CHOICE HOTELS INTERNATIONAL INC /DE 10-Q

ITEM 1. FINANCIAL STATEMENTS CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 REVENUES Royalty fees $ 127,317 $ 79,666 $ 299,606 $ 200,157 Initial franchise and relicensing fees 6,149 6,071 18,904 20,031 Procurement services 13,010 10,115 36,293 34,609 Marketing and reservation system 156,871 107,141 384,380 297,203 Owned hotels 11,377 4,201 24,724 15,731 Other 8,645 3,577 20,753 12,948 Total revenues 323,369 210,771 784,660 580,679 OPERATING EXPENSES Selling, general and administrative 35,110 31,779 99,847 104,098 Depreciation and amortization 5,883 6,382 18,477 19,309 Marketing and reservation system 116,216 113,808 327,674 333,564 Owned hotels 7,054 3,812 16,534 12,822 Total operating expenses 164,263 155,781 462,532 469,793 Loss on impairment of assets — ( 4,290 ) — ( 5,516 ) Operating income 159,106 50,700 322,128 105,370 OTHER INCOME AND EXPENSES, NET Interest expense 11,638 12,691 35,106 37,153 Interest income ( 1,202 ) ( 1,744 ) ( 3,717 ) ( 6,277 ) Loss on extinguishment of debt — 15,958 — 16,565 Other (gains) losses 407 ( 2,030 ) ( 2,906 ) ( 858 ) Equity in net (gain) loss of affiliates ( 3,326 ) 1,731 1,492 7,172 Total other income and expenses, net 7,517 26,606 29,975 53,755 Income before income taxes 151,589 24,094 292,153 51,615 Income tax expense (benefit) 34,934 9,594 67,279 ( 15,907 ) Net income $ 116,655 $ 14,500 $ 224,874 $ 67,522 Basic earnings per share $ 2.10 $ 0.26 $ 4.05 $ 1.22 Diluted earnings per share $ 2.08 $ 0.26 $ 4.01 $ 1.21 Cash dividends declared per share $ 0.225 $ — $ 0.450 $ 0.225 The accompanying notes are an integral part of these consolidated financial statements. 3 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net income $ 116,655 $ 14,500 $ 224,874 $ 67,522 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment ( 57 ) 240 66 ( 237 ) Other comprehensive income (loss), net of tax ( 57 ) 240 66 ( 237 ) Comprehensive income $ 116,598 $ 14,740 $ 224,940 $ 67,285 The accompanying notes are an integral part of these consolidated financial statements. 4 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) September 30, 2021 December 31, 2020 ASSETS Current assets Cash and cash equivalents $ 415,116 $ 234,779 Accounts receivable (net of allowance for credit losses of $ 48,275 and $ 59,424 , respectively) 197,999 149,921 Income taxes receivable — 4,186 Notes receivable (net of allowance for credit losses of $ 7,428 and $ 4,179 , respectively) 71,334 24,048 Prepaid expenses and other current assets 26,520 19,980 Total current assets 710,969 432,914 Property and equipment, at cost (net of accumulated depreciation and amortization of $ 248,693 and $ 223,421 , respectively) 351,768 334,901 Operating lease right-of-use assets 10,655 17,688 Goodwill 159,196 159,196 Intangible assets (net of accumulated amortization of $ 175,548 and $ 163,128 , respectively) 306,008 303,725 Notes receivable (net of allowance for credit losses of $ 12,611 and $ 15,305 , respectively) 67,755 95,785 Investments, employee benefit plans, at fair value 31,285 29,104 Investments in unconsolidated entities 42,961 57,879 Deferred income taxes 101,922 67,745 Other assets 83,415 88,396 Total assets $ 1,865,934 $ 1,587,333 LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) Current liabilities Accounts payable $ 88,056 $ 83,329 Accrued expenses and other current liabilities 129,173 78,920 Deferred revenue 80,607 50,290 Current portion of long-term debt 216,217 — Liability for guest loyalty program 76,541 43,308 Total current liabilities 590,594 255,847 Long-term debt 843,820 1,058,738 Long-term deferred revenue 106,410 122,406 Deferred compensation and retirement plan obligations 35,958 33,756 Income taxes payable 20,642 23,394 Operating lease liabilities 5,666 12,739 Liability for guest loyalty program 40,236 77,071 Other liabilities 10,462 9,134 Total liabilities 1,653,788 1,593,085 Commitments and Contingencies Common stock, $ 0.01 par value; 160,000,000 shares authorized; 95,065,638 shares issued at September 30, 2021 and December 31, 2020; 55,630,704 and 55,535,554 shares outstanding at September 30, 2021 and December 31, 2020, respectively 951 951 Additional paid-in-capital 253,361 233,921 Accumulated other comprehensive loss ( 4,580 ) ( 4,646 ) Treasury stock, at cost; 39,434,934 and 39,530,084 shares at September 30, 2021 and December 31, 2020, respectively ( 1,261,926 ) ( 1,260,478 ) Retained earnings 1,224,340 1,024,500 Total shareholders’ equity (deficit) 212,146 ( 5,752 ) Total liabilities and shareholders’ equity (deficit) $ 1,865,934 $ 1,587,333 The accompanying notes are an integral part of these consolidated financial statements. 5 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Nine Months Ended September 30, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 224,874 $ 67,522 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 18,477 19,309 Depreciation and amortization – marketing and reservation system 18,364 14,994 Franchise agreement acquisition cost amortization 9,734 8,343 Loss on impairment of assets — 5,516 Loss on extinguishment of debt — 16,565 Non-cash stock compensation and other charges 24,277 4,748 Non-cash interest and other investment income ( 11,039 ) ( 465 ) Deferred income taxes ( 34,285 ) ( 31,411 ) Equity in net losses from unconsolidated joint ventures, less distributions received 8,421 7,320 Franchise agreement acquisition costs, net of reimbursements ( 28,466 ) ( 16,960 ) Change in working capital and other 14,887 ( 25,801 ) Net cash provided by operating activities 245,244 69,680 CASH FLOWS FROM INVESTING ACTIVITIES Investment in property and equipment ( 46,098 ) ( 32,176 ) Investment in intangible assets ( 3,113 ) ( 1,212 ) Proceeds from sale of tax credits for rehabilitation of historic building — 9,197 Contributions to equity method investments ( 2,150 ) ( 4,620 ) Distributions and sale proceeds from equity method investments 15,554 3,362 Purchases of investments, employee benefit plans ( 1,279 ) ( 2,254 ) Proceeds from sales of investments, employee benefit plans 2,487 2,372 Purchase/issuance of notes receivable ( 17,918 ) ( 9,845 ) Collection of notes receivable 63 5,113 Other items, net ( 115 ) ( 473 ) Net cash used in investing activities ( 52,569 ) ( 30,536 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of Term Loan — 249,500 Proceeds from issuance of 2020 Senior Notes — 447,723 Net borrowings pursuant to revolving credit facilities — ( 18,200 ) Principal payments on long-term debt — ( 466,915 ) Payments to extinguish long-term debt — ( 14,347 ) Debt issuance costs ( 365 ) ( 4,620 ) Purchase of treasury stock ( 10,039 ) ( 55,158 ) Dividends paid ( 12,528 ) ( 25,274 ) Proceeds from exercise of stock options 10,817 6,615 Net cash (used in) provided by financing activities ( 12,115 ) 119,324 Net change in cash and cash equivalents 180,560 158,468 Effect of foreign exchange rate changes on cash and cash equivalents ( 223 ) ( 267 ) Cash and cash equivalents at beginning of period 234,779 33,766 Cash and cash equivalents at end of period $ 415,116 $ 191,967 Supplemental disclosure of cash flow information Cash payments during the period for: Income taxes, net of refunds $ 58,229 $ 41 Interest, net of capitalized interest $ 36,519 $ 37,338 Non-cash investing and financing activities: Dividends declared but not paid $ 12,517 $ — Investment in property, equipment and intangibles acquired in accounts payable and accrued liabilities $ 6,920 $ 757 The accompanying notes are an integral part of these consolidated financial statements. 6 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) Common Stock - Shares Outstanding Common Stock - Par Value Additional Paid-in- Capital Accumulated Other Comprehensive Income (Loss) Treasury Stock Retained Earnings Total Balance as of December 31, 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 ) Net income — — — — — ( 2,441 ) ( 2,441 ) Other comprehensive income (loss) — — — 187 — — 187 Share-based payment activity (2) 29,997 — 2,166 — 1,825 ( 171 ) 3,820 Dividends declared (2) — — — — — — — Treasury purchases ( 6,525 ) — — — ( 464 ) — ( 464 ) Balance as of June 30, 2020 55,363,895 $ 951 $ 223,719 $ ( 5,027 ) $ ( 1,264,527 ) $ 1,002,132 $ ( 42,752 ) Net income — — — — — 14,500 14,500 Other comprehensive income (loss) — — — 240 — — 240 Share based payment activity (2) 101,857 — 4,802 — 2,424 3 7,229 Dividends declared (2) — — — — — — — Treasury purchases ( 7,504 ) — — — ( 621 ) — ( 621 ) Balance as of September 30, 2020 55,458,248 951 228,521 ( 4,787 ) ( 1,262,724 ) 1,016,635 ( 21,404 ) Common Stock - Shares Outstanding Common Stock - Par Value Additional Paid-in- Capital Accumulated Other Comprehensive Income (Loss) Treasury Stock Retained Earnings Total Balance as of December 31, 2020 55,535,554 $ 951 $ 233,921 $ ( 4,646 ) $ ( 1,260,478 ) $ 1,024,500 $ ( 5,752 ) 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 March 31, 2021 55,537,836 $ 951 $ 237,538 $ ( 4,594 ) $ ( 1,261,494 ) $ 1,046,834 $ 19,235 Net income — — — — — 85,882 85,882 Other comprehensive income (loss) — — — 71 — — 71 Share-based payment activity (2) 111,895 — 9,066 — 3,516 1 12,583 Dividends declared ($ 0.225 per share) (2) — — — — — ( 12,521 ) ( 12,521 ) Treasury purchases ( 2,738 ) — — — ( 317 ) — ( 317 ) Balance as of June 30, 2021 55,646,993 $ 951 $ 246,604 $ ( 4,523 ) $ ( 1,258,295 ) $ 1,120,196 $ 104,933 Net income — — — — — 116,655 116,655 Other comprehensive income (loss) — — — ( 57 ) — — ( 57 ) Share based payment activity (2) 23,757 — 6,757 — 1,045 6 7,808 Dividends declared ($ 0.225 per share) (2) — — — — — ( 12,517 ) ( 12,517 ) Treasury purchases ( 40,046 ) — — — ( 4,676 ) — ( 4,676 ) Balance as of September 30, 2021 55,630,704 951 253,361 ( 4,580 ) ( 1,261,926 ) 1,224,340 212,146 7 Table of Contents (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. On February 28, 2020, the Company’s board of directors declared a quarterly cash dividend of $ 0.225 per share of common stock. The dividend was payable on April 16, 2020 to shareholders of record on April 2, 2020. In 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 and September 9, 2021, the Company's board of directors declared a quarterly cash dividend of $ 0.225 per share of common stock. The accompanying notes are an integral part of these consolidated financial statements. 8 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation and Significant Accounting Policies Basis of Presentation The accompanying unaudited consolidated financial statements of Choice Hotels International, Inc. and its subsidiaries (together the "Company") have been prepared by the Company in accordance with 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 information and footnote disclosures normally included in financial statements presented in accordance with GAAP have been omitted. 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. 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 The Company’s significant accounting policies are detailed in the “Summary of Significant Accounting Policies” section of Note 1 in the Annual Report on Form 10-K for the year ended December 31, 2020. The significant accounting policies that changed in 2021 are set forth below. Recently Adopted Accounting Standards 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 Company adopted ASU 2019-12 on January 1, 2021 and the adoption does not have material impacts on our consolidated financial statements and disclosures . 2. Revenue Contract Liabilities Contract liabilities relate to (i) advance consideration received, such as initial franchise and relicensing fees paid when a franchise agreement is 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 are typically redeemed within three years of issuance. Significant changes in the contract liabilities balances during the period December 31, 2020 to September 30, 2021 are as follows: (in thousands) Balance as of December 31, 2020 $ 156,227 Increases to the contract liability balance due to cash received 76,936 Revenue recognized in the period ( 58,264 ) Balance as of September 30, 2021 $ 174,899 Remaining Performance Obligations The aggregate amount of transaction price allocated to unsatisfied or partially unsatisfied performance obligations is $ 174.9 million as of September 30, 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 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 Three Months Ended September 30, 2021 September 30, 2020 (in thousands) Over time Point in time Total Over time Point in time Total Royalty fees $ 127,317 $ — $ 127,317 $ 79,666 $ — $ 79,666 Initial franchise and relicensing fees 6,149 — 6,149 6,071 — 6,071 Procurement services 12,285 725 13,010 9,620 495 10,115 Marketing and reservation system 145,216 11,655 156,871 93,327 13,814 107,141 Owned hotels 9,614 1,652 11,266 3,498 595 4,093 Other 8,645 — 8,645 3,317 — 3,317 Total Topic 606 revenues $ 309,226 $ 14,032 323,258 $ 195,499 $ 14,904 210,403 Non-Topic 606 revenues 111 368 Total revenues $ 323,369 $ 210,771 Nine Months Ended Nine Months Ended September 30, 2021 September 30, 2020 (in thousands) Over time Point in time Total Over time Point in time Total Royalty fees $ 299,606 $ — $ 299,606 $ 200,157 $ — $ 200,157 Initial franchise and relicensing fees 18,904 — 18,904 20,031 — 20,031 Procurement services 34,526 1,767 36,293 33,069 1,540 34,609 Marketing and reservation system 346,211 38,169 384,380 247,092 50,111 297,203 Owned hotels 20,683 3,709 24,392 13,159 2,248 15,407 Other 20,753 — 20,753 12,167 — 12,167 Total Topic 606 revenues $ 740,683 $ 43,645 784,328 $ 525,675 $ 53,899 579,574 Non-Topic 606 revenues 332 1,105 Total revenues $ 784,660 $ 580,679 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 $ 13.5 million and $ 6.4 million for the three months ended September 30, 2021 and 2020, respectively, and $ 30.5 million and $ 21.8 million for the nine months ended September 30, 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 $ 0.9 million and $ 0.3 million for the three months ended September 30, 2021 and 2020, respectively, and $ 1.9 million and $ 1.2 million for the nine months ended September 30, 2021 and 2020, respectively. 3. Receivables and Allowance for Credit Losses Notes Receivable The Company has provided financing in the form of notes receivable loans to franchisees to support the development of properties in strategic markets. The Company's credit quality indicator is the level of security in the note receivable. The composition of notes receivable balances by credit quality indicator and the allowance for credit losses is as follows: (in thousands) September 30, 2021 December 31, 2020 Senior $ 123,526 $ 104,716 Subordinated 34,192 33,234 Unsecured 1,410 1,367 Total notes receivable 159,128 139,317 Total allowance for notes receivable credit losses ( 20,039 ) ( 19,484 ) Total notes receivable, net of allowance $ 139,089 $ 119,833 Current portion, net of allowance $ 71,334 $ 24,048 Long-term portion, net of allowance $ 67,755 $ 95,785 During the second quarter of 2021, the Company acquired a senior note collateralized by an operating hotel for $ 17.9 million. The acquired senior note has an origination date in June 2018. Amortized cost basis by year of origination and credit quality indicator are as follows: (in thousands) 2021 2020 2019 Prior Total Senior $ — $ — $ 28,867 $ 94,659 $ 123,526 Subordinated — — 2,747 31,445 34,192 Unsecured — — — 1,410 1,410 Total notes receivable $ — $ — $ 31,614 $ 127,514 $ 159,128 The following table summarizes the activity related to the Company’s notes receivable allowance for credit losses, including the impacts of adopting Topic 326: (in thousands) September 30, 2021 December 31, 2020 Beginning balance $ 19,484 $ 4,556 Allowances established from adoption of Topic 326 — 8,348 Provision for credit losses 555 7,634 Write-offs — ( 1,054 ) Ending balance $ 20,039 $ 19,484 The provisions recorded in the nine months ended September 30, 2021 primarily result 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 are $ 9.1 million and $ 7.8 million as of September 30, 2021 and December 31, 2020, respectively. 9 Table of Contents As of September 30, 2021, three loans with senior and/or subordinated tranches met the definition of collateral-dependent and are collateralized by either land parcels, an operating hotel, 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. The Company reviewed the borrower's financial statements, economic trends, industry projections for the market, and comparable sales capitalization rates, which represent significant inputs to the cash flow projections. 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 September 30, 2021. In September 2021, the Company reached a settlement with a borrower holding a loan classified as collateral-dependent, collateralized by an operating hotel. The key terms of the settlement resulted in a deed in lieu of foreclosure on the operating hotel in exchange for releasing obligations pursuant to the senior and mezzanine loans and the associated franchise agreement. The property was exchanged in full settlement of the senior and mezzanine loans and will be recorded at fair value as of the acquisition date of October 1, 2021. The Company will account for the acquisition of the hotel as an asset acquisition in the fourth quarter of 2021. As a result of the COVID-19 pandemic, the Company extended interest deferral terms on certain notes receivable. The Company considers loans 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. The Company suspends the accrual of interest when payments on loans are more than 30 days past due or upon a loan being classified as collateral-dependent. 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. The amortized cost basis of notes receivable on non-accrual status was $ 68.7 million and $ 28.9 million at September 30, 2021 and December 31, 2020, respectively. The Company has identified loans totaling approximately $ 13.1 million as of both September 30, 2021 and December 31, 2020, with stated interest rates that are less than market rate, representing a total unamortized discount of $ 0.4 million and $ 0.8 million as of September 30, 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. The past due balances by credit quality indicator of notes receivable are as follows: (in thousands) 1- 30 days Past Due 31-89 days Past Due > 90 days Past Due Total Past Due Current Total Notes Receivable As of September 30, 2021 Senior $ — $ — $ 17,917 $ 17,917 $ 105,609 $ 123,526 Subordinated — — 8,838 8,838 25,354 34,192 Unsecured — — — — 1,410 1,410 $ — $ — $ 26,755 $ 26,755 $ 132,373 $ 159,128 As of December 31, 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 September 30, 2021. Refer to Note 12. The Company has issued notes receivables to certain entities that have created variable interests in these borrowers totaling $ 138.5 million and $ 119.3 million as of September 30, 2021 and December 31, 2020, respectively. The Company has determined that it is not the primary beneficiary of these variable interest entities ("VIEs"). These loans have stated fixed and/or variable interest amounts. 10 Table of Contents Accounts Receivable Accounts receivable consist primarily of franchise and related fees due from hotel franchisees and are recorded at the invoiced amount. During the nine months ended September 30, 2020, the Company recorded provisions for credit losses on accounts receivable of $ 10.4 million in SG&A expenses and $ 18.0 million in marketing and reservation system expenses, in consideration of the economic and credit conditions resulting from the COVID-19 pandemic and estimates of other expected credit losses. During nine months ended September 30, 2021, the Company recorded reversals of provisions for credit losses on accounts receivable of $ 2.2 million in SG&A expenses and $ 4.2 million in marketing and reservation system expenses, after considering improved collection patterns and economic and credit conditions. 4. Investments in Unconsolidated Entities The Company maintains a portfolio of investments owned through noncontrolling interests in equity method investments with one or more partners. The Company has equity method investments in joint ventures that represent VIEs totaling $ 40.5 million and $ 56.9 million on the consolidated balance sheets at September 30, 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. Based on an analysis of who has the power to direct the activities that most significantly impact these entities performance and who has an obligation to absorb losses of these entities or a right to receive benefits from these entities that could potentially be significant to the entity, the Company determined that it is not the primary beneficiary of any of these VIEs. The Company based its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and the relevant development, operating management and financial agreements. Although the Company is not the primary beneficiary of these VIEs, it does exercise significant influence through its equity ownership and as a result the Company's investment in these entities is accounted for under the equity method. For the three months ended September 30, 2021 and 2020, the Company recognized (gains) losses totaling $( 2.5 ) million and $ 2.3 million, respectively, from these investments that represent VIEs. For the nine months ended September 30, 2021 and 2020, the Company recognized losses totaling $ 3.0 million and $ 6.9 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 other-than-temporary impairment 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 other-than-temporary impairment from the carrying value to the estimated fair value for the investment. The other-than-temporary impairment 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. During the second quarter of 2021, the Company sold its ownership interest in three separate equity method investments. The Company recognized a cumulative gain of $ 2.6 million on the sales of these investments, which is recorded in equity in net (gain) loss of affiliates. During the third quarter of 2021, a joint venture for which the Company maintains an ownership interest sold its underlying assets. The Company received a distribution and recognized a gain of $ 4.3 million, which is recorded in equity in net (gain) loss of affiliates. 11 Table of Contents 5. Debt Debt consists of the following: September 30, 2021 December 31, 2020 (in thousands) $ 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 $ 5.7 million and $ 6.1 million at September 30, 2021 and December 31, 2020, respectively $ 444,318 $ 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 $ 4.9 million and $ 5.4 million at September 30, 2021 and December 31, 2020, respectively 395,086 394,635 $ 400 million senior unsecured notes due 2022 ("2012 Senior Notes") with an effective interest rate of 6.00 %, less deferred issuance costs of $ 0.4 million and $ 0.7 million at September 30, 2021 and December 31, 2020, respectively 216,217 215,827 $ 600 million senior unsecured revolving credit facility (1) — — Economic development loans with an effective interest rate of 3.00 % at September 30, 2021 and December 31, 2020, respectively 4,416 4,416 Total debt $ 1,060,037 $ 1,058,738 Less current portion 216,217 — Long-term debt $ 843,820 $ 1,058,738 (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 as of September 30, 2021 and December 31, 2020. As there are no outstanding borrowings at September 30, 2021 or December 31, 2020, deferred issuance costs for the senior unsecured revolving credit facility of $ 2.4 million and $ 2.4 million, respectively, are presented in non-current Other assets in the consolidated balance sheets. In August 2021, the Company executed a one-year extension on the senior unsecured revolving credit facility for $ 540 million of the $ 600 million total capacity in exchange for fees of $ 0.4 million. The extended maturity date is August 20, 2026. Refer to Note 12 and the Liquidity and Capital Resources header of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information. 6. Accumulated Other Comprehensive Loss The changes in accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2021 and 2020 are as follows: (in thousands) Balance as of December 31, 2020 $ ( 4,646 ) Other comprehensive income (loss) before reclassification 66 Net current period other comprehensive income (loss) 66 Balance as of September 30, 2021 $ ( 4,580 ) (in thousands) Balance as of December 31, 2019 $ ( 4,550 ) Other comprehensive income (loss) before reclassification ( 237 ) Net current period other comprehensive income (loss) ( 237 ) Balance as of September 30, 2020 $ ( 4,787 ) The other comprehensive income (loss) before reclassification for both the nine months ended September 30, 2021 and 2020 relate to foreign currency items. 7. Fair Value Measurements The Company estimates the fair value of its financial instruments utilizing a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The following summarizes the three levels of inputs, as well as the assets that the Company values using those levels of inputs on a recurring basis. Level 1 : Quoted prices in active markets for identical assets and liabilities. The Company’s Level 1 assets consist of marketable securities (primarily mutual funds) held in the Deferred Compensation Plan. Level 2 : Observable inputs, other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable. The Company’s Level 2 assets consist of money market funds held in the Company's Deferred Compensation Plan. Level 3 : Unobservable inputs, supported by little or no market data available, where the reporting entity is required to develop its own assumptions to determine the fair value of the instrument. The Company does not currently have any assets recorded at fair value whose fair value was determined using Level 3 inputs and there were no transfers of Level 3 assets during the nine months ended September 30, 2021. As of September 30, 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) Total Level 1 Level 2 Level 3 As of September 30, 2021 Mutual funds (1) $ 31,069 $ 31,069 $ — $ — Money market funds (1) 2,519 — 2,519 — Total $ 33,588 $ 31,069 $ 2,519 $ — 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 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, we believe its carrying amount, when amounts are drawn, approximates fair value. The fair values of the Company's senior unsecured notes are classified as Level 2, as the significant inputs are observable in an active market. Refer to Note 5 for further information on debt. At September 30, 2021 and December 31, 2020, the carrying amounts and fair values are as follows: September 30, 2021 December 31, 2020 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value 2020 Senior Notes $ 444,318 $ 484,574 $ 443,860 $ 498,290 2019 Senior Notes 395,086 428,544 394,635 438,104 2012 Senior Notes 216,217 224,688 215,827 232,381 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 or a prudent management decision. 8. Income Taxes The effective income tax rates were 23.1 % and 39.4 % for the three months ended September 30, 2021 and 2020, respectively. The effective income tax rates were 23.0 % and ( 30.8 )% for the nine months ended September 30, 2021 and 2020, respectively. The effective income tax rate for the three months ended September 30, 2021 was higher than the U.S. federal income tax rate of 21.0% primarily due to the impact of state income taxes, partially offset by $ 0.4 million of excess tax benefits from share-based compensation and $ 0.7 million of additional federal research and development ("R&D") tax credits. The effective income tax rate for the nine months ended September 30, 2021 was higher than the U.S. federal income tax rate of 21.0% primarily due to the impact of state income taxes, partially offset by $ 2.4 million of excess tax benefits from share-based compensation and $ 0.7 million of additional federal R&D tax credits. 12 Table of Contents 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% primarily 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 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. 9. Share-Based Compensation and Capital Stock The components of the Company’s pretax share-based compensation activity and associated income tax expense are as follows for the three and nine months ended September 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Stock options $ 933 $ 497 $ 2,482 $ 1,478 Restricted stock awards 2,285 2,206 7,126 6,249 Performance vested restricted stock units 2,950 675 7,760 ( 4,836 ) Total share-based compensation expense $ 6,168 $ 3,378 $ 17,368 $ 2,891 Income tax expense $ 1,498 $ 805 $ 4,219 $ 689 A summary of share-based award activity as of and changes during the nine months ended September 30, 2021 are presented below: Stock Options Restricted Stock Performance Vested Restricted Stock Units Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Outstanding at January 1, 2021 819,610 $ 70.48 304,439 $ 84.48 321,752 $ 109.25 Granted 280,811 104.87 55,439 107.49 98,544 108.75 Performance-Based Leveraging (1) — — — — 75,476 107.51 Exercised/Vested ( 181,458 ) 59.61 ( 106,167 ) 80.80 ( 3,986 ) 81.55 Expired — — — — ( 72,955 ) 81.55 Forfeited ( 1,629 ) 104.87 ( 15,401 ) 89.79 ( 3,324 ) 95.98 Outstanding at September 30, 2021 917,334 $ 83.10 5.8 years 238,310 $ 91.12 415,507 $ 114.05 Options exercisable at September 30, 2021 425,571 $ 67.02 3.1 years (1) PVRSUs outstanding have been increased by 75,476 units in the nine months ended September 30, 2021 due to the Company exceeding the targeted performance conditions contained in PVRSUs. 13 Table of Contents 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. The fair value of the options granted was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions: 2021 Grants Risk-free interest rate 0.94 % Expected volatility 29.23 % Expected life of stock option 5.9 years Dividend yield (1) 0.82 % Requisite service period 4 years Contractual life 10 years Weighted average fair value of options granted (per option) $ 28.00 (1) In April 2020, in light of uncertainty resulting from the COVID-19 pandemic, we suspended future, undeclared dividends. On May 7, 2021 and September 9, 2021, the Company's board of directors declared a quarterly cash dividend of $ 0.225 per share of common stock. 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. 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 nine months ended September 30, 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 nine months ended September 30, 2021, the Company granted PVRSUs with market conditions, PVRSUs with performance 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 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 nine months ended September 30, 2020, the Company reduced the leveraging factor for 230,647 unvested PVRSUs to 0 %. 14 Table of Contents Share Repurchases and Redemptions 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. During the three and nine months ended September 30, 2021, there were 34,746 and 36,328 purchases of common stock under the share repurchase program at a total cost of $ 4.0 million and $ 4.2 million, respectively. During the three and nine months ended September 30, 2021, the Company redeemed 5,300 and 52,955 shares of common stock at a total cost of $ 0.7 million and $ 5.8 million, respectively, from employees to satisfy the option exercise price and statutory minimum tax-withholding requirements related to the exercising of stock options and vesting of performance vested restricted stock units and restricted stock grants. These redemptions were outside the share repurchase program. 10. Earnings Per Share 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. The computation of basic and diluted earnings per share of common stock is as follows: Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except per share amounts) 2021 2020 2021 2020 Numerator: Net income $ 116,655 $ 14,500 $ 224,874 $ 67,522 (Income) loss allocated to participating securities ( 420 ) ( 78 ) ( 910 ) ( 378 ) Net income (loss) available to common shareholders $ 116,235 $ 14,422 $ 223,964 $ 67,144 Denominator: Weighted average shares of common stock outstanding – basic 55,427 55,106 55,360 55,167 Basic earnings per share $ 2.10 $ 0.26 $ 4.05 $ 1.22 Numerator: Net income $ 116,655 $ 14,500 $ 224,874 $ 67,522 (Income) loss allocated to participating securities ( 420 ) ( 78 ) ( 910 ) ( 377 ) Net income (loss) available to common shareholders $ 116,235 $ 14,422 $ 223,964 $ 67,145 Denominator: Weighted average shares of common stock outstanding – basic 55,427 55,106 55,360 55,167 Dilutive effect of stock options and PVRSUs 478 304 429 273 Weighted average shares of common stock outstanding – diluted 55,905 55,410 55,789 55,440 Diluted earnings per share $ 2.08 $ 0.26 $ 4.01 $ 1.21 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 Nine Months Ended September 30, September 30, (in thousands) 2021 2020 2021 2020 Stock options — 155 — 155 PVRSUs 155 234 155 234 15 Table of Contents 11. Reportable Segment Information Hotel Franchising: Hotel Franchising includes the Company's hotel franchising operations consisting of its fourteen brands. The fourteen brands are aggregated within this segment considering their similar economic characteristics, types of customers, distribution channels and regulatory business environments. Revenues from the hotel franchising business include royalty fees, initial franchise and relicensing fees, marketing and reservation system fees, procurement services revenue and other hotel franchising related revenue. The Company is obligated under its hotel franchise agreements to provide marketing and reservation services appropriate for the operation of its systems. These services do not represent separate reportable segments as their operations are directly related to the Company's hotel franchising business. The revenues received from franchisees that are used to pay for part of the Company's ongoing operations are included in hotel franchising revenues and are offset by the related expenses paid for marketing and reservation 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 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). Our President and Chief Executive Officer, who is our chief operating decision maker, does not use assets by operating segment when assessing performance or making operating segment resource allocations and therefore assets by segment are not disclosed below. The following table presents the financial information for the Company's segments: Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 (in thousands) Hotel Franchising Corporate & Other Intersegment Eliminations Consolidated Hotel Franchising Corporate & Other Intersegment Eliminations Consolidated Revenues $ 310,703 $ 13,532 $ ( 866 ) $ 323,369 $ 204,717 $ 6,368 $ ( 314 ) $ 210,771 Operating income (loss) $ 169,516 $ ( 10,410 ) $ — $ 159,106 $ 70,940 $ ( 20,240 ) $ — $ 50,700 Income (loss) before income taxes $ 172,338 $ ( 20,749 ) $ — $ 151,589 $ 69,208 $ ( 45,114 ) $ — $ 24,094 Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 (in thousands) Hotel Franchising Corporate & Other Intersegment Eliminations Consolidated Hotel Franchising Corporate & Other Intersegment Eliminations Consolidated Revenues $ 756,013 $ 30,504 $ ( 1,857 ) $ 784,660 $ 560,082 $ 21,785 $ ( 1,188 ) $ 580,679 Operating income (loss) $ 360,269 $ ( 38,141 ) $ — $ 322,128 $ 154,770 $ ( 49,400 ) $ — $ 105,370 Income (loss) before income taxes $ 358,274 $ ( 66,121 ) $ — $ 292,153 $ 147,598 $ ( 95,983 ) $ — $ 51,615 12. Commitments and Contingencies The Company is not a party to any litigation other than litigation in the ordinary course of business. The Company's management and legal counsel do not expect that the ultimate outcome of any of its currently ongoing legal proceedings, individually or collectively, will have a material adverse effect on the Company's financial position, results of operations or cash flows. Contingencies The Company entered into various limited payment guaranties with regards to the Company’s VIEs supporting their 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 16 Table of Contents its affiliates, ceases to be a member of the VIE. The maximum exposure of principal incidental to these limited payment guaranties is $ 5.7 million, plus unpaid expenses and accrued unpaid interest. As of September 30, 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. Commitments The Company has the following commitments outstanding at September 30, 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, 2021, the Company had commitments to extend an additional $ 269.2 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 $ 7.5 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. At September 30, 2021, the Company has committed to provide an aggregate of approximately $ 7.7 million, upon certain conditions being met, and none of these amounts have been disbursed. • The Company’s franchise agreements require the payment of franchise fees, which include marketing and reservation system fees. In accordance with terms of our franchise agreements, the Company is obligated to use the marketing and reservation system revenues it collects from the current franchisees comprising its various hotel brands to provide marketing and reservation services appropriate to support the operation of the overall system. To the extent revenues collected exceed expenditures incurred, the Company has a commitment to the franchisee system to make expenditures in future years. Conversely, to the extent expenditures incurred exceed revenues collected, the Company has the contractual enforceable right to assess and collect such amounts. In the ordinary course of business, the Company enters into numerous agreements that contain standard indemnities whereby the Company indemnifies another party for breaches of representations and warranties. Such indemnifications are granted under various agreements, including those governing (i) purchases or sales of assets or businesses, (ii) leases of real estate, (iii) licensing of trademarks, (iv) access to credit facilities, (v) issuances of debt or equity securities, and (vi) certain operating agreements. The indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords in lease contracts, (iii) franchisees in licensing agreements, (iv) financial institutions in credit facility arrangements, (v) underwriters in debt or equity security issuances and (vi) parties under certain operating agreements. In addition, these parties are also generally indemnified against any third-party claim resulting from the transaction that is contemplated in the underlying agreement. While some of these indemnities extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under these indemnities, nor is the Company able to develop an estimate of the maximum potential amount of future payments to be made under these indemnifications as the triggering events are not subject to predictability. With respect to certain of the aforementioned indemnities, such as indemnifications of landlords against third-party claims for the use of real estate property leased by the Company, the Company maintains insurance coverage that mitigates potential liability. 13. Transactions with Unconsolidated Joint Ventures The Company has a management fee arrangement for marketing services with a joint venture partner. For the three months ended September 30, 2021 and 2020, fees earned and payroll costs reimbursed under this arrangement totaled $ 0.6 million and $ 0.5 million, respectively. For both the nine months ended September 30, 2021 and 2020, fees earned and payroll costs reimbursed under this arrangement totaled $ 1.1 million and $ 0.9 million, respectively. The Company has entered into franchise agreements with certain of the unconsolidated joint ventures discussed in Note 4. Pursuant to these franchise agreements, for the three months ended September 30, 2021 and 2020, the Company recorded royalty, marketing reservation system, and other fees of approximately $ 8.0 million and $ 3.6 million, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded royalty, marketing reservation system, and other fees of approximately $ 15.0 million and $ 10.4 million, respectively. The Company recorded $ 3.0 million and $ 2.4 million as a receivable due from these joint ventures as of September 30, 2021 and December 31, 2020, respectively. 17 Table of Contents 14. Assets Held for Sale Assets held for sale of $ 6.4 million are recorded within Prepaid expenses and other current assets on the consolidated balance sheets and relate to a commercial office building previously awarded to the Company pursuant to a court settlement. No revision to the carrying value was recorded upon reaching held for sale classification. As a result of the Company's long range planning process, management pursued a sale of the commercial office building. The building was sold in November 2021 . 15. Subsequent Events On October 4, 2021, an office lease with an approximate 10 -year term with an unrelated third party commenced. The Company expects to account for this lease as an operating lease and establish a lease liability and right-of-use asset of approximately $ 34.6 million and $ 25.3 million, respectively, during the fourth quarter of 2021. On October 12, 2021, the Company executed a purchase and sale agreement for a parcel of land recorded at $ 8.7 million within Property and equipment, at cost, net on the consolidated balance sheets. As a result, this parcel of land is deemed to meet held for sale classification in October 2021. Management expects to sell the parcel of land in 2022. On October 21, 2021, the Company entered into an office lease agreement with an unrelated third-party with an approximately 11 year term. This office lease is expected to commence in 2023.