What changed in this filing

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Item 1. Financial Statements

2021-05-10 compared with 2020-11-05 · 261 added, 341 removed, 301 unchanged (67% of the section changed)

5 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Royalty fees $ 66,047 $ 70,339

Initial franchise and relicensing fees 5,427 7,284

1 unchanged sentence

Marketing and reservation system 91,521 110,385

Owned hotels 4,354 9,422

Other 4,407 6,948

Total revenues 182,947 218,175

3 unchanged sentences

Marketing and reservation system 98,173 130,447

Owned hotels 4,147 6,034

Total operating expenses

Impairment of goodwill

Loss on asset dispositions and impairments

Loss on sale of business

Gain on sale of assets, net

138,949 171,393

Operating income 43,998 46,782

3 unchanged sentences

Loss on extinguishment of debt — 607

Other gains, net

Other (gain) loss ( 1,205 ) 4,729

Equity in net loss of affiliates 5,997 1,955

2 unchanged sentences

Income tax expense (benefit) 6,373 ( 25,064 )

Net income $ 22,337 $ 55,463

Basic earnings per share $ 0.40 $ 1.00

7 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Net income $ 22,337 $ 55,463

Other comprehensive income (loss), net of tax:

Amortization of loss on cash flow hedge

Foreign currency translation adjustment 52 ( 664 )

6 unchanged sentences

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

September 30, 2020

December 31, 2019

March 31, 2021 December 31, 2020

Current assets

1 unchanged sentence

Receivables (net of allowance for credit losses of $ 65,728 and $ 59,424 , respectively)

156,754 149,921

Income taxes receivable 2,791 4,186

Notes receivable

Allowance for notes receivable credit losses

Notes receivable (net of allowance for credit losses of $ 6,094 and $ 4,179 , respectively)

38,286 24,048

Other current assets 24,352 19,980

2 unchanged sentences

Operating lease right-of-use assets 15,312 17,688

Goodwill 159,196 159,196

Intangible assets, net 306,868 303,725

Notes receivable

Allowance for notes receivable losses

Notes receivable (net of allowance for credit losses of $ 13,524 and $ 15,305 , respectively)

82,651 95,785

Investments, employee benefit plans, at fair value 28,558 29,104

1 unchanged sentence

Deferred income taxes 69,094 67,745

LIABILITIES AND SHAREHOLDERS’ DEFICIT

Other assets 87,804 88,396

Total assets $ 1,584,138 $ 1,587,333

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current liabilities

2 unchanged sentences

Deferred revenue 52,701 50,290

Current portion of long-term debt

Liability for guest loyalty program 54,432 43,308

11 unchanged sentences

160,000,000 shares authorized;

95,065,638 shares issued at September 30, 2020 and December 31, 2019;

55,458,248 and 55,702,628 shares outstanding at September 30, 2020 and December 31, 2019, respectively

95,065,638 shares issued at March 31, 2021 and December 31, 2020;

55,537,836 and 55,535,554 shares outstanding at March 31, 2021 and December 31, 2020, respectively

Additional paid-in-capital 237,538 233,921

1 unchanged sentence

Treasury stock, at cost;

39,607,390 and 39,363,010 shares at September 30, 2020 and December 31, 2019, respectively

39,527,802 and 39,530,084 shares at March 31, 2021 and December 31, 2020, respectively

( 1,261,494 ) ( 1,260,478 )

Retained earnings 1,046,834 1,024,500

Total shareholders’ deficit

Total liabilities and shareholders’ deficit

Total shareholders’ equity (deficit) 19,235 ( 5,752 )

Total liabilities and shareholders’ equity (deficit) $ 1,584,138 $ 1,587,333

The accompanying notes are an integral part of these consolidated financial statements.

3 unchanged sentences

(IN THOUSANDS)

Nine Months Ended

September 30,

Three Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES

Net income $ 22,337 $ 55,463

Adjustments to reconcile net income to net cash provided by operating activities:

2 unchanged sentences

Franchise agreement acquisition cost amortization 3,044 2,819

Gain on disposal of assets

Loss on sale of business

Loss on asset disposition and impairments

Impairment of goodwill

Loss on extinguishment of debt

Loss on debt extinguishment — 607

Non-cash stock compensation and other charges 5,026 ( 2,575 )

Non-cash interest and other income

Non-cash interest and other investment (income) loss ( 2,059 ) 4,339

Deferred income taxes ( 1,378 ) ( 26,677 )

1 unchanged sentence

Franchise agreement acquisition costs, net of reimbursements ( 6,770 ) ( 7,122 )

Change in working capital and other, net of acquisition

Change in working capital and other ( 38,254 ) ( 34,597 )

Net cash provided by operating activities 120 5,764

2 unchanged sentences

Investment in intangible assets ( 885 ) ( 1,004 )

Proceeds from sales of assets

Payment on business disposition, net

Asset acquisition, net of cash acquired

Proceeds from sale of unconsolidated joint venture

Contributions to equity method investments ( 968 ) ( 2,201 )

3 unchanged sentences

Issuance of notes receivable — ( 5,778 )

Collections of notes receivable

Proceeds from sale of tax credits

Collection of notes receivable 63 63

Other items, net — 14

1 unchanged sentence

CASH FLOWS FROM FINANCING ACTIVITIES

Net (repayments) borrowings pursuant to revolving credit facilities

Proceeds from issuance of Term Loan

Proceeds from issuance of 2020 Senior Notes

Net borrowings pursuant to revolving credit facilities — 396,800

Principal payments on long-term debt — ( 33,239 )

Payments to extinguish long-term debt

Purchase of treasury stock ( 5,046 ) ( 54,072 )

Dividends paid — ( 12,791 )

Debt issuance costs

Proceeds from issuance of long-term debt

Payments on transfer of interest in notes receivable

Proceeds from exercise of stock options 2,845 1,235

Net cash provided by financing activities

Net cash (used in) provided by financing activities ( 2,201 ) 297,933

Net change in cash and cash equivalents ( 11,794 ) 288,872

2 unchanged sentences

Cash and cash equivalents at end of period $ 222,961 $ 321,954

CHOICE HOTELS INTERNATIONAL, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(IN THOUSANDS)

Supplemental disclosure of cash flow information

4 unchanged sentences

Dividends declared but not paid $ — $ 12,313

Investment in property and equipment acquired in accounts payable

Investment in property, equipment and intangibles acquired in accounts payable and accrued liabilities $ 2,785 $ 2,709

The accompanying notes are an integral part of these consolidated financial statements.

1 unchanged sentence

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Outstanding Common

Value Additional

Capital Accumulated

Comprehensive

Income (Loss)

Income (Loss) Treasury

Stock Retained

Earnings Total

Balance as of December 31, 2019 55,702,628 $ 951 $ 231,160 $ ( 4,550 ) $ ( 1,219,905 ) $ 968,833 $ ( 23,511 )

Cumulative-effect adjustment (1)

— — — — — ( 6,831 ) ( 6,831 )

Net income — — — — — 55,463 55,463

Other comprehensive income (loss) — — — ( 664 ) — — ( 664 )

Share based payment activity (2)

294,826 — ( 9,607 ) — 8,089 ( 269 ) ( 1,787 )

Dividends declared ($ 0.225 per share) (2)

— — — — — ( 12,452 ) ( 12,452 )

Treasury purchases ( 657,031 ) — — — ( 54,072 ) — ( 54,072 )

Balance as of March 31, 2020 55,340,423 $ 951 $ 221,553 $ ( 5,214 ) $ ( 1,265,888 ) $ 1,004,744 $ ( 43,854 )

Other comprehensive income (loss)

Share based payment activity

Dividends declared ($0.215 per share)

Treasury purchases

Balance as of June 30, 2019

Other comprehensive income (loss)

Share based payment activity

Dividends declared ($0.215 per share)

Treasury purchases

Balance as of September 30, 2019

Outstanding Common

Value Additional

Capital Accumulated

Comprehensive

Income (Loss)

Income (Loss) Treasury

Stock Retained

Earnings Total

Balance as of December 31, 2020 55,535,554 $ 951 $ 233,921 $ ( 4,646 ) $ ( 1,260,478 ) $ 1,024,500 $ ( 5,752 )

Cumulative-effect adjustment (3)

Other comprehensive income (loss)

Share based payment activity

Dividends declared ($0.225 per share) (4)

Treasury purchases

Balance as of March 31, 2020

Other comprehensive income (loss)

Share based payment activity (4)

Dividends declared (4)

Treasury purchases

Balance as of June 30, 2020

Net income — — — — — 22,337 22,337

Other comprehensive income (loss) — — — 52 — — 52

Share based payment activity (2)

48,781 — 3,617 — 4,030 ( 3 ) 7,644

Dividends declared (2)

— — — — — — —

Treasury purchases ( 46,499 ) — — — ( 5,046 ) — ( 5,046 )

Balance as of September 30, 2020

(1) Impact of adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Update (“ASU”) No.

2014-09, Revenue From Contracts with Customers (Topic 606) and subsequent amendments to the initial guidance ("Topic 606") related to a foreign joint venture accounted for as an equity method investment.

(2) Impact of transaction resulting in an increase in ownership of a consolidated joint venture for the construction and operation of a Cambria Hotel.

(3) Reflects the cumulative effect of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which was adopted on January 1, 2020.

Refer to Note 1 for additional details.

Balance as of March 31, 2021 55,537,836 $ 951 $ 237,538 $ ( 4,594 ) $ ( 1,261,494 ) $ 1,046,834 $ 19,235

(1) Reflects the cumulative effect of ASU 2016-13 , Financial Instruments - Credit Losses (Topic 326) and subsequent amendments issued thereafter (collectively "Topic 326"), which was adopted on January 1, 2020.

Refer to Note 3.

(2) During the fourth quarter of 2019, the Company's board of directors announced a 5 % increase to the quarterly dividend rate to $ 0.225 per share from $ 0.215 per share, beginning with the dividend payable in the first quarter of 2020.

1 unchanged sentence

The dividend was payable on April 16, 2020 to shareholders of record on April 2, 2020.

Subsequent to the payment of the dividend, in light of uncertainty resulting from the COVID-19 pandemic, we suspended future, undeclared dividends for at least the remainder of 2020.

In the second and third quarters of 2020, dividends were paid to certain shareholders upon vesting of certain performance-based stock grants which are captured in Share based payment activity.

In April 2020, subsequent to the payment of the dividend and in light of uncertainty resulting from the COVID-19 pandemic, we suspended future, undeclared dividends.

During 2020 and 2021, accumulated dividends were paid to certain shareholders upon vesting of certain performance vested restricted stock units ("PVRSU") which are captured in Share based payment activity.

On May 7, 2021, the Company's board of directors declared a quarterly cash dividend of $0.225 per share of common stock.

Refer to Note 14.

The accompanying notes are an integral part of these consolidated financial statements.

5 unchanged sentences

The accompanying unaudited consolidated financial statements of Choice Hotels International, Inc.

and its subsidiaries (together the "Company") have been prepared by the Company in accordance with United States of America generally accepted accounting principles ("GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").

These unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present the Company's financial position and results of operations.

and its subsidiaries (together the "Company") have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America ("GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").

All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates.

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments that are necessary to fairly present the Company's financial position and results of operations.

Except as otherwise disclosed, all adjustments are of a normal recurring nature.

Certain prior year amounts in our Consolidated Statements of Income have been reclassified in order to maintain comparability with current year presentation.

Certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP have been omitted.

The Company believes the disclosures made are adequate to make the information presented not misleading.

The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2019 and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 2, 2020 .

Although we believe the disclosures made are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2020 and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the SEC on February 26, 2021.

Interim results are not necessarily indicative of the entire year results.

All inter-company transactions and balances between Choice Hotels International, Inc.

and its subsidiaries have been eliminated in consolidation.

Actual results could differ from those estimates.

Certain prior year amounts in our consolidated financial statements have been reclassified in order to maintain comparability with current year presentation.

Foreign currency transaction gains and losses that were previously presented in selling, general and administrative ("SG&A") expenses are now presented within other gain (loss) in the consolidated statements of income.

The reclassification had no effect on the Company’s previously reported results of operations.

Summary of Significant Accounting Policies

2 unchanged sentences

Recently Adopted Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) and issued subsequent amendments to the initial guidance at various points thereafter ("Topic 326").

Under legacy standards, we recognized an impairment of receivables when it was probable that a loss had been incurred.

Topic 326 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts (which includes losses that may be incurred in future periods), and enhanced disclosures to provide insight to significant estimates and judgments used in estimating credit losses.

The Company adopted Topic 326 on January 1, 2020 using the modified retrospective approach resulting in a cumulative-effect adjustment of $ 6.8 million (inclusive of deferred taxes) recorded in retained earnings as of the date of adoption.

The scope and provisions of Topic 326 impact the allowance for the Company's Notes and Trade receivables.

During the three and nine months ended September 30, 2020 , the Company recorded provisions for credit losses of $ 3.7 million and $ 14.6 million , respectively, with contemplation to economic and credit conditions resulting from the COVID-19 pandemic and estimates of other expected credit losses.

Refer to Note 3 for further details on the adoption of Topic 326 and the impact to the Company's accounting policies for Notes receivable.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13").

ASU 2018-13 modifies disclosure requirements on fair value measurements.

The Company adopted ASU 2018-13 on a retrospective basis on January 1, 2020, with limited modifications to its fair value footnote disclosure.

Refer to Note 7 .

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) :

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

("ASU 2018-15").

ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

The Company adopted ASU 2018-15 on a prospective basis on January 1, 2020.

As the majority of the Company's hosting arrangements are service contracts, the capitalization and subsequent amortization of implementation costs incurred after adoption are expected to impact the timing, but not classification, of expense recognition.

Recently Issued Accounting Standard

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12").

ASU 2019-12 enhances and simplifies various aspects of the income tax accounting guidance in Accounting Standards Codification ("ASC") 740, Income Taxes.

The guidance is effective for annual reporting periods beginning after December 15, 2020 and interim periods within those fiscal years.

Early adoption is permitted.

T he Company is evaluating the effect of adopting ASU 2019-12, but does not expect adoption will have a material impact on the consolidated financial statements and disclosures .

The Company adopted ASU 2019-12 on January 1, 2021 and the adoption does not have material impacts on our consolidated financial statements and disclosures .

Contract Liabilities

Contract liabilities relate to (i) advance consideration received, such as initial franchise and relicensing fees paid when a franchise agreement is awarded and system implementation fees paid at time of installation, for services considered to be part of the brand intellectual property performance obligation and (ii) amounts received when Choice Privileges points are issued, but for which revenue is not yet recognized since the related points have not been redeemed.

Initial and relicensing fees are charged when (i) new hotels enter the franchise system, (ii) there is a change of ownership, or (iii) existing franchise agreements are extended.

These revenues are recognized as revenue ratably as services are provided over the enforceable period of the franchise agreement.

System implementation fees charged to franchisees are also deferred and recognized as revenue over the enforceable period of the franchise agreement.

The enforceable period is the period from hotel opening to the first date the franchisee or the Company can terminate the franchise agreement without incurring a significant penalty.

Contract liabilities relate to (i) advance consideration received, such as initial franchise and relicensing fees paid when a franchise agreement is executed and system implementation fees paid at time of installation, for services considered to be part of the brand intellectual property performance obligation and (ii) amounts received when Choice Privileges points are issued, but for which revenue is not yet recognized since the related points have not been redeemed.

Deferred revenues from initial and relicensing fees and system implementation fees will typically be recognized over a five - to ten-year period, unless the franchise agreement is terminated and the hotel exits the franchise system whereby remaining deferred amounts will be recognized to revenue in the period of termination.

Loyalty points represent a performance obligation attributable to usage of the points, and thus revenues are recognized at the point in time when the loyalty points are redeemed by members for benefits.

The estimated fair value of future redemptions is reflected in current and non-current Liability for guest loyalty program in the consolidated balance sheets.

The amount of the loyalty program fees in excess of the point liability represents current and non-current deferred revenue, which is recognized to revenue as points are redeemed including an estimate of future forfeitures.

The anticipated redemption pattern of the points is the basis for current and non-current designation of each liability, which was adjusted in the first quarter of 2020 to reflect an anticipated longer issuance to redemption period in light of impacts from the COVID-19 pandemic.

Loyalty points are typically redeemed within three years of issuance.

Significant changes in the contract liabilities balances during the period December 31, 2019 to September 30, 2020 are as follows:

Significant changes in the contract liabilities balances during the period December 31, 2020 to March 31, 2021 are as follows:

(in thousands)

2 unchanged sentences

Revenue recognized in the period ( 18,826 )

Balance as of September 30, 2020

Balance as of March 31, 2021 $ 152,526

Remaining Performance Obligations

The aggregate amount of transaction price allocated to unsatisfied or partially unsatisfied performance obligations is $ 158.5 million as of September 30, 2020 .

The aggregate amount of transaction price allocated to unsatisfied or partially unsatisfied performance obligations is $ 152.5 million as of March 31, 2021.

This amount represents fixed transaction price that will be recognized as revenue in future periods, which is captured in the consolidated balance sheet as current and non-current deferred revenue.

Based on practical expedient elections permitted by Topic 606, the Company does not disclose the value of unsatisfied performance obligations for (i) variable consideration subject to the sales or usage-based royalty constraint or comprising a component of a series (including franchise, partnership, qualified vendor, and software as a service ("SaaS") agreements), (ii) variable consideration for which we recognize revenue at the amount to which we have the right to invoice for services performed, or (iii) contracts with an expected original duration of one year or less.

Based on practical expedient elections permitted by ASU 2014-09, Revenue From Contracts with Customers (Topic 606) and subsequent amendments ("Topic 606"), the Company does not disclose the value of unsatisfied performance obligations for (i) variable consideration subject to the sales or usage-based royalty constraint or comprising a component of a series (including franchise, partnership, qualified vendor, and software as a service ("SaaS") agreements), (ii) variable consideration for which we recognize revenue at the amount to which we have the right to invoice for services performed, or (iii) contracts with an expected original duration of one year or less.

Disaggregation of Revenue

Three Months Ended

September 30, 2020

September 30, 2019

(in thousands)

Point in time

Initial franchise and relicensing fees

Procurement services

Marketing and reservation system

Total Topic 606 revenues

Non-Topic 606 revenues

Total revenues

Nine Months Ended

September 30, 2020

September 30, 2019

(in thousands)

Point in time

Three Months Ended Three Months Ended

March 31, 2021 March 31, 2020

(in thousands) Over time Point in time Total Over time Point in time Total

Royalty fees $ 66,047 $ — $ 66,047 $ 70,339 $ — $ 70,339

Initial franchise and relicensing fees 5,427 — 5,427 7,284 — 7,284

1 unchanged sentence

Marketing and reservation system 79,052 12,469 91,521 99,329 11,056 110,385

Owned hotels 3,517 722 4,239 8,021 1,293 9,314

Other 4,407 — 4,407 6,687 — 6,687

Total Topic 606 revenues $ 169,189 $ 13,643 182,832 $ 204,948 $ 12,858 217,806

2 unchanged sentences

Non-Topic 606 revenues primarily represent revenue from leasing and are presented in Owned hotels and Other revenues in the consolidated statements of income.

As presented in Note 11 , the Corporate & Other segment amounts represent $ 6.4 million and $ 10.2 million for the three months ended September 30, 2020 and 2019 , respectively, and $ 21.8 million and $ 17.6 million for the nine months ended September 30, 2020 and 2019 , respectively, and are included in the Over time column of Other revenues and the Owned Hotels and Non-Topic 606 revenues rows.

As presented in Note 11, the Corporate & Other segment amounts represent $ 6.0 million and $ 10.9 million for the three months ended March 31, 2021 and 2020, respectively, and are included in the Over time column of Other revenues and the Owned Hotels and Non-Topic 606 revenues rows.

The remaining revenues relate to the Hotel Franchising segment.

Royalty fees and Marketing and reservation system revenues are presented net of intersegment revenues of $ 0.3 million and $ 0.8 million for the three months ended September 30, 2020 and 2019, respectively, and $ 1.2 million and $ 0.8 million for the nine months ended September 30, 2020 and 2019, respectively, as described in Note 11 .

Royalty fees and Marketing and reservation system revenues are presented net of intersegment revenues of $ 0.3 million and $ 0.8 million for the three months ended March 31, 2021 and 2020, respectively .

Notes Receivable and Allowance for Credit Losses

The Company has provided financing in the form of notes receivable loans to franchisees to support the development of properties in strategic markets.

As of September 30, 2020 and December 31, 2019 , the Company had $ 139.7 million and $ 133.0 million , respectively, in notes receivable loans outstanding.

The Company has developed a systematic methodology to determine its allowance for credit losses across our portfolio of notes receivable loans.

The Company monitors the risk and performance of our portfolio by the level of security in collateral (i.e., senior, subordinated or unsecured).

As each of the Company’s notes receivable loans has unique risk characteristics, the Company deploys its methodology to calculate allowances for credit losses at the individual notes receivable loan level.

The Company primarily utilizes a discounted cash flow ("DCF") approach to measure the credit allowance, influenced by the key economic variables of each note receivable loan.

The Company identified the key economic variables for these loans to be loan-to-cost ("LTC") or loan-to-value ("LTV") ratios and debt service coverage ratio ("DSCR").

The LTC or LTV ratio represents the loan principal relative to the project cost or value and is an indication of the ability to be re-paid principal at loan maturity.

The DSCR represents borrower net operating income as a percentage of the interest and principal payments incurred (i.e., debt service) on all debt of the borrower and is an indication of the ability of the borrower to timely pay amounts due during the term of the loan.

The LTC or LTV ratios and DSCR are considered during loan underwriting as indications of risk and, accordingly, we believe these factors are the most representative risk indicators for calculating the allowance for credit loss.

Loans with higher LTC or LTV ratios and lower DSCR ratios generally are representative of loans with greater risk and, accordingly, have higher credit allowances as a percentage of loan principal.

Conversely, loans with lower LTC or LTV ratios and higher DSCR ratios generally are representative of loans with lesser risk and, accordingly, have lower credit allowances as a percentage of loan principal.

The following table shows the composition of the Company's notes receivable balances based on the level of security credit quality indicator:

(in thousands)

September 30, 2020

December 31, 2019

The composition of notes receivable balances based on the level of security credit quality indicator and the allowance for credit losses is as follows:

(in thousands) March 31, 2021 December 31, 2020

Senior $ 105,333 $ 104,716

Subordinated 33,672 33,234

Unsecured 1,550 1,367

Total notes receivable 140,555 139,317

4 unchanged sentences

Amortized cost basis by year of origination and level of security credit quality indicator are as follows:

(in thousands)

(in thousands) 2021 2020 2019 Prior Total

Senior $ — $ — $ 28,981 $ 76,352 $ 105,333

Subordinated — — 2,591 31,081 33,672

Unsecured — — — 1,550 1,550

Total notes receivable $ — $ — $ 31,572 $ 108,983 $ 140,555

As disclosed in Note 1 , Topic 326 required a cumulative-effect adjustment to the consolidated balance sheet as of the beginning of the first reporting period in which the guidance was effective.

As of the adoption date of January 1, 2020, the Company established a credit allowance on its notes receivable loans of $ 12.9 million , an increase from a previous loan allowance of $ 4.6 million as of December 31, 2019.

The cumulative-effect adjustment of adopting Topic 326 of $ 6.8 million , net of tax impact, is recorded in the consolidated balance sheets in the Retained earnings line item.

The following table summarizes the activity related to the Company’s notes receivable allowance for credit losses, including the impacts of adopting Topic 326:

The provisions recorded in the nine months ended September 30, 2020 reflect the increased likelihood of adverse outcomes on loans to borrowers with contemplation to impacts of the COVID-19 pandemic and estimates of other expected credit losses.

(in thousands)

September 30, 2020

December 31, 2019

(in thousands) March 31, 2021 December 31, 2020

Beginning balance $ 19,484 $ 4,556

Reserves established from adoption of Topic 326

Allowances established from adoption of Topic 326 — 8,348

Provision for credit losses 134 7,634

Write-offs — ( 1,054 )

Ending balance $ 19,618 $ 19,484

The Company considers loans to be past due and in default when payments are not made when due.

The provisions recorded in the three months ended March 31, 2021 primarily results from changes in the classification of certain loans as collateral-dependent and associated revisions to their allowances.

Allowances for credit losses attributable to collateral-dependent loans is $ 3.5 million and $ 7.8 million as of March 31, 2021 and December 31, 2020, respectively.

As of March 31, 2021, two loans with senior or subordinated tranches met the definition of collateral-dependent and are collateralized by either land parcels or membership interests in the borrowing entities.

The Company used a discounted cash flow ("DCF") technique to project cash flows or a market approach via quoted market prices to value the underlying collateral.

In projecting cash flows, the Company reviewed the borrower's financial statements, economic trends, industry projections for the market, and comparable sales capitalization rates.

These nonrecurring fair value measurements are classified as level three of the fair value measurement hierarchy, as there are unobservable inputs which are significant to the overall fair value.

Based on these analyses, the fair value of collateral secures the carrying value of each loan to a significant extent.

During the first quarter of 2021, a loan with senior and subordinated tranches, that met the definition of collateral-dependent as of December 31, 2020, was restructured and as a result no longer meets the classification of collateral-dependent as of March 31, 2021.

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.

The amortized cost basis of notes receivable on non-accrual status was $ 28.9 million and $ 1.7 million at September 30, 2020 and December 31, 2019 , respectively.

The Company has identified loans totaling approximately $ 13.1 million and $ 16.3 million , respectively, with stated interest rates that are less than market rate, representing a total discount of $ 1.0 million and $ 1.3 million as of September 30, 2020 and December 31, 2019 , respectively.

The Company does not resume interest accrual until all delinquent payments are received based on then current loan provisions.

The amortized cost basis of notes receivable on non-accrual status was $ 50.7 million and $ 28.9 million at March 31, 2021 and December 31, 2020, respectively.

The Company has identified loans totaling approximately $ 13.1 million as of both March 31, 2021 and December 31, 2020, with stated interest rates that are less than market rate, representing a total unamortized discount of $ 0.6 million and $ 0.8 million as of March 31, 2021 and December 31, 2020, respectively.

These discounts are reflected as a reduction of the outstanding loan amounts and are amortized over the life of the related loan.

Past due balances of notes receivable by credit quality indicators are as follows:

(in thousands)

The past due balances by credit quality indicator of notes receivable are as follows:

(in thousands) 30-89 days

Past Due > 90 days

Past Due Total

Past Due Current Total

Notes Receivable

As of September 30, 2020

As of March 31, 2021

Senior $ — $ 15,200 $ 15,200 $ 90,133 $ 105,333

Subordinated — 2,209 2,209 31,463 33,672

Unsecured — — — 1,550 1,550

$ — $ 17,409 $ 17,409 $ 123,146 $ 140,555

As of December 31, 2020

The Company evaluated its off-balance-sheet credit exposure for loan commitments and determined the likelihood of having to perform is remote as of September 30, 2020 .

Senior $ — $ 15,200 $ 15,200 $ 89,516 $ 104,716

Subordinated — 2,209 2,209 31,025 33,234

Unsecured — — — 1,367 1,367

$ — $ 17,409 $ 17,409 $ 121,908 $ 139,317

The Company evaluated its off-balance-sheet credit exposure for loan commitments and determined the likelihood of having to perform is remote as of March 31, 2021.

Refer to Note 12.

Variable Interest through Notes Issued

The Company has issued notes receivables to certain entities that have created variable interests in these borrowers totaling $ 121.5 million and $ 126.5 million as of September 30, 2020 and December 31, 2019 , respectively.

The Company has issued notes receivables to certain entities that have created variable interests in these borrowers totaling $ 120.1 million and $ 119.3 million as of March 31, 2021 and December 31, 2020, respectively.

The Company has determined that it is not the primary beneficiary of these variable interest entities ("VIEs").

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The Company maintains a portfolio of investments owned through noncontrolling interests in equity method investments with one or more partners.

The Company has equity method investments in joint ventures that represent VIEs totaling $ 71.9 million and $ 74.4 million on the consolidated balance sheets at September 30, 2020 and December 31, 2019 , respectively.

The Company has equity method investments in joint ventures that represent VIEs totaling $ 51.6 million and $ 56.9 million on the consolidated balance sheets at March 31, 2021 and December 31, 2020, respectively.

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

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Although the Company is not the primary beneficiary of these VIEs, it does exercise significant influence through its equity ownership and as a result the Company's investment in these entities is accounted for under the equity method.

For the three months ended September 30, 2020 and 2019 , the Company recognized losses totaling $ 2.3 million and $ 6.9 million , respectively, from these investments.

For the nine months ended September 30, 2020 and 2019 , the Company recognized losses totaling $ 6.9 million and $ 10.9 million , respectively, from these investments.

For the three months ended March 31, 2021 and 2020, the Company recognized losses totaling $ 6.4 million and $ 2.0 million, respectively, from these investments that represent VIEs.

The Company's maximum exposure to losses related to its investments in VIEs is limited to its equity investments as well as certain limited payment guaranties described in Note 12 of these financial statements.

During the first quarter of 2021, the Company recognized an impairment charge of $ 4.8 million related to an equity method investment.

The Company assessed the estimated fair value of the investment from comparable market transactions of the investment.

Based on this analysis, the Company determined that the fair market value declined below the carrying value and the decline is other-than-temporary.

As a result, the Company recorded an impairment charge from the carrying value to the estimated fair value for the investment.

The impairment charge is classified as equity in net loss of affiliates in the consolidated statements of income and captured in the Hotel Franchising reportable segment in Note 11.

Debt consists of the following:

September 30, 2020

December 31, 2019

March 31, 2021 December 31, 2020

(in thousands)

$400 million senior unsecured notes due 2022 with an effective interest rate of 6.0%, less deferred issuance costs of $0.9 million and $2.3 million at September 30, 2020 and December 31, 2019, respectively

$400 million senior unsecured notes due 2029 with an effective interest rate of 3.88%, less a discount and deferred issuance costs of $5.5 million and $6.0 million at September 30, 2020 and December 31, 2019, respectively

$600 million senior unsecured revolving credit facility with an effective interest rate of 2.76%, less deferred issuance costs of $2.7 million at December 31, 2019 (1)

$450 million senior unsecured notes due 2031 with an effective interest rate of 3.86%, less a discount and deferred issuance costs of $6.3 million at September 30, 2020

Construction loan with an effective interest rate of 6.23%, less deferred issuance costs of $0.6 million at December 31, 2019.

Fixed rate collateralized mortgage with an effective interest rate of 4.57%, plus a fair value adjustment of $34 thousand and $0.2 million at September 30, 2020 and December 31, 2019, respectively

Economic development loans with an effective interest rate of 3.0% at September 30, 2020 and December 31, 2019, respectively

Current portion of long-term debt

$ 450 million senior unsecured notes due 2031 ("2020 Senior Notes") with an effective interest rate of 3.86 %, less a discount and deferred issuance costs of $ 6.0 million and $ 6.1 million at March 31, 2021 and December 31, 2020, respectively

$ 444,012 $ 443,860

$ 400 million senior unsecured notes due 2029 ("2019 Senior Notes") with an effective interest rate of 3.88 %, less a discount and deferred issuance costs of $ 5.2 million and $ 5.4 million at March 31, 2021 and December 31, 2020, respectively

394,786 394,635

$ 400 million senior unsecured notes due 2022 ("2012 Senior Notes") with an effective interest rate of 6.00 %, less deferred issuance costs of $ 0.6 million and $ 0.7 million at March 31, 2021 and December 31, 2020, respectively

215,955 215,827

$ 600 million senior unsecured revolving credit facility (1)

Economic development loans with an effective interest rate of 3.00 % at March 31, 2021 and December 31, 2020, respectively

Long-term debt $ 1,059,169 $ 1,058,738

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

As there are no outstanding borrowings at September 30, 2020 , deferred issuance costs of $ 2.5 million for the senior unsecured revolving credit facility are presented in non-current Other Assets in the Consolidated Balance Sheets.

In April 2020, the Company entered into a $ 250 million unsecured term loan (the "Term Loan") with a scheduled maturity date of April 15, 2021 .

In July 2020, the Company issued $ 450 million aggregate principal amount of 3.70 % senior unsecured notes due 2031 (the "2020 Senior Notes") and announced the early tender results of a cash tender offer (the "Tender Offer") for the purchase of approximately $ 183.4 million aggregate principal amount of the Company's 5.75 % senior unsecured notes due 2022 (the "2012 Senior Notes").

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

As a result of the early redemption of the 2012 Senior Notes and the early payoff of the Term Loan, the Company recognized a total charge of $ 16.0 million loss on extinguishment of debt.

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

Prior to the Amendment, the Credit Agreement provided that if certain subsidiaries of the Company were to incur certain recourse debt or become obligors in respect of certain recourse debt of the Company or certain of its other subsidiaries, those obligated subsidiaries were required to guarantee the Company’s obligations under the unsecured revolving credit facility provided pursuant to the Restated Credit Agreement (the “springing guarantee”).

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

On March 5, 2020 , the Company paid off the construction loan in the amount $ 33.1 million inclusive of accrued and unpaid interest and recorded a loss on extinguishment of debt of $ 0.6 million .

On August 12, 2020, the Company executed a one-year extension on the senior unsecured credit facility for $ 525 million of the $ 600 million total capacity in exchange for a fee of $ 0.3 million .

The extended maturity date is August 20, 2025.

(1) During the third quarter of 2020, the Company utilized excess cash on hand to pay down its senior unsecured revolving credit facility balance in full and the facility remains undrawn upon as of December 31, 2020 and March 31, 2021.

As there are no outstanding borrowings at December 31, 2020 or March 31, 2021, deferred issuance costs for the senior unsecured revolving credit facility of $ 2.4 million and $ 2.3 million, respectively, are presented in non-current Other Assets in the Consolidated Balance Sheets.

Refer to Note 12 and the Liquidity and Capital Resources header of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information.

Accumulated Other Comprehensive Loss

The following represents the changes in accumulated other comprehensive loss, net of tax, by component for the nine months ended September 30, 2020 and 2019 :

The changes in accumulated other comprehensive loss, net of tax, for the three months ended March 31, 2021 and 2020 are as follows:

(in thousands)

Loss on Cash Flow Hedge

Foreign Currency Items

Balance as of December 31, 2020 $ ( 4,646 )

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Net current period other comprehensive income (loss) 52

Balance as of September 30, 2020

Balance as of March 31, 2021 $ ( 4,594 )

(in thousands)

Loss on Cash Flow Hedge

Foreign Currency Items

Balance as of December 31, 2019 $ ( 4,550 )

Other comprehensive loss before reclassification ( 664 )

Amounts reclassified from accumulated other comprehensive loss

Net current period other comprehensive income (loss) ( 664 )

Balance as of September 30, 2019

During the three and nine ended September 30, 2019 , $ 0.2 million and $ 0.6 million , respectively, was reclassified from accumulated other comprehensive loss to Interest expense in the Company's Consolidated Statements of Income with reference to a cash flow hedge loss on an interest rate contract.

There was no income tax expense or benefit.

There were no amounts reclassified during the three and nine months ended September 30, 2020 , as the debt related to the Interest rate contract was paid off in December 2019.

Balance as of March 31, 2020 $ ( 5,214 )

The other comprehensive loss before reclassification for both the three months ended March 31, 2021 and 2020 relate to foreign currency items.

Fair Value Measurements

The Company estimates the fair value of its financial instruments utilizing a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.

The following summarizes the three levels of inputs, as well as the assets that the Company values using those levels of inputs.

The following summarizes the three levels of inputs, as well as the assets that the Company values using those levels of inputs on a recurring basis.

Quoted prices in active markets for identical assets and liabilities.

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Unobservable inputs, supported by little or no market data available, where the reporting entity is required to develop its own assumptions to determine the fair value of the instrument.

The Company does not currently have any assets recorded at fair value whose fair value was determined using Level 3 inputs and there were no transfers of Level 3 assets during the three and nine months ended September 30, 2020 .

As of September 30, 2020 and December 31, 2019 , the Company had the following assets recorded in the consolidated balance sheets measured at fair value on a recurring basis:

As of March 31, 2021 and December 31, 2020, the Company had the following assets recorded in the consolidated balance sheets measured at fair value on a recurring basis:

Fair Value Measurements at Reporting Date Using

(in thousands)

As of September 30, 2020

(in thousands) Total Level 1 Level 2 Level 3

As of March 31, 2021

Mutual funds (1)

$ 28,880 $ 28,880 $ — $ —

Money market funds (1)

2,485 — 2,485 —

Total $ 31,365 $ 28,880 $ 2,485 $ —

As of December 31, 2020

Mutual funds (1)

$ 28,520 $ 28,520 $ — $ —

Money market funds (1)

2,836 — 2,836 —

Total $ 31,356 $ 28,520 $ 2,836 $ —

(1) Included in Investments, employee benefit plans, at fair value and Other current assets on the consolidated balance sheets.

Other financial instruments disclosure

The Company believes that the fair value of its current assets and current liabilities approximate their reported carrying amounts due to the short-term nature of these items.

The Company believes that the fair values of its current assets and current liabilities approximate their reported carrying amounts due to the short-term nature of these items.

In addition, the interest rates of the Company's senior unsecured revolving credit facility adjust frequently based on current market rates;

accordingly its carrying amount approximates fair value.

The Company estimates the fair value of notes receivable, which approximate their carrying value, utilizing an analysis of future cash flows and credit worthiness for similar types of arrangements.

Based upon the availability of market data, the notes receivable have been classified as Level 3 inputs.

The primary sensitivity in these calculations is based on the selection of appropriate interest and discount rates.

For further information on notes receivable, refer to Note 3 .

The fair values of the Company's $ 400 million 2012 Senior Notes, $ 400 million senior unsecured notes due 2029 and $ 450 million 2020 Senior Notes are classified as Level 2, as the significant inputs are observable in an active market.

At December 31, 2019 , the $ 400 million 2012 Senior Notes had an approximate fair value of $ 432.0 million .

On July 23, 2020, the Company purchased approximately $ 183.4 million aggregate principal amount of the 2012 Senior Notes.

At September 30, 2020 , the $ 216.6 million remaining 2012 Senior Notes had an approximate fair value of $ 231.7 million .

At September 30, 2020 and December 31, 2019 , the $ 400.0 million senior unsecured notes due 2029 had an approximate fair value of $ 426.8 million and $ 403.4 million , respectively.

At September 30, 2020 , the $ 450 million 2020 Senior Notes had an approximate fair value of $ 474.7 million .

accordingly we believe its carrying amount, when amounts are drawn, approximates fair value.

The fair values of the Company's $ 400 million 2012 Senior Notes, $ 400 million 2019 Senior Notes, and $ 450 million 2020 Senior Notes are classified as Level 2, as the significant inputs are observable in an active market.

At March 31, 2021 and December 31, 2020, the $ 216.6 million remaining 2012 Senior Notes had an approximate fair value of $ 228.8 million and $ 232.4 million.

At March 31, 2021 and December 31, 2020, the $ 400 million 2019 Senior Notes had an approximate fair value of $ 418.9 million and $ 438.1 million, respectively, and the $ 450 million 2020 Senior Notes had an approximate fair value of $ 471.9 million and $ 498.3 million, respectively.

Refer to Note 5 for further information on debt.

Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.

Settlement of such fair value amounts may not be possible and may not be a prudent management decision.

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

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

On January 1, 2018, the Company adopted ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other than Inventory ("ASU 2016-16"), which provides guidance on recognition of current income tax consequences for inter-company asset transfers (other than inventory) at the time of transfer.

On January 1, 2020 , the Company completed a reorganization of its foreign legal entity structure that resulted in a $ 30.6 million tax benefit.

In accordance with ASU 2016-16, the Company recorded the $ 30.6 million benefit and a corresponding deferred tax asset in the first quarter of 2020.

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

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

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

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

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

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

federal income tax rate of 21.0% due to the impacts of ASU-2016 and the corresponding valuation allowance, $ 3.4 million of excess tax benefits from share-based compensation, an adjustment to our deferred taxes, and the impact of foreign operations, partially offset by state income taxes and a change in estimated uncertain tax positions.

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

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

Settlement of such fair value amounts may not be possible or a prudent management decision.

The effective income tax rates were 22.2 % and ( 82.5 )% for the three months ended March 31, 2021 and 2020, respectively.

The effective income tax rate for the three months ended March 31, 2021 was higher than the U.S.

federal income tax rate of 21.0% primarily due to the impact of state income taxes and foreign operations, partially offset by $ 0.8 million of excess tax benefits from share-based compensation.

The effective income tax rate for the three months ended March 31, 2020 was lower than the U.S.

federal income tax rate of 21.0% primarily due to the impact of our international reorganization in accordance with 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, that resulted in a $ 30.6 million tax benefit.

The effective income tax rate was also lower due to $ 2.4 million of excess tax benefits from share-based compensation.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed into law.

The CARES Act provided opportunities to support companies affected by the COVID-19 pandemic and contained numerous income tax provisions.

The provisions in the CARES Act do not have any significant impact to the Company's consolidated financial statements.

Share-Based Compensation and Capital Stock

The components of the Company’s pretax share-based compensation activity and associated income tax benefit are as follows for the three and nine months ended September 30, 2020 and 2019 :

Three Months Ended September 30,

Nine Months Ended September 30,

The components of the Company’s pretax share-based compensation activity and associated income tax benefit are as follows for three months ended March 31, 2021 and 2020:

Three Months Ended

(in thousands) 2021 2020

Stock options $ 616 $ 491

Restricted stock

Restricted stock awards 2,519 1,944

Performance vested restricted stock units 1,666 ( 5,187 )

Total share-based compensation expense $ 4,801 $ ( 2,752 )

Income tax benefit

Refer to the discussion of Performance Vested Restricted Stock Units (“PVRSUs”) leveraging for unvested grants below.

A summary of stock-based award activity as of and changes during the nine months ended September 30, 2020 are presented below:

Stock Options

Restricted Stock

Performance Vested

Income tax benefit (expense) $ 1,157 $ ( 674 )

A summary of share-based award activity as of and changes during the three months ended March 31, 2021 are presented below:

Stock Options Restricted Stock Performance Vested

Restricted Stock Units

Options Weighted

Price Weighted

Term Shares Weighted

Fair Value Shares Weighted

Outstanding at January 1, 2021 819,610 $ 70.48 304,439 $ 84.48 321,752 $ 109.25

Granted 280,811 104.87 43,607 105.24 96,447 108.52

Performance-Based Leveraging (1)

— — — — 920 81.55

Exercised/Vested ( 48,237 ) 59.00 ( 84,711 ) 82.20 ( 3,986 ) 81.55

Outstanding at September 30, 2020

Options exercisable at September 30, 2020

(1) PVRSUs outstanding have been increased by 30,116 units due to the Company exceeding the targeted performance conditions contained in PVRSUs granted in prior periods which vested in the nine months ended September 30, 2020 .

Expired — — — — ( 72,944 ) 81.55

Forfeited — — ( 5,998 ) 82.63 ( 1,003 ) 97.68

Outstanding at March 31, 2021 1,052,184 $ 80.19 5.7 years 257,337 $ 88.79 341,186 $ 113.22

Options exercisable at March 31, 2021 556,285 $ 65.32 3.1 years

(1) PVRSUs outstanding have been increased by 920 units in the three months ended March 31, 2021 due to the Company exceeding the targeted performance conditions contained in PVRSUs granted in prior periods.

Stock Options

The stock options granted by the Company had an exercise price equal to the market price of the Company's common stock on the date of grant.

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Expected volatility 29.23 %

Expected life of stock option

Expected life of stock option 5.9 years

Dividend yield (1)

Requisite service period

Contractual life

Requisite service period 4 years

Contractual life 10 years

Weighted average fair value of options granted (per option) $ 28.00

The fair value of restricted stock grants is measured by the market price of the Company's common stock on the date of grant.

(1) In April 2020, in light of uncertainty resulting from the COVID-19 pandemic, we suspended future, undeclared dividends.

On May 7, 2021, the Company's board of directors declared a quarterly cash dividend of $ 0.225 per share of common stock.

Refer to Note 14.

Restricted Stock Awards

The Company grants two types of restricted stock awards:

i) shares of restricted stock and ii) restricted stock units ("RSU").

Shares of restricted stock provide the participant a non-forfeitable right to dividends, if declared, and the right to vote as a shareholder while the shares are unvested.

RSUs provide the participant declared dividends that are contingent upon vesting of the award.

Restricted stock awards generally vest ratably over the service period beginning with the first anniversary of the grant date.

Vesting service period of shares granted during the nine months ended September 30, 2020 range from 12 to 48 months .

The Company grants two types of PVRSU awards:

PVRSUs with performance conditions based on internal performance metrics and PVRSUs with market conditions based on the Company's total shareholder return ("TSR") relative to a predetermined peer group.

The vesting of PVRSU stock awards is contingent upon the Company achieving internal performance or TSR targets over a specified period and the employees' continued employment for a service period.

The fair value of restricted stock awards is measured by the market price of the Company's common stock on the

date of grant.

The service period of restricted stock awards granted during the three months ended March 31, 2021 range from 9 to 48 months.

Performance Vested Restricted Stock Units

The Company grants three types of PVRSU awards:

i) PVRSUs with performance conditions based on internal performance conditions, ii) PVRSUs with market conditions based on the Company's total shareholder return ("TSR") relative to a predetermined peer group, and iii) PVRSUs with both performance and market conditions.

The vesting of PVRSU awards is contingent upon the Company achieving internal performance and/ or TSR targets over a specified period and the employees' continued employment for a service period.

These performance and market conditions affect the number of shares that will ultimately vest.

During the three months ended September 30, 2020 , PVRSU awards granted had a service period of 31 months with award vesting ranges between 0 % and 200 % of the initial units granted.

The fair value of PVRSUs based on internal performance metrics is measured by the market price of the Company's common stock on the date of award grant.

During the three months ended March 31, 2021, the Company granted PVRSUs with market conditions and PVRSUs with performance and market conditions with requisite service periods between 9 months and 60 months with award vesting ranges between 0 % and 300 % of the initial units granted.

The fair value of PVRSUs with only internal performance conditions is measured by the market price of the Company's common stock on the date of award grant.

Compensation expense is recognized ratably over the requisite service period based on the Company's estimate of the achievement of the performance conditions.

Management monitors current results and forecasts of the relevant internal performance metrics and, as necessary, adjusts the performance-based leveraging of unvested PVRSUs.

During the nine months ended September 30, 2020 , the Company reduced the leveraging factor for 230,647 unvested PVRSUs granted in the current and prior periods to 0 % , based on management's estimate of achievement of performance targets with contemplation to impacts from the COVID-19 pandemic.

The fair value of TSR PVRSUs are estimated using a Monte Carlo simulation method as of the date of award grant.

Management monitors current results and forecasts of the relevant internal performance and, as necessary, adjusts the performance-based leveraging of unvested PVRSUs.

The fair value of PVRSUs with market conditions is estimated using a Monte Carlo simulation method as of the date of award grant.

Compensation expense is recognized ratably over the requisite service period, regardless of whether the market conditions are achieved and the awards ultimately vest.

The fair value of PVRSUs with both performance and market conditions is estimated using a Monte Carlo simulation method as of the date of award grant.

Compensation expense is recognized ratably over the requisite service period based on the Company's estimate of the achievement of the performance conditions, with subsequent adjustments made for performance-based leveraging of unvested PVRSUs, as necessary.

During the three months ended March 31, 2020, the Company reduced the leveraging factor for 227,114 unvested PVRSUs periods to 0 %.

Share Repurchases and Redemptions

There were no purchases of common stock under the share repurchase program during the three months ended September 30, 2020 .

The Company purchased 548,031 shares of common stock under the share repurchase program at a total cost of $ 43.3 million during the nine months ended September 30, 2020 .

During the three and nine months ended September 30, 2020 , the Company redeemed 7,504 and 123,029 shares of common stock at a total cost of approximately $ 0.7 million and $ 11.9 million , respectively, from employees to satisfy the option exercise price and statutory minimum tax-withholding requirements related to the exercising of stock options and vesting of performance vested restricted stock units and restricted stock grants.

There were no purchases of common stock under the share repurchase program during the three months ended March 31, 2021.

During three months ended March 31, 2021, the Company redeemed 46,499 shares of common stock at a total cost of $ 5.1 million from employees to satisfy the option exercise price and statutory minimum tax-withholding requirements related to the exercising of stock options and vesting of performance vested restricted stock units and restricted stock grants.

These redemptions were outside the share repurchase program.

In light of uncertainty resulting from the COVID-19 pandemic, the Company has temporarily suspended activity under the share repurchase program.

In April 2020, in light of uncertainty resulting from the COVID-19 pandemic, the Company temporarily suspended activity under the Company's share repurchase program.

On May 7, 2021, the Company's board of directors approved resumption of the share repurchase program.

Refer to the Liquidity and Capital Resources header of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information.

Earnings Per Share

The computation of basic and diluted earnings per common share is as follows:

The Company’s shares of restricted stock contain rights to receive nonforfeitable dividends and thus are participating securities requiring the computation of basic earnings per share (“EPS”) using the two-class method.

As the shares of restricted stock are both potential shares of common stock and participating securities, the Company calculates diluted earnings per share by the more dilutive of the treasury stock method or the two-class method.

The calculation of EPS for net income available to common shareholders excludes the distribution of dividends and undistributed earnings attributable to participating securities from the numerator.

The diluted earnings weighted average shares of common stock outstanding includes stock options, PVRSUs and RSUs.

Stock options are included in the calculation, unless the exercise price is lower than the Company’s average share price for the period as the inclusion would be anti-dilutive.

PVRSUs are included in the calculation if the performance condition has been met or the market condition is probable as of the reporting date.

The computation of basic and diluted earnings per share of common stock is as follows:

Three Months Ended

Nine Months Ended

September 30,

(in thousands, except per share amounts) 2021 2020

Net income $ 22,337 $ 55,463

Income allocated to participating securities ( 110 ) ( 317 )

Net income available to common shareholders $ 22,227 $ 55,146

Weighted average common shares outstanding – basic

Weighted average shares of common stock outstanding – basic 55,263 55,343

Basic earnings per share $ 0.40 $ 1.00

Net income $ 22,337 $ 55,463

Income allocated to participating securities ( 110 ) ( 316 )

Net income available to common shareholders $ 22,227 $ 55,147

Weighted average common shares outstanding – basic

Weighted average shares of common stock outstanding – basic 55,263 55,343

Diluted effect of stock options and PVRSUs 398 334

Weighted average common shares outstanding – diluted

Weighted average shares of common stock outstanding – diluted 55,661 55,677

Diluted earnings per share $ 0.40 $ 0.99

The Company's unvested restricted shares contain rights to receive nonforfeitable dividends, and thus are participating securities requiring the two-class method of computing earnings per share ("EPS").

The calculation of EPS for common stock shown above excludes the income attributable to the unvested restricted share awards from the numerator and excludes the dilutive impact of those awards from the denominator.

As of both September 30, 2020 and 2019 , the Company had 0.9 million outstanding stock options.

Stock options are included in the diluted EPS calculation using the treasury stock method and average market prices during the period, unless the stock options would be anti-dilutive.

For both the three and nine months ended September 30, 2020 , 0.2 million anti-dilutive stock options were excluded from the diluted EPS calculation.

For the three months ended September 30, 2019 , no anti-dilutive stock options were excluded from the diluted EPS calculation.

For the nine months ended September 30, 2019 , 0.2 million anti-dilutive stock options were excluded from the diluted EPS calculation.

PVRSUs are also included in the diluted EPS calculation when the performance conditions have been met at the reporting date.

However, at September 30, 2020 and 2019 , PVRSUs totaling 233,713 and 314,795 , respectively, were excluded from the computation since the performance conditions had not been met.

The following securities have been excluded from the calculation of diluted weighted average shares of common stock outstanding as the inclusion of these securities would have an anti-dilutive effect or the performance or market conditions have not been met:

Three Months Ended

(in thousands) 2021 2020

Stock options — 159

PVRSUs 83 253

Reportable Segment Information

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These services do not represent separate reportable segments as their operations are directly related to the Company's hotel franchising business.

The revenues received from franchisees that are used to pay for part of the Company's ongoing operations are included in hotel franchising revenues and are offset by the related expenses paid for marketing and reservation activities to calculate hotel franchising operating income.

The Company evaluates its hotel franchising segment based primarily on the results of the segment without allocating corporate expenses, income taxes or indirect general and administrative expenses, which are included in the Corporate & Other column.

Corporate & Other revenues include owned hotel revenues and rental income related to a commercial office building owned by the Company, as well as revenues related to the Company's SaaS technology solutions divisions which provide cloud-based property management software to non-franchised hoteliers.

The revenues received from franchisees that are used to pay for part of the Company's ongoing operations are included in hotel franchising revenues and are offset by the

related expenses paid for marketing and reservation system activities to calculate hotel franchising operating income.

Equity in earnings or losses from hotel franchising related joint ventures is allocated to the Company's hotel franchising segment.

The Company does not allocate interest expense, interest income, other gains and losses or income taxes to its segments.

The Company evaluates its hotel franchising segment based primarily on the results of the segment without allocating corporate expenses, indirect general and administrative expenses, interest expense, interest income, other gains and losses or income taxes, which are included in the Corporate & Other column.

Corporate & Other revenues include owned hotel revenues, rental income related to an office building owned by the Company, and revenues related to the Company's SaaS technology solutions division which provide cloud-based property management software to non-franchised hoteliers.

Intersegment revenue adjustment is from the elimination of Hotel Franchising revenue which include royalty and marketing and reservation system fees charged to our owned hotels against franchise fee expense recognized by our owned hotels in Corporate & Other operating income (loss).

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The following table presents the financial information for the Company's segments:

Three Months Ended September 30, 2020

Three Months Ended September 30, 2019

(in thousands)

Intersegment Eliminations

Operating income (loss)

Income (loss) before income taxes

Nine Months Ended September 30, 2020

Nine Months Ended September 30, 2019

(in thousands)

Intersegment Eliminations

Three Months Ended March 31, 2021 Three Months Ended March 31, 2020

(in thousands) Hotel

Franchising Corporate &

Other Intersegment Eliminations Consolidated Hotel

Franchising Corporate &

Other Intersegment Eliminations Consolidated

Revenues $ 177,218 $ 6,040 $ ( 311 ) $ 182,947 $ 208,047 $ 10,905 $ ( 777 ) $ 218,175

Operating income (loss) $ 58,153 $ ( 14,155 ) $ — $ 43,998 $ 50,986 $ ( 4,204 ) $ — $ 46,782

7 unchanged sentences

The maximum exposure of principal incidental to these limited payment guaranties is $ 5.7 million, plus unpaid expenses and accrued unpaid interest.

As of September 30, 2020 and December 31, 2019 , the Company believed the likelihood of having to perform under the aforementioned limited payment guaranties was remote.

As of March 31, 2021 and December 31, 2020, the Company believed the likelihood of having to perform under the aforementioned limited payment guaranties was remote.

In the event of performance, the Company has recourse for one of the transactions in the form of a membership interest pledge as collateral for the guaranty.

The Company has the following commitments outstanding at September 30, 2020 :

The Company has the following commitments outstanding at March 31, 2021:

• The Company provides financing in the form of franchise agreement acquisition payments to franchisees for property improvements, hotel development efforts and other purposes.

These payments are typically made at commencement of construction or hotel opening, in accordance with agreed upon provisions in individual franchise agreements.

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

At March 31, 2021, the Company had commitments to extend an additional $ 291.2 million for these purposes provided the conditions of the payment are met by its franchisees.

• To the extent existing unconsolidated joint ventures proceed to the hotel construction phase, the Company is committed to make capital contributions totaling $ 8.4 million to support their efforts to construct Cambria hotels.

• The Company committed to provide financing in the form of mezzanine loans or credit facilities to franchisees for Choice brand development efforts.

In the third quarter of 2020, the Company has committed to provide an aggregate of approximately $ 1.0 million , upon certain conditions being met.

As of September 30, 2020 , no amounts have been disbursed.

In March 2018, the Company entered into a construction loan agreement for the rehabilitation and development of a former office building into a hotel through a consolidated joint venture with a commercial lender, which is secured by the building.

The construction loan can be drawn up to $ 34.9 million .

On March 5, 2020 , the Company paid off the construction loan in the amount $ 33.1 million inclusive of accrued and unpaid interest and recorded a loss on extinguishment of debt of $ 0.6 million .

In the first quarter of 2021, the Company has committed to provide an aggregate of

approximately $ 1.0 million, upon certain conditions being met.

As of March 31, 2021, no amounts have been disbursed.

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

11 unchanged sentences

The Company has a management fee arrangement for marketing services with a joint venture partner.

For the three months ended September 30, 2020 and 2019 , fees earned and payroll costs reimbursed under this arrangement totaled $ 0.5 million and $ 0.8 million , respectively.

For the nine months ended September 30, 2020 and 2019 , fees earned and payroll costs reimbursed under this arrangement totaled $ 0.9 million and $ 1.7 million , respectively.

For the three months ended March 31, 2021 and 2020, fees earned and payroll costs reimbursed under this arrangement totaled $ 0.2 million and $ 0.4 million, respectively.

The Company has entered into franchise agreements with certain of the unconsolidated joint ventures discussed in Note 4.

Pursuant to these franchise agreements, for the three months ended September 30, 2020 and 2019 , the Company recorded royalty and marketing reservation system fees of approximately $ 3.6 million and $ 7.4 million , respectively.

For the nine months ended September 30, 2020 and 2019 , the Company recorded royalty and marketing reservation system fees of

approximately $ 10.4 million and $ 19.0 million , respectively.

The Company recorded $ 2.4 million and $ 1.4 million as a receivable due from these joint ventures as of September 30, 2020 and December 31, 2019 , respectively.

Impairment of Long-Lived Assets

On December 30, 2014, a court awarded the Company title to a commercial office building as settlement of a portion of an outstanding loan receivable for which the building was pledged as collateral.

At the time of settlement, a single tenant fully occupied the building.

The initial lease term expiration is in December 2020 and the tenant has extension options for up to 30 years .

The tenant has recently provided notice that the lease renewal options will not be exercised.

Management identified this as a triggering event requiring the interim reevaluation of the commercial office building's long-lived assets, comprised of $ 11.1 million in property and equipment and $ 0.2 million in intangible assets.

Recoverability of the long-lived asset group is assessed based on net, undiscounted expected cash flows of the asset group.

We have prepared undiscounted expected cash flows aligned with Management’s present long-term strategy for the building and concluded the undiscounted expected cash flows are less than the carrying amount of the asset group.

An impairment charge was recorded for the excess of the carrying value over the fair value of the asset group.

To estimate the fair value of the long-lived asset group, the Company utilized a combination of market and income approach valuation methods.

The Company recognized a non-cash pretax long-lived asset group impairment charge in the amount of $ 4.3 million .

The results of the commercial office building are included in the Corporate & Other segment in Note 11 .

The impairment charge does not have an impact on the Company's liquidity or compliance with financial covenants under existing debt arrangements.

Pursuant to these franchise agreements, for the three months ended March 31, 2021 and 2020, the Company recorded royalty and marketing reservation system fees of approximately $ 2.9 million and $ 4.6 million, respectively.

The Company recorded $ 2.2 million and $ 2.4 million as a receivable due from these joint ventures as of March 31, 2021 and December 31, 2020, respectively.

Subsequent Events

On May 7, 2021, the Company's board of directors declared a quarterly cash dividend of $ 0.225 per share of common stock and approved resumption of the share repurchase program.

The dividend is payable on July 16, 2021, to stockholders of record on July 1, 2021.

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

What changed 10-Q

Item 1. Financial Statements