addition, during the first quarter of 2019 the Company recognized a long-lived asset group impairment charge for the full amount of SaaS for vacation rentals long-lived assets of $7.3 million. To estimate the fair value of the SaaS for vacation rentals long-lived asset group, the Company utilized a combination of income and market approach valuation methods via performance of a discounted cash flow analysis and quoted market prices. In performing the quantitative tests in the first quarter of 2019, the Company determined the fair value of the SaaS for vacation rentals reporting unit utilizing a combination of market and income approach valuation methods via performance of a DCF analysis and quoted market prices. There were significant judgments and assumptions used in the DCF and market-based models including the amount and timing of expected future cash flows, long-term growth rates, discount rate, and our selection of guideline company revenue multiples. The cash flows employed in the DCF analysis for the SaaS for vacation rentals reporting unit reflect expectations based upon recent operating performance and projected future performance. Discount rate assumptions were based on an assessment of the risk inherent in the future cash flows of the respective reporting unit and market conditions. The SaaS for vacation rentals reporting unit was sold during the second quarter of 2019, resulting in the write-off of the remaining goodwill of $6.3 million and recognition of a loss on sale of $4.7 million. Other than the SaaS for vacation rentals reporting unit, the Company did not record any impairment of goodwill or intangible assets with indefinite lives during the years ended December 31, 2020, 2019 and 2018. Valuation of Investments in Equity Method Investments The Company evaluates an investment in a venture for impairment when circumstances indicate that the carrying value may not be recoverable, for example due to loan defaults, significant under performance relative to historical or projected operating performance, and significant negative industry or economic trends. When there is indication that a loss in value has occurred, the Company evaluates the carrying value compared to the estimated fair value of the investment. Fair value is based upon internally developed discounted cash flow models, third-party appraisals, and if appropriate, current estimated net sales proceeds from pending offers. If the estimated fair value is less than carrying value, management uses its judgment to determine if the decline in value is other-than-temporary. In determining this, the Company considers factors including, but not limited to, the length of time and extent of the decline, loss of values as a percentage of the cost, financial condition and near-term financial projections, the Company's intent and ability to recover the lost value, and current economic conditions. For declines in value that are deemed other-than-temporary, impairments are charged to earnings. During the year ended December 31, 2020, the Company recognized impairment charges of $7.3 million related to four separate equity method investments. The impairment charges are classified as equity in net loss of affiliates in the consolidated statements of income. Accounts & Notes Receivable and Expected Credit Losses 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. 61 Table of Contents 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. Management assesses the credit quality of the portfolio and adequacy of credit loss allowances on an at least quarterly basis. Significant judgment is required in this analysis. Collateral-dependent financial assets are financial assets for which repayment is expected to be derived substantially through the operation or sale of the collateral and where the borrower is experiencing financial difficulty. For collateral-dependent loans, expected credit losses are based on the fair value of the collateral, less selling costs. 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. Accounts receivable consist primarily of franchise and related fees due from hotel franchisees and are recorded at the invoiced amount. The allowance for credit losses is the Company’s best estimate of the amount of expected credit losses inherent in the accounts receivable balance. The Company determines the allowance considering historical write-off experience, review of aged receivable balances and customer payment trends, the economic environment, and other available evidence. The Company records provisions for credit losses in SG&A expenses and marketing and reservation system expenses in the accompanying consolidated statements of income. When the Company determines that an account is not collectible, the account is written-off to the associated allowance for credit losses. Historically, the Company has considered its credit risk associated with accounts receivables to be partially mitigated due to the dispersion of these receivables across a large number of geographically diverse franchisees. With contemplation to economic and credit conditions resulting from the COVID-19 pandemic and estimates of other expected credit losses, during the year ended December 31, 2020 the Company recorded provisions for credit losses on accounts receivable of $15.6 million in SG&A expenses and $26.0 million in marketing and reservation system expenses, and provisions for credit losses on notes receivable of $7.6 million in SG&A expenses. As a result of the COVID-19 pandemic, the Company extended interest deferral terms on certain notes receivable. The Company considers loans to be past due and in default when payments are not made when due in accordance with then current loan provisions or terms extended to borrowers, including loans with concessions or interest deferral. 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 based on then current loan provisions. Stock Compensation The Company’s policy is to recognize compensation cost related to share-based payment transactions in the financial statements based on the fair value of the equity or liability instruments issued. Compensation expense related to the fair value of share-based awards is recognized over the requisite service period based on an estimate of those awards that will ultimately vest. The Company estimates the share-based compensation expense for awards that will ultimately vest upon inception of the grant and adjusts the estimate of share-based compensation for those awards with performance and/or service requirements that will not be satisfied so that compensation cost generally is recognized only for awards that ultimately vest. Income Taxes Income taxes are recorded using the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not such 62 Table of Contents assets will be unrealized. Historically, deferred United States income taxes have not been recorded for temporary differences related to investments in certain foreign subsidiaries and corporate affiliates. The temporary differences consisted primarily of undistributed earnings that are considered permanently reinvested in operations outside the United States. Due to the changes resulting from the 2017 Tax Cuts and Jobs Act, the Company has implemented a new foreign dividend policy effective during the quarter ended September 30, 2018. As a result of the new policy, the Company intends to limit any future foreign distributions to income which has been previously subject to US taxation, for which relevant taxes have been recorded. Nonetheless, the Company will continue to assert that any other outside basis difference of the foreign subsidiaries will be permanently (or indefinitely) reinvested outside of the U.S. Consequently, the Company will not record any additional deferred taxes for this item in 2020. With respect to uncertain income tax positions, a tax liability is recorded in full when management determines that the position does not meet the more likely than not threshold of being sustained on examination. A tax liability may also be recognized for a position that meets the more likely than not threshold, based upon management’s assessment of the position’s probable settlement value. The Company records interest and penalties on unrecognized tax benefits in the provision for income taxes . New Accounting Standards Refer to the "Recently Adopted Accounting Standards" section of Note 1 and the "Future Adoption of Accounting Standards" at Note 25 of our consolidated financial statements for information related to our adoption of new accounting standards in 2020 and anticipated adoption of recently issued accounting standards.