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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-04 · 163 added, 301 removed, 289 unchanged (62% of the section changed)

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The COVID-19 pandemic continues to cause disruptions to the global economy and the hospitality industry, including in the United States, where more than 80% of our franchised hotels are located.

The COVID-19 pandemic has led governments and other authorities and businesses around the world to impose or recommend measures intended to control its spread, including temporary closures of and occupancy limits on many businesses, travel restrictions, cancellation of events, social distancing measures and other governmental regulations.

As a result, the COVID-19 pandemic and its consequences have reduced travel and demand for hotel rooms, which has had a material adverse impact on the hospitality industry and the Company both financially and operationally.

The development of effective vaccines and the on-going distribution and vaccination efforts have been significant and positive developments and we believe have contributed to improved operating metrics since the second quarter of 2021.

However, the extent to which the COVID-19 pandemic will continue to impact the hospitality industry and our operations remains uncertain and will depend largely on future developments, including the rate and pace of vaccination in the broader population, the severity and duration of resurgences or variants of the virus, and the effectiveness of actions by government authorities and the public to continue to contain the pandemic.

The impacts of COVID-19 on the Company's business were first experienced toward the end of the first quarter of 2020, with domestic occupancy levels ranging between 25.5% and 32.5% in the last ten days of March 2020 resulting in significant decreases in revenue per available room ("RevPAR").

These trends steadily improved, albeit remained significantly impacted, over the remainder of 2020, resulting in full year 2020 domestic RevPAR experiencing a decline of approximately 30.7% from full year 2019.

The Company continued to experience significant negative impacts through the first quarter of 2021, although an increase in leisure travel reservations was observed in March 2021 that steadily improved through September 2021.

The third quarter 2021 domestic RevPAR experienced an increase of approximately 56.4% and 11.4% relative to third quarter 2020 and third quarter 2019, respectively.

As of both September 30, 2021 and September 30, 2020, there were less than 1% of Company's domestic hotel system that had temporarily suspended operations due to governmental restriction or a franchisee’s election.

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

Further, as of September 30, 2021, the Company had approximately $1.0 billion in cash and additional available borrowing capacity through its senior unsecured revolving credit facility.

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

In response to the COVID-19 pandemic, we implemented measures during 2020 to focus on the safety of our customers, employees, franchisees and their staff, while at the same time seeking to mitigate the impact on franchisees' and our Company's financial position and operations.

The duration of these measures cannot be predicted at this time.

The measures that remain in effect during the third quarter of 2021 include, but are not limited to, the following:

• Preserving fee-deferral programs for domestic and international franchisees.

• Continuing to extend capital-intensive brand deadlines and offer more flexible brand standard options to assist franchisees.

• Advising franchisees on benefits and eligibility requirements of government relief SBA programs and other CARES Act and American Rescue Plan Act of 2021 provisions.

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

While a recovery in the hospitality industry has commenced, industry projections anticipate that recovery to 2019 operating performance will span multiple years.

Since its onset, the COVID-19 pandemic has led governments and other authorities and businesses around the world at multiple times to impose or recommend measures intended to control its spread.

As a result, the COVID-19 pandemic and its consequences have reduced travel and demand for hotel rooms, which has adversely impacted, both financially and operationally and at varying degrees throughout the pandemic, the hospitality industry generally and the Company.

The development and distribution of effective vaccines and other containment efforts have been significant positive developments that we believe have contributed to improved operating metrics since the second quarter of 2021.

However, the extent to which the COVID-19 pandemic will impact the hospitality industry generally and our operations remains uncertain and will depend in part on future developments, including the severity and duration of resurgences or variants of the virus, the effectiveness of actions by government authorities and the public to continue to contain the pandemic, and the potential for adverse changes in consumer sentiment with respect to travel during the pandemic.

Since the time the impacts of COVID-19 on the Company's business were first experienced in March 2020, trends have improved steadily, with the first quarter 2022 domestic RevPAR experiencing an increase of approximately 35.9% and 10.4% relative to first quarter 2021 and first quarter 2019, respectively.

As of both March 31, 2022 and March 31, 2021, less than 1% of Company's domestic hotel system had temporarily suspended operations due to governmental restriction or a franchisee’s election.

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

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

In April 2020, in light of uncertainty resulting from the COVID-19 pandemic, we determined to suspend future, undeclared dividends and temporarily suspended activity under the Company's share repurchase program.

Given our strong liquidity and credit profile, the Company's board of directors declared on May 7, 2021, a quarterly cash dividend of $0.225 per share of common stock and approved resumption of the share repurchase program.

Additionally, on September 9, 2021, the Company's board of directors declared a quarterly cash dividend of $0.225 per share of common stock, which was paid in October 2021.

believe these points are illustrated by the Company's RevPAR results for full year 2021 and first quarter 2022, which reflect growth relative to the comparable 2019 periods.

Further, as of March 31, 2022, the Company had approximately $1.1 billion in cash and additional borrowing capacity through its senior unsecured revolving credit facility.

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

For additional information, see Risk Factors in Part II, Item 1A of our first quarter 2021 Form 10-Q and 2020 Form 10-K.

We are primarily a hotel franchisor with franchise agreements and owned hotels representing 7,102 hotels open comprising 601,776 rooms and 912 hotels under construction, awaiting conversion or approved for development comprising 78,547 rooms as of September 30, 2021, located in 50 states, the District of Columbia and more than 40 countries and territories outside the United States.

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

For additional information, refer to Risk Factors in Part II, and Part I, Item 1A of the 2021 Form 10-K.

We are primarily a hotel franchisor with franchise agreements and owned hotels representing 6,996 hotels open comprising 577,714 rooms and 903 hotels under construction, awaiting conversion or approved for development comprising 81,526 rooms as of March 31, 2022, located in 50 states, the District of Columbia and nearly 40 countries and territories outside the United States.

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

The Company's primary segment is the hotel franchising business.

The Company's domestic operations are conducted through direct franchising relationships and the ownership of five Cambria hotels, while its international franchise operations are conducted through a combination of direct franchising and master franchising or master development (collectively, "master franchising") relationships.

The Company's domestic operations are conducted through direct franchising relationships and the ownership of six Cambria hotels, while its international franchise operations are conducted through a combination of direct franchising and master franchising relationships.

Master franchising relationships are governed by master franchising agreements which generally provide the master franchisee with the right to use our brands and sub-license the use of our brands in a specific geographic region, usually for a fee.

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Our Company generates revenues, income and cash flows primarily from our hotel franchising operations and the initial, relicensing and continuing royalty fees attributable to our franchise agreements.

Revenues are also generated from partnerships with qualified vendors and travel partners that provide value-added solutions to our platform of guests hotels, five owned hotels, and other sources.

Revenues are also generated from partnerships with qualified vendors and travel partners that provide value-added solutions to our platform of guests hotels, six owned hotels, and other sources.

Historically, the hotel industry has been seasonal in nature.

For most hotels, demand is ordinarily

lower in November through February than during the remainder of the year.

For most hotels, demand is ordinarily lower in November through February than during the remainder of the year.

Our principal source of revenues is franchise fees based on the gross room revenues or number of rooms of our franchised properties.

The Company’s franchise fees, as well as its owned hotels revenues, normally reflect the industry’s seasonality and historically have been lower in the first and fourth quarters than in the second and third quarters.

However, as a result of the COVID-19 pandemic, historical trends may not be reliable to predict future performance.

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

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growth in the number of hotel rooms owned and under franchise;

occupancy and room rates achieved by the hotels in our system;

occupancy and room rates achieved

by the hotels in our system;

the effective royalty rate achieved on our franchise agreements;

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The number of rooms in our hotel system and the occupancy and room rates at those properties significantly affect the Company’s results because our fees are based upon room revenues or the number of rooms at owned and franchised hotels.

All of these factors have been and may continue to be disrupted by the COVID-19 pandemic.

To varying degrees, all of these factors have been and may continue to be disrupted by the COVID-19 pandemic.

The key industry standard for measuring hotel-operating performance is RevPAR, which is calculated by multiplying the percentage of occupied rooms by the average daily room rate realized.

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

The effects of the COVID-19 pandemic on our third quarter 2021 results and anticipated trends are discussed above under the heading "Impact of the COVID-19 Pandemic" and below under the heading "Operations Review".

The effects of the COVID-19 pandemic on our first quarter 2022 results and anticipated trends are discussed above under the heading "Impact of the COVID-19 Pandemic" and below under the heading "Operations Review".

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

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Greater awareness and preference promotes long-term growth in business delivery to our franchisees and increases the desirability of our brands to hotel owners and developers, which ultimately increases franchise fees earned by the Company.

Due to increased RevPAR growth during the second and third quarters of 2021 and our management of discretionary marketing and reservation system expenditures, we anticipate marketing and reservation revenues to exceed expenses for full year 2021.

Our Company articulates its mission as a commitment to our franchisees’ profitability by providing our franchisees with hotel franchises that strive to generate the highest return on investment of any hotel franchise.

We have developed an operating system dedicated to our franchisees’ success that focuses on delivering guests to hotels and reducing hotel operating costs.

As discussed above, the Company has taken and is continuing to take measures to combat the impact of the COVID-19 pandemic on our business.

These measures have been and remain a priority in order to mitigate the financial impacts to our franchisees and the Company.

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

The Company has taken and is continuing to take measures to combat the impact of the COVID-19 pandemic on our business and on our franchisees.

We believe these measures support and complement our strategic priorities to create value for our shareholders over the long-term.

These key long-term goals are as follows:

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Our success is dependent on improving the performance of our hotels, increasing our system size by selling additional hotel franchises with a focus on revenue-intense chain scales and markets, improving our effective royalty rate, expanding our qualified vendor programs and travel-related partnerships and maintaining a disciplined cost structure.

As noted above, we have introduced several temporary measures designed to assist franchisees during the COVID-19 pandemic.

We have introduced several temporary measures designed to assist franchisees during the COVID-19 pandemic.

We attempt to improve our revenues and overall profitability by providing a variety of products and services designed to increase business delivery and/or reduce operating and development costs.

These products and services include national marketing campaigns, maintaining a guest loyalty program, a central reservation system, property and yield management programs and systems, revenue management services, quality assurance standards, qualified vendor relationships and expanding our partnerships with other travel-related companies that provide services to our franchisees and guests.

These products and services include national marketing campaigns, a guest loyalty program, a central reservation system, property and yield management programs and systems, revenue management services, quality assurance standards, qualified vendor relationships and partnerships with other travel-related companies that provide services to our franchisees and guests.

We believe that healthy brands, which deliver a compelling return on investment, will enable us to sell additional hotel franchises and raise royalty rates.

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

As disclosed above, prior to the second and third quarters of 2021, the Company's hotels experienced declines in occupancy and RevPAR resulting from the impacts of the COVID-19 pandemic.

As disclosed above, prior to the second quarter of 2021, the Company's hotels experienced declines in occupancy and RevPAR resulting from the impacts of the COVID-19 pandemic.

The declines impacted the profitability of the Company and the negative impact to the Company could return if a resurgence of the COVID-19 pandemic significantly impacts travel.

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

Additionally, on September 9, 2021, the Company's board of directors declared a quarterly cash dividend of $0.225 per share of common stock.

The Company also allocates capital to financing, investment and guaranty support to incent franchise development for certain brands in strategic markets;

hotel ownership;

and exploring growth opportunities in business areas that are adjacent or complementary to our core hotel franchising business, which leverage our core competencies and are additive to our franchising business model.

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

Given our strong liquidity and credit profile, in May 2021, the Company resumed the payment of quarterly dividends, subject to future declarations by our board of directors, and activity under the share repurchase program.

On December 6, 2021, the Company's board of directors approved a 6% increase in the quarterly cash dividend and declared a quarterly cash dividend of $0.2375 per share of common stock, which was paid in January 2022.

On February 24, 2022 the Company's board of directors declared a quarterly cash dividend of $0.2375 per share of common stock, which was paid on April 15, 2022.

In addition to our hotel franchising business, we have also developed or acquired six Cambria hotels.

We intend to continue to strategically develop hotels to increase the presence of our brands in the United States, drive greater guest satisfaction and

brand preference, and ultimately increase the number of franchise agreements awarded.

When developing hotels, we seek key markets with strong growth potential that will deliver strong operating performance and improve the recognition of our brands.

Our hotel development and ownership efforts currently focus on the Cambria Hotels and Everhome Suites brands.

We believe our owned hotels provide us the opportunity to support and accelerate growth of our brands.

We do not anticipate owning hotels on a permanent basis and expect to target dispositions to a franchisee in the future.

The Company also allocates capital to financing, investment and guaranty support to incentivize franchise development for certain brands in strategic markets;

and to explore growth opportunities in business areas that are adjacent or complementary to our core hotel franchising business, which leverage our core competencies and are additive to our franchising business model.

The timing and amount of these investments are subject to market and other conditions.

In light of uncertainty resulting from the COVID-19 pandemic and to preserve liquidity, we have limited certain discretionary investments until such time as we determine conditions are appropriate to resume such activity.

We believe our growth investments and strategic priorities, when properly implemented, will enhance our profitability, maximize our financial returns and continue to generate value for our shareholders.

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

Due to the seasonal nature of the Company’s hotel franchising business and the multi-year investments required to support franchise operations, in addition to the Company's incremental spend to support franchisees and lower marketing and reservation system fees for certain periods resulting from the impacts of the COVID-19 pandemic, quarterly and/or annual deficits may be generated.

During the nine months ended September 30, 2021, marketing and reservation system revenues exceeded expenses by $56.7 million.

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

Due to the seasonal nature of the Company’s hotel franchising business and the multi-year investments required to support franchise operations, in addition to the Company's incremental spend to support franchisees and lower marketing and reservation system fees for certain periods most significantly impacted by the COVID-19 pandemic, quarterly and/or annual deficits may be generated.

During the three months ended March 31, 2022, marketing and reservation system revenues exceeded expenses by $13.0 million.

During the three months ended March 31, 2021, marketing and reservation system expenses exceeded revenues by $6.7 million.

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

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Since our business has not historically required significant reinvestment of capital, we typically utilize cash in ways that management believes provide the greatest returns to our shareholders which include share repurchases and dividends.

However, in April 2020 in light of uncertainty resulting from the COVID-19 pandemic, we determined to suspend future, undeclared dividends and temporarily suspended activity under the Company's share repurchase program.

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.

Additionally, on September 9, 2021, the Company's board of directors declared a quarterly cash dividend of $0.225 per share of common stock.

The Company's declaration of quarterly dividends and activity under the share repurchase program were temporarily suspended at the height of the COVID-19 pandemic, as detailed above within the Maximizing Financial Returns and Creating Value for Shareholders section.

We believe the Company’s cash flow from operations and available financing capacity is sufficient to meet the expected future operating, investing and financing needs of the business.

Refer to MD&A heading Liquidity and Capital Resources for additional analysis.

Inflation has been moderate in recent years and has not had a significant impact on our business.

We are monitoring the implications of governmental assistance programs related to COVID-19 on future inflation trends and any resulting impacts on our business.

We believe that moderate increases in the rate of inflation will generally result in comparable or greater increases in hotel room rates.

We are monitoring future inflation trends and any resulting impacts on our business.

Non-GAAP Financial Statement Measurements

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The Company utilizes revenues excluding marketing and reservation system activities rather than total revenues when analyzing the performance of the business.

Marketing and reservation system activities are excluded since the Company is contractually required by its franchise agreements to utilize the fees collected specifically for system-wide marketing and reservation system activities.

Marketing and reservation activities are excluded since the Company is contractually required by its franchise agreements to utilize the fees collected specifically for system-wide marketing and reservation activities.

This non-GAAP measure is a commonly used measure of performance in our industry and facilitates comparisons between the Company and its competitors.

Calculation of Revenues excluding marketing and reservation system activities

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2022 2021

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Operations Review

Comparison of Operating Results for the Three-Month Periods Ended September 30, 2021 and 2020

Summarized financial results for the three months ended September 30, 2021 and 2020 are as follows:

Comparison of Operating Results for the Three-Month Periods Ended March 31, 2022 and 2021

Summarized financial results for the three months ended March 31, 2022 and 2021 are as follows:

(in thousands) 2022 2021

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158,359 138,949

Loss on impairment of assets — (4,290)

Gain on sale of asset 29 —

Operating income 99,397 43,998

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Interest income (1,280) (1,281)

Loss on extinguishment of debt — 15,958

Other (gains) losses 1,716 (1,205)

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Income before income taxes 87,735 28,710

Income tax expense (benefit) 34,934 9,594

Income tax expense 20,344 6,373

Net income $ 67,391 $ 22,337

Results of Operations

The Company recorded income before income taxes of $151.6 million for the three-month period ended September 30, 2021, a $127.5 million increase from the same period of the prior year.

The increase in income before income taxes primarily reflects a $108.4 million increase in operating income, recognition of a $16.0 million loss on extinguishment of debt during the three-month period ended September 30, 2020, a $5.0 million increase in equity in net (gain) loss of affiliates, and a $1.1 million decrease in interest expense, partially offset by a $2.4 million decrease in other (gains) losses for the three-month period ended September 30, 2020.

Operating income increased $108.4 million primarily due to a $47.6 million increase in royalty revenues, a $47.4 million increase in the net surplus generated from marketing and reservation system activities, a $5.0 million increase in other revenues, a $3.9 million increase in owned hotels revenues in excess of expense, recognition of $4.3 million in impairment of assets during the three-month period ended September 30, 2020, and a $2.9 million increase in procurement services revenues, partially offset by a $3.3 million increase in SG&A expenses.

The Company recorded income before income taxes of $87.7 million for the three-month period ended March 31, 2022, a $59.0 million increase from the same period of the prior year.

The increase in income before income taxes primarily reflects a $55.4 million increase in operating income and a $6.2 million increase in equity in net (gain) loss of affiliates, partially offset by a $2.9 million decrease in other (gains) losses for the three-month period ended March 31, 2021.

Operating income increased $55.4 million primarily due to a $24.7 million increase in royalty revenues, a $19.6 million increase in the net surplus generated from marketing and reservation system activities, a $3.8 million increase in other revenues, a $3.7 million increase in owned hotels revenues in excess of expense, and a $3.0 million increase in initial franchise and relicensing fees.

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

Domestic royalty fees for the three months ended September 30, 2021 increased $46.6 million to $123.0 million from $76.4 million for the three months ended September 30, 2020, an increase of 61.0%.

The increase in domestic royalties reflect a 56.4% increase in domestic RevPAR.

Domestic royalty fees for the three months ended March 31, 2022 increased $24.0 million to $87.0 million from $63.0 million for the three months ended March 31, 2021, an increase of 38.0%.

The increase in domestic royalties reflects a 35.9% increase in domestic RevPAR.

System-wide RevPAR increased due to a 21.2% increase in average daily rates and a 570 basis point increase in occupancy.

The increase in domestic royalties is also due to a 1.2% increase in the number of domestic franchised hotel rooms and a 8 basis point increase in the effective royalty rate from 4.91% for the three months ended September 30, 2020 to 4.99% for the three months ended September 30, 2021.

The increase in domestic royalties is also due to a 3 basis point increase in the effective royalty rate from 5.02% for the three months ended March 31, 2021 to 5.05% for the three months ended March 31, 2022, partially offset by a 2.8% decrease in the number of domestic franchised hotel rooms in the comparative period.

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

Three Months Ended Three Months Ended Change

September 30, 2021 September 30, 2020

March 31, 2022 March 31, 2021

Rate Occupancy RevPAR Average

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Total $ 84.31 52.8 % $ 44.50 $ 69.54 47.1 % $ 32.74 21.2 % 570 bps 35.9 %

A summary of domestic hotels and rooms in our franchise system at September 30, 2021 and 2020 by brand is as follows:

September 30, 2021 September 30, 2020 Variance

A summary of domestic hotels and rooms in our franchise system at March 31, 2022 and 2021 by brand is as follows:

March 31, 2022 March 31, 2021 Variance

Hotels Rooms Hotels Rooms Hotels Rooms % %

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Total Domestic Franchises 5,894 457,546 5,967 470,552 (73) (13,006) (1.2) % (2.8) %

As of both September 30, 2021 and September 30, 2020, there were less than 1% of the Company's domestic hotel system that had temporarily suspended operations due to governmental restriction or a franchisee’s election.

As of both March 31, 2022 and March 31, 2021, less than 1% of the Company's domestic hotel system had temporarily suspended operations due to governmental restriction or a franchisee’s election.

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

International royalty fees for the three months ended September 30, 2021 increased $1.0 million to $4.3 million compared to the three months ended September 30, 2020 as a result of improvements in RevPAR performance, despite reductions of the international franchise system size by 32 hotels (from 1,192 as of September 30, 2020 to 1,160 as of September 30, 2021) and

13 rooms (from 134,316 as of September 30, 2020 to 134,303 as of September 30, 2021).

As of September 30, 2021 and September 30, 2020, approximately 2% and 3%, respectively, of the Company's international branded hotels temporarily suspended operations due to governmental restriction or a franchisee’s election.

We expect the uncertainty surrounding the potential duration of the pandemic, including an increase in the prevalence in variants, as well as the rate and pace of vaccinations around the world, to continue to impact the number of domestic and international hotels that temporarily suspend operations.

International royalty fees for the three months ended March 31, 2022 increased $0.8 million to $3.8 million compared to the three months ended March 31, 2021 as a result of improvements in RevPAR performance, despite reductions of the international franchise system size by 69 hotels (from 1,171 as of March 31, 2021 to 1,102 as of March 31, 2022) and 13,047 rooms (from 133,215 as of March 31, 2021 to 120,168 as of March 31, 2022).

As of March 31, 2022 and March 31, 2021, approximately 1% and 4%, respectively, of the Company's international branded hotels temporarily suspended operations due to governmental restriction or a franchisee’s election.

As a result of the acquisition of AMResorts®, the Company’s relationship with AMResorts® was terminated during the fourth quarter of 2021 and 17 domestic and 37 international open AMResorts®-branded hotels exited the Ascend Hotel Collection portfolio.

We expect the uncertainty surrounding the potential duration of the pandemic, including resurgences and new variants, as well as the rate, pace and effectiveness of vaccinations around the world, to continue to have the potential to impact the number of domestic and international hotels that remain open and operating.

Initial Franchise and Relicensing Fees

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

During the third quarter of 2021, the Company awarded 89 domestic franchise agreements representing 7,640 rooms compared to 81 franchising agreements representing 6,573 rooms for the third quarter of 2020.

Domestic franchise agreements awarded for new construction hotels totaled 32 contracts representing 3,178 rooms during the three months ended September 30, 2021, compared to 21 contracts representing 1,805 rooms for the three months ended September 30, 2020.

Conversion hotel awarded franchise agreements totaled 57 representing 4,462 rooms for the three months ended September 30, 2021, compared to 60 agreements representing 4,768 rooms for the three months ended September 30, 2020.

The Company awarded 56 domestic relicensing contracts during the three months ended September 30, 2021, compared to 54 executed during the three months ended September 30, 2020.

The Company awarded 6 domestic renewal agreements during the three months ended September 30, 2021, compared to 5 awarded during the three months ended September 30, 2020.

During the first quarter of 2022, the Company awarded 93 domestic franchise agreements representing 11,377 rooms compared to 89 franchising agreements representing 11,780 rooms for the first quarter of 2021.

Domestic franchise agreements awarded for new construction hotels totaled 38 contracts representing 3,717 rooms during the three months ended March 31, 2022, compared to 15 contracts representing 1,282 rooms for the three months ended March 31, 2021.

Conversion hotel awarded franchise agreements totaled 55 representing 7,660 rooms for the three months ended March 31, 2022, compared to 74 agreements representing 10,498 rooms for the three months ended March 31, 2021.

The Company awarded 138 domestic relicensing contracts during the three months ended March 31, 2022, compared to 52 executed during the three months ended March 31, 2021.

The Company awarded 7 domestic renewal agreements during the three months ended March 31, 2022, compared to 12 awarded during the three months ended March 31, 2021.

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

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

Initial franchise and relicensing fee revenue remained unchanged at $6.1 million for both the three months ended September 30, 2020 and September 30, 2021.

At September 30, 2021, the Company had 859 franchised hotels with 71,346 rooms under construction, awaiting conversion or approved for development in its domestic system as compared to 945 hotels and 76,155 rooms at September 30, 2020.

The number of new construction franchised hotels in the Company's domestic pipeline decreased from 710 at September 30, 2020 to 652 at September 30, 2021.

Initial franchise and relicensing fee revenue increased $3.0 million from $5.4 million to $8.4 million for the three months ended March 31, 2021 and March 31, 2022, respectively.

At March 31, 2022, the Company had 864 franchised hotels with 77,769 rooms under construction, awaiting conversion or approved for development in its domestic system as compared to 943 hotels and 77,292 rooms at March 31, 2021.

The number of new construction franchised hotels in the Company's domestic pipeline decreased from 709 at March 31, 2021 to 657 at March 31, 2022.

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

The number of conversion franchised hotels in the Company's domestic pipeline decreased from 235 hotels at September 30, 2020 to 207 hotels at September 30, 2021.

The number of conversion franchised hotels in the Company's domestic pipeline decreased from 234 hotels at March 31, 2021 to 207 hotels at March 31, 2022.

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

The Company had an additional 53 franchised hotels with 7,201 rooms under construction, awaiting conversion or approved for development in its international system as of September 30, 2021, compared to 48 hotels and 5,592 rooms at September 30, 2020.

The Company had an additional 39 franchised hotels with 3,757 rooms under construction, awaiting conversion or approved for development in its international system as of March 31, 2022, compared to 58 hotels and 7,158 rooms at March 31, 2021.

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

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Given the uncertainty as to the potential duration of the COVID-19 pandemic and its severity, there is additional uncertainty with respect to the opening of new construction hotels, which are reliant on, amongst other things, access to liquidity, availability of construction labor and materials, and local governmental approvals and entitlements, all of which may be constrained during the duration of the pandemic.

Procurement Services:

Revenues increased $2.9 million from $10.1 million for the three months ended September 30, 2020 to $13.0 million for the three months ended September 30, 2021.

These results reflect an increase in fees generated from travel-related partnerships and qualified vendors resulting from increased occupancy during the third quarter of 2021 at our franchised hotels.

Owned Hotels:

The Company's revenues, net of expenses, from owned hotels increased $3.7 million from $0.2 million for the three months ended March 31, 2021 to $3.9 million for the three months ended March 31, 2022.

These results reflect improved operating performance at our owned hotels and the addition of an owned hotel during the fourth quarter of 2021.

Other Revenues:

Other revenues increased $5.0 million from $3.6 million for the three months ended September 30, 2020 to $8.6 million for the three months ended September 30, 2021 driven by an increase in non-compliance fees and other franchising revenues.

Other revenues increased $3.8 million from $4.4 million for the three months ended March 31, 2021 to $8.2 million for the three months ended March 31, 2022 driven by an increase in non-compliance fees and other franchising revenues.

Selling, General and Administrative Expenses:

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

SG&A expenses were $35.1 million for the three months ended September 30, 2021, an increase of $3.3 million from the three months ended September 30, 2020.

SG&A expenses for the three months ended September 30, 2021 and 2020 include approximately $0.3 million and $0.4 million, respectively, related to the Company's alternative growth initiatives and expenses related to operations and maintenance of an office building.

Excluding SG&A expenses for alternative growth initiatives and office building operations, SG&A for the three months ended September 30, 2021 increased $3.4 million to $34.8 million in the current quarter primarily due to cost increases for general corporate purposes and lifting of certain cost mitigation measures related to the COVID-19 pandemic, partially offset by a decrease in provision for credit losses in accounts receivable recorded in accordance with Topic 326 and a decrease in the Company's deferred compensation liabilities based on decreases in the underlying investments.

Loss on Impairment of Assets :

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

Loss on Extinguishment of Debt:

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

SG&A expenses were $30.3 million for the both the three months ended March 31, 2022, and 2021.

SG&A expenses experienced a $3.2 million decrease in provision for credit losses in accounts receivable and a $3.1 million decrease in the Company's deferred compensation liabilities based on decreases in the underlying investments These decreases were offset by approximately equivalent cost increases for general corporate purposes and lifting of certain cost mitigation measures related to the COVID-19 pandemic, including compensation, benefits, and travel.

Gain on sale of assets :

In the first quarter of 2022, the Company recognized a $29 thousand gain related to excess proceeds received on the sale of a parcel of land meeting held for sale classification during the fourth quarter of 2021.

Other (Gains) Losses:

The Company recorded other net losses of $0.4 million for the three months ended September 30, 2021, compared to other net gains of $2.0 million for the three months ended September 30, 2020.

The Company recorded other net losses of $1.7 million for the three months ended March 31, 2022, compared to other net gains of $1.2 million for the three months ended March 31, 2021.

The current period losses relate to decreases in the Company's deferred compensation assets based on decreases in the underlying investments and foreign currency transaction losses.

Equity in Net (Gain) Loss of Affiliates :

The Company recorded net gains of $3.3 million from its unconsolidated joint ventures for the three months ended September 30, 2021, compared to net losses of $1.7 million for the three months ended September 30, 2020.

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

The fluctuation is primarily attributable to the distribution from an unconsolidated joint venture which sold its underlying assets resulting in a gain of $4.3 million in the third quarter of 2021, in addition to increased losses for the three months ended September 30, 2020 of operating joint venture hotels as impacted by the COVID-19 pandemic.

The Company recorded net gains of $0.2 million from its unconsolidated affiliates for the three months ended March 31, 2022, compared to net losses of $6.0 million for the three months ended March 31, 2021.

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

The activity for the three months ended March 31, 2021 reflects an other-than-temporary impairment of an unconsolidated affiliate resulting in a loss of $4.8 million, and increased losses of operating affiliate hotels as impacted by the COVID-19 pandemic.

Refer to Note 4 to our consolidated financial statements for additional information.

We anticipate the results recognized from these investments will continue to be impacted by the uncertainty of the COVID-19 pandemic for the remainder of 2021.

Income Tax Expense (Benefit):

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 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 R&D tax credits.

On January 1, 2018, the Company adopted ASU 2016-16, which provides guidance on recognition of current income tax consequences for intercompany asset transfers (other than inventory) at the time of transfer.

On January 1, 2020, the Company completed a reorganization of its foreign legal entity structure 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 excess tax benefits from share-based compensation.

Operations Review

Comparison of Operating Results for the Nine-Month Periods Ended September 30, 2021 and 2020

Summarized financial results for the nine months ended September 30, 2021 and 2020 are as follows:

(In thousands) 2021 2020

Royalty fees $ 299,606 $ 200,157

Initial franchise and relicensing fees 18,904 20,031

Procurement services 36,293 34,609

Marketing and reservation system 384,380 297,203

Owned hotels 24,724 15,731

Other 20,753 12,948

Total revenues 784,660 580,679

OPERATING EXPENSES

Selling, general and administrative 99,847 104,098

Depreciation and amortization 18,477 19,309

Marketing and reservation system 327,674 333,564

Owned hotels 16,534 12,822

Total operating expenses

462,532 469,793

Loss on impairment of assets — (5,516)

Operating income 322,128 105,370

OTHER INCOME AND EXPENSES, NET

Interest expense 35,106 37,153

Interest income (3,717) (6,277)

Loss on extinguishment of debt — 16,565

Other (gains) losses (2,906) (858)

Equity in net (gain) loss of affiliates 1,492 7,172

Total other income and expenses, net 29,975 53,755

Income before income taxes 292,153 51,615

Income tax expense (benefit) 67,279 (15,907)

Net income $ 224,874 $ 67,522

Results of Operations

The Company recorded income before income taxes of $292.2 million for the nine-month period ended September 30, 2021, a $240.6 million increase from the same period of the prior year.

The increase in income before income taxes reflects a $216.8 million increase in operating income, recognition of a $16.6 million loss on extinguishment of debt during the nine-month period ended September 30, 2020, a $5.7 million increase in equity of net (gains) losses of affiliates, a $2.0 million increase in other (gains) losses, and a $2.1 million decrease in interest expense, partially offset by $2.6 million decrease in interest income.

Operating income increased $216.8 million primarily due to a $99.4 million increase in royalty revenues, a $93.1 million increase in the net surplus generated from marketing and reservation system activities, expenses, a $7.9 million increase in other revenues, a $5.3 million increase in owned hotels revenues in excess of expenses, a $4.3 million decrease in SG&A expenses, recognition of $5.5 million in impairment of assets during the nine-month period ended September 30, 2020, a $1.7 million increase in procurement services revenues, partially offset by a $1.1 million decrease in initial franchise and relicensing fees.

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

Domestic royalty fees for the nine months ended September 30, 2021 increased $97.7 million to $288.8 million, a 51% increase compared to the nine months ended September 30, 2020.

The increase in royalties reflect a 46.0% increase in RevPAR.

System-wide RevPAR increased due to a 1,230 basis point increase in occupancy rates and a 15.1% increase in average daily rates.

The increase in domestic royalties is also due to a 1.2% increase in the number of domestic franchised hotel rooms and a 7 basis point increase in the effective royalty rate from 4.93% for the nine months ended September 30, 2020 to 5.00% for the nine months ended September 30, 2021.

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

Nine Months Ended Nine Months Ended Change

September 30, 2021 September 30, 2020

Rate Occupancy RevPAR Average

Rate Occupancy RevPAR

Comfort $ 97.74 60.8 % $ 59.40 $ 85.22 46.2 % $ 39.40 14.7 % 1,460 bps 50.8 %

Sleep 86.39 59.6 % 51.45 77.36 46.5 % 35.98 11.7 % 1,310 bps 43.0 %

Quality 83.94 54.5 % 45.77 73.23 42.1 % 30.81 14.6 % 1,240 bps 48.6 %

Clarion 87.91 43.8 % 38.52 74.79 33.3 % 24.93 17.5 % 1,050 bps 54.5 %

Econo Lodge 68.35 51.1 % 34.94 59.66 41.2 % 24.56 14.6 % 990 bps 42.3 %

Rodeway 68.20 52.0 % 35.48 60.15 44.0 % 26.45 13.4 % 800 bps 34.1 %

WoodSpring 50.83 81.9 % 41.63 46.14 72.0 % 33.24 10.2 % 990 bps 25.2 %

MainStay 79.84 62.8 % 50.15 77.38 55.1 % 42.61 3.2 % 770 bps 17.7 %

Suburban 54.49 71.5 % 38.95 52.14 63.7 % 33.21 4.5 % 780 bps 17.3 %

Cambria Hotels 129.62 55.1 % 71.44 116.78 38.3 % 44.78 11.0 % 1,680 bps 59.5 %

Ascend Hotel Collection 138.31 54.4 % 75.28 120.21 43.9 % 52.72 15.1 % 1,050 bps 42.8 %

Total $ 83.70 58.2 % $ 48.71 $ 72.71 45.9 % $ 33.36 15.1 % 1,230 bps 46.0 %

International royalty fees for the nine months ended September 30, 2021 increased $1.6 million to $10.9 million compared to the nine months ended September 30, 2020 as a result of increases in RevPAR performance, despite reductions of the international franchise system decreasing by 32 hotels (from 1,192 as of September 30, 2020 to 1,160 as of September 30, 2021) and 13 rooms (from 134,316 as of September 30, 2020 to 134,303 as of September 30, 2021).

We expect the uncertainty surrounding the pandemic, including an increase in the prevalence in variants as well as the rate and pace of vaccinations around the world, to continue to impact the number of domestic and international hotels that temporarily suspend operations.

Initial Franchise and Relicensing Fees

Initial franchise fees are fees paid to the Company when a franchisee executes a franchise agreement;

During the nine months ended September 30, 2021, the Company awarded 289 domestic franchise agreements representing 28,308 rooms compared to 232 franchise agreements representing 18,022 rooms for the nine months ended September 30, 2020.

Domestic franchise agreements awarded for new construction hotels totaled 88 representing 8,471 rooms during the nine months ended September 30, 2021 compared to 71 franchise agreements representing 6,102 rooms for the nine months ended September 30, 2020.

Conversion hotel awarded franchise agreements totaled 201 representing 19,837 rooms for the nine months ended September 30, 2021 compared to 161 franchise agreements representing 11,920 rooms for the nine months ended September 30, 2020.

The Company awarded 236 domestic relicensing contracts during the nine months ended September 30, 2021, compared to 164 executed during the nine months ended September 30, 2020.

The Company awarded 19 domestic renewal agreements during both the nine months ended September 30, 2021, compared to 25 executed during nine months ended September 30, 2020.

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

However, the recognition of revenue is deferred until the hotel is open or the franchise agreement is terminated.

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

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

Initial franchise and relicensing fee revenue decreased $1.1 million from $20.0 million during the nine months ended September 30, 2020 to $18.9 million during nine months ended September 30, 2021.

Given the uncertainty as to the duration of the COVID-19 pandemic and virus variants, there is additional uncertainty with respect to the opening of new construction hotels, which are reliant on, amongst other things, access to liquidity, availability of construction labor and materials, and local governmental approvals and entitlements, all of which may be constrained during the duration of the pandemic.

Procurement Services:

Revenues increased $1.7 million from $34.6 million for the nine months ended September 30, 2020 to $36.3 million for the nine months ended September 30, 2021.

These results reflect a increase in fees generated from travel-related partnerships and qualified vendors resulting from increased occupancy during the second and third quarters of 2021 at our franchised hotels.

Other Revenues:

Other revenues increased $7.9 million from $12.9 million for the nine months ended September 30, 2020 to $20.8 million in the same period of the current year driven by an increase in non-compliance fees and other franchising revenues.

Selling, General and Administrative Expenses:

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

SG&A expenses were $99.8 million for the nine months ended September 30, 2021, a decrease of $4.3 million from the nine months ended September 30, 2020.

SG&A expenses for the nine months ended September 30, 2021 and 2020 include approximately $1.1 million and $1.9 million, respectively, related to the Company's alternative growth initiatives and expenses related to operations and maintenance of an office building.

Excluding SG&A for alternative growth initiatives and office building operations, SG&A for the nine months ended September 30, 2021 decreased $3.4 million to $98.8 million in the current year primarily due to a decrease in provision for credit losses in accounts and notes receivable recorded in accordance with Topic 326, partially offset by cost increases for general corporate purposes and lifting of certain cost mitigation measures related to the COVID-19 pandemic, and an increase in the Company's deferred compensation liabilities based on increases in the underlying investments.

Loss on impairment of assets :

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

Interest Expense:

The Company recorded interest expense of $35.1 million for the nine months ended September 30, 2021, a decrease of $2.1 million from the nine months ended September 30, 2020.

The decrease in interest expense is a result of lower effective interest rates on outstanding borrowings in the comparative periods.

Interest Income:

The Company recorded interest income of $3.7 million for the nine months ended September 30, 2021, a decrease of $2.6 million from the nine months ended September 30, 2020.

The decrease in interest income is primarily a result of an increase in loans on non-accrual of interest status.

Loss on Extinguishment of Debt:

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

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

Other (Gains) Losses :

The Company recorded other net gains of $2.9 million for the nine months ended September 30, 2021, compared to other net gains of $0.9 million, an increase of $2.0 million for the nine months ended September 30, 2020.

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

Equity in Net (Gain) Loss of Affiliates :

The Company recorded net losses of $1.5 million from its unconsolidated joint ventures for the nine months ended September 30, 2021 compared to net losses of $7.2 million for the nine months ended September 30, 2020.

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

The fluctuation is primarily attributable to the sales of ownership interests of and

distributions from unconsolidated joint ventures resulting in gains of $2.6 million in the second quarter of 2021 and $4.3 million in the third quarter of 2021, in addition to increased losses for the three months ended September 30, 2020 of operating joint venture hotels as impacted by the COVID-19 pandemic, partially offset by an other-than-temporary impairment of an unconsolidated joint venture resulting in a loss of $4.8 million in the first quarter of 2021.

We anticipate the results recognized from these investments will continue to be impacted by the COVID-19 pandemic for the remainder of 2021.

Income Tax Expense (Benefit):

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 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.

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

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

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

federal income tax rate of 21.0% primarily due to the impacts ASU 2016-16 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.

Income Tax Expense:

The effective income tax rates were 23.2% and 22.2% for the three months ended March 31, 2022 and 2021, respectively.

The effective income tax rate for the three months ended March 31, 2022 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 excess tax benefits from share-based compensation.

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 excess tax benefits from share-based compensation.

Liquidity and Capital Resources

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

At September 30, 2021, the Company had approximately $1.0 billion in cash and available borrowing capacity through its senior unsecured revolving credit facility.

As of September 30, 2021, we were in compliance with the financial covenants of our credit agreements and expect to remain in such compliance.

Additionally, on September 9, 2021, the Company's board of directors declared a quarterly cash dividend of $0.225 per share of common stock.

As a result, the company expects to pay dividends totaling approximately $25 million during 2021.

Our Company historically generates strong and predictable operating cash flows primarily from our hotel franchising operations and the initial, relicensing and continuing royalty fees attributable to our franchise agreements.

Our capital allocation decisions, including capital structure and uses of capital, are intended to maximize our return on invested capital and create value for our shareholders, while maintaining a strong balance sheet and financial flexibility.

The Company's short-term and long-term liquidity requirements primarily arise from working capital needs, debt obligations, income tax payments, dividend payments, share repurchases, capital expenditures and investments in growth opportunities.

The Company's 2012 Senior Notes mature on July 1, 2022 with a principal maturity, net of unamortized deferred issuance costs, of $216.5 million.

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

On February 24, 2022 the Company's board of directors declared a quarterly cash dividend of $0.2375 per share of common stock, which was paid on April 15, 2022.

Our board of directors authorized a program which permits us to offer financing, investment, and guaranty support to qualified franchisees, and allows us to acquire or develop and resell hotels to incentivize franchise development of our brands in strategic markets.

We deploy capital pursuant to this program opportunistically to promote growth of our brands.

With respect to our hotel development and ownership, affiliate investments, and lending, the Company had approximately $473.7 million in support of the Cambria Hotels and Everhome Suites brands currently reflected on the balance sheet as of March 31, 2022, which it generally targets to recycle within a five year period, and expects our outstanding investment to not exceed $975 million at any point in time based on current board of directors' authorization.

The deployment and annual pace of future financial support activities will depend upon market and other conditions.

The Company also strategically deploys capital in the form of franchise agreement acquisition payments across our brands to incentivize franchise development.

As of March 31, 2022, the Company had commitments to extend an additional $277.0 million for these purposes provided the conditions of the payment are met by its franchisees.

The Company's primary sources of liquidity as of March 31, 2022 consisted of $1.1 billion in cash and available borrowing capacity through its senior unsecured revolving credit facility.

As of March 31, 2022, the Company was in compliance with the financial covenants of its credit agreements and expects to remain in such compliance.

Based on our business model and information known at this time, the Company believes that cash, available borrowing capacity, and cash flows from operations will provide sufficient liquidity to meet the expected future operating, investing and financing needs of the business for at least the next 12 months.

Operating Activities

During the nine months ended September 30, 2021 and 2020, net cash provided by operating activities totaled $245.2 million and $69.7 million, respectively.

During the three months ended March 31, 2022 and 2021, net cash provided by operating activities totaled $63.9 million and $0.1 million, respectively.

Operating cash flows increased $63.8 million primarily due to an increase in operating income, excluding certain non-cash charges, and timing of working capital items.

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

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

If the franchisee remains in the franchise system in good standing over the term specified in the incentive agreement, the Company forgives the incentive ratably.

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

During the nine months ended September 30, 2021 and 2020, the Company's net advances for these purposes totaled $28.5 million and $17.0 million, respectively.

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

During the three months ended March 31, 2022 and 2021, the Company's net advances for these purposes totaled $12.4 million and $6.8 million, respectively.

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

At 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.

At March 31, 2022, the Company had commitments to extend an additional $277.0 million for these purposes provided the conditions of the payment are met by its franchisees.

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

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

During the nine months ended September 30, 2021, marketing and reservation system revenues exceeded expenses by $56.7 million.

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

During the three months ended March 31, 2022, marketing and reservation system revenues exceeded expenses by $12.9 million.

During the three months ended March 31, 2021, marketing and reservation system expenses exceeded revenues by $6.7 million.

Investing Activities

Cash utilized for investing activities totaled $52.6 million and $30.5 million for the nine months ended September 30, 2021 and 2020, respectively.

The increase in cash utilized for investing activities for the nine months ended September 30, 2021 primarily reflects the following items:

During the nine months ended September 30, 2021 and 2020, capital expenditures in property and equipment totaled $46.1 million and $32.2 million, respectively.

The increase in capital expenditures primarily reflects costs incurred to support the continued growth of the Cambria Hotels brand, including acquisition of a land parcel in the third quarter of 2021 to develop into a Cambria hotel.

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

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

The Company maintains equity method investments related to the Company's program to offer equity support to qualified franchisees to develop and operate Cambria Hotels in strategic markets.

During the nine months ended September 30, 2021 and 2020, the Company invested $2.2 million and $4.6 million, respectively, to support these efforts.

In addition, during the nine months ended September 30, 2021 and 2020, the Company received distributions and sales proceeds from these joint ventures totaling $3.4 million and $15.6 million, respectively.

To the extent existing unconsolidated joint ventures proceed to the hotel construction phase, the Company is committed to make additional capital contributions totaling $7.5 million to support these efforts.

We are currently engaged in these financial support activities to encourage acceleration of the growth of our Cambria Hotels and Everhome Suites brands, primarily in strategic markets and locations.

With respect to our hotel development and ownership, affiliate investments, and lending, the Company had approximately $473.7 million outstanding in support of the Cambria Hotels and Everhome Suites brands currently reflected on the balance sheet as of March 31, 2022, which it generally targets to recycle within a five year period, and expects our outstanding investment to not exceed $975 million at any point of time based on current board of directors' authorization.

We expect to continue to deploy capital in these manners in support of our brands.

The deployment and annual pace of future financial support activities will depend upon market and other conditions, including among others, our franchise sales results, the environment for new construction hotel development and the hotel lending environment, and our assessment of the ongoing impacts of the COVID-19 pandemic.

Cash utilized for investing activities totaled $22.5 million and $9.7 million for the three months ended March 31, 2022 and 2021, respectively.

The increase in cash utilized for investing activities for the three months ended March 31, 2022 primarily reflects the following items:

During the three months ended March 31, 2022 and 2021, capital expenditures in property and equipment totaled $26.8 million and $9.4 million, respectively.

The increase in capital expenditures primarily reflects increased costs incurred to support the continued growth of the Cambria Hotels brand, including acquisition of a land parcel in the first quarter of 2022 to develop into a Cambria hotel.

During the three months ended March 31, 2022, the Company realized net proceeds of $8.5 million from the sale of one parcel of land.

The Company maintains equity method investments in affiliates related to the Company's program to offer equity support to qualified franchisees to develop and operate Cambria Hotels in strategic markets.

During the three months ended March 31, 2022 and 2021, the Company invested $0.3 million and $1.0 million, respectively, to support these efforts.

During the three months ended March 31, 2022 and 2021, the Company received no distributions from these affiliates.

To the extent existing unconsolidated affiliates proceed to the hotel construction phase, the Company is committed to make additional capital contributions totaling $7.8 million to support these efforts.

The Company has entered into various limited payment guaranties with regards to the Company’s investments in affiliates.

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

The Company believes the likelihood of having to perform under the aforementioned limited payment guaranties was remote as of March 31, 2022 and March 31, 2021.

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

Refer to Note 12 to our consolidated financial statements for further discussion.

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

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

During the nine months ended September 30, 2021, the Company advanced no amounts and received repayments totaling $0.1 million for these purposes, and acquired a senior note with collateral in an underlying operating hotel for $17.9 million.

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

At September 30, 2021, the Company had commitments to extend an additional $7.7 million for these purposes provided certain conditions are met by its franchisees.

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

Since 2006, we have engaged in these financial support activities to encourage acceleration of the growth of our Cambria Hotels brand, primarily in strategic markets and locations.

Over the next three to five years, we expect to continue to deploy capital in support of this brand and expect our outstanding investment not to exceed $725 million over that time period.

The deployment and annual pace of future financial support activities will depend upon market and other conditions including among others, our franchise sales results, the environment for new construction hotel development and the hotel lending environment, and our assessment of the ongoing impacts of the COVID-19 pandemic.

Our support of the Cambria Hotels brand’s growth is expected to be primarily in the form of franchise agreement acquisition costs, joint venture investments, hotel ownership and development, senior mortgage loans, development loans, mezzanine lending, and through the operation of a land-banking program.

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

At September 30, 2021, the Company had approximately $561.9 million outstanding pursuant to these financial support activities.

During the three months ended March 31, 2022, the Company advanced $1.2 million and received repayments totaling $0.1 million for these purposes.

For the three months ended March 31, 2021, the Company advanced and received repayments totaling zero and $0.1 million for these purposes, respectively.

At March 31, 2022, the Company had commitments to extend an additional $6.2 million for these purposes provided certain conditions are met by its franchisees.

Financing Activities

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The Restated Credit Agreement provides that the Company may elect to have borrowings bear interest at a rate equal to (i) LIBOR plus a margin ranging from 90 to 150 basis points or (ii) a base rate plus a margin ranging from 0 to 50 basis points, in each case, with the margin determined according to the Company’s senior unsecured long-term debt rating or under circumstances as set forth in the Restated Credit Agreement, the Company’s total leverage ratio in the event that such total leverage ratio is less than 2.5 to 1.0.

On August 11, 2021, we amended the Restated Credit Agreement to provide customary language for the replacement of LIBOR with an alternative benchmark rate if it is publicly announced that the administrator of LIBOR has ceased or will cease to provide LIBOR, or if it is publicly announced by the applicable regulatory supervisor that LIBOR is no longer representative.

On August 11, 2021, we amended the Restated Credit Agreement to provide customary provisions for the replacement of LIBOR with an alternative benchmark rate if it is publicly announced that the administrator of LIBOR has ceased or will cease to provide LIBOR, or if it is publicly announced by the applicable regulatory supervisor that LIBOR is no longer representative.

The Restated Credit Agreement requires the Company to pay a fee on the total commitments, calculated on the basis of the actual daily amount of the commitments (regardless of usage) times a percentage per annum ranging from 0.075% to 0.25% (depending on the Company’s senior unsecured long-term debt rating or under circumstances as set forth in the Restated Credit Agreement, the Company’s total leverage ratio in the event that such total leverage ratio is less than 2.5 to 1.0).

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

At September 30, 2021, the Company maintained a total leverage ratio of 2.65x and was in compliance with all financial covenants under the Restated Credit Agreement.

The senior unsecured revolving credit facility was paid down in full during the third quarter of 2020 and remains undrawn as of December 31, 2020 and September 30, 2021.

At March 31, 2022, the Company maintained a total leverage ratio of 2.17x and was in compliance with all financial covenants under the Restated Credit Agreement.

The senior unsecured revolving credit facility was paid down in full during the third quarter of 2020 and remains undrawn as of December 31, 2021 and March 31, 2022.

Debt issuance costs incurred in connection with the Restated Credit Agreement are amortized on a straight-line basis, which is not materially different than the effective interest method, through maturity.

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The 2019 Senior Notes will mature on December 1, 2029, with interest to be paid semi-annually on December 1 st and June 1 st .

The Company used the net proceeds of this offering, after deducting underwriting discounts, commissions and other offering expenses, to repay previously outstanding senior notes in the principal amount of $250 million due August 28, 2020, and for working capital and other general corporate purposes.

The Company used the net proceeds of this offering, after deducting underwriting discounts, commissions and other offering expenses, to repay the previously outstanding senior notes in the principal amount of $250 million due August 28, 2020, and for working capital and other general corporate purposes.

The Company may redeem the 2019 Senior Notes, in whole or in part, at its option at the applicable redemption price before maturity.

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

Additionally, at the option of the holders of the

2019 Senior Notes, the Company may be required to repurchase all or a portion of the 2019 Senior Notes of a holder upon the occurrence of a change of control event at a price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest, to the date of repurchase.

Additionally, at the option of the holders of the 2019 Senior Notes, the Company may be required to repurchase all or a portion of the 2019 Senior Notes of a holder upon the occurrence of a change of control event at a price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest, to the date of repurchase.

Senior Unsecured Notes Due 2022

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

Construction Loan

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

The construction was completed and the hotel opened in the third quarter of 2019, resulting in the satisfaction of the completion guaranty.

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

Fixed Rate Collateralized Mortgage

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

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

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

Payments were made in each quarter of 2020, with the balloon payment of $6.9 million made at maturity in December 2020.

The Company's 2012 Senior Notes mature on July 1, 2022 with a principal maturity, net of unamortized deferred issuance costs, of $216.5 million.

Economic Development Loans

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

At September 30, 2021, the Company had been fully advanced the amounts due pursuant to these agreements.

At March 31, 2022, the Company had been fully advanced the amounts due pursuant to these agreements.

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

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If the Company fails to meet an annual performance condition, the Company may be required to repay a portion or all of the advances including accrued interest by April 30 th following the measurement date.

Any outstanding advances at the expiration of the Company's ten year corporate headquarters lease in 2023 will be forgiven in full.

The advances will be included in long-term debt in the Company's consolidated balance sheets until the Company determines that the future performance conditions will be met over the entire term of the agreement and the Company will not be required to repay the

Any outstanding advances at the expiration in 2023 of the Company's current ten year corporate headquarters lease in 2023 will be forgiven in full.

will be included in long-term debt in the Company's consolidated balance sheets until the Company determines that the future performance conditions will be met over the entire term of the agreement and the Company will not be required to repay the advances.

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

The Company was in compliance with all applicable current performance conditions as of September 30, 2021.

In April 2020, in light of uncertainty resulting from the COVID-19 pandemic, we determined to suspend future, undeclared dividends.

Given our strong liquidity and credit profile, 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.

Additionally, on September 9, 2021, the Company's board of directors declared a quarterly cash dividend of $0.225 per share of common stock.

The declaration of future dividends is subject to the discretion of our board of directors.

During the nine months ended September 30, 2021, the Company paid $12.5 million in cash dividends.

The Company was in compliance with all applicable current performance conditions as of March 31, 2022.

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

Given our strong liquidity and credit profile, in May 2021, the Company resumed the payment of quarterly dividends, subject to future declarations by our board of directors.

On February 24, 2022 the Company board of directors declared a cash dividend of $0.2375 per share of common stock, which was paid on April 15, 2022.

During the three months ended March 31, 2022, the Company paid $13.2 million in cash dividends.

We expect that cash dividends will continue to be paid in the future, subject to declaration by our board of directors, future business performance, economic conditions, changes in tax regulations and other matters.

Based on our present dividend rate and outstanding share count, aggregate annual regular dividends for 2022 are estimated to be approximately $53.0 million.

The Company may not declare or make any payment if there is an existing event of default under the Restated Credit Agreement or if the payment would create an event of default.

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

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

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

During the nine months ended September 30, 2021, the Company repurchased 36,328 shares of its common stock under the share repurchase program at a total cost of $4.2 million.

Through September 30, 2021, the Company repurchased 51.7 million shares of its common stock (including 33.0 million prior to the two-for-one stock split effected in October 2005) under the program at a total cost of $1.5 billion.

In April 2020 in light of uncertainty resulting from the COVID-19 pandemic, we suspended activity under our share repurchase program.

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

During the three months ended March 31, 2022, the Company repurchased 68,486 shares of its common stock under the share repurchase program at a total cost of $9.9 million.

Through March 31, 2022, the Company repurchased 51.8 million shares of its common stock (including 33.0 million prior to the two-for-one stock split effected in October 2005) under the program at a total cost of $1.5 billion.

Considering the effect of the two-for-one stock split, the Company has repurchased 84.8 million shares at an average price of $17.73 per share.

As of September 30, 2021, the Company had 3.4 million shares remaining under the current share repurchase authorization.

During the nine months ended September 30, 2021, the Company redeemed 52,955 shares of common stock at a total cost of $5.8 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.

As of March 31, 2022, the Company had 3.3 million shares remaining under the current share repurchase authorization.

During the three months ended March 31, 2022, the Company redeemed 32,426 shares of common stock at a total cost of $4.8 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 PVRSUs and restricted stock grants.

These redemptions were outside the share repurchase program.

Off Balance Sheet Arrangements

The Company has 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 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 our guaranty.

Refer to Note 12 for further discussion of our off-balance sheet arrangements.

Critical Accounting Policies

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New Accounting Standards

Refer to the "Recently Adopted Accounting Standards" section of Note 1 for information related to our adoption of new accounting standards in 2021.

Refer to the "Recently Adopted Accounting Standards" section of Note 1 for information related to our evaluation of new accounting standards in 2022.

FORWARD-LOOKING STATEMENTS

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Such risks include, but are not limited to, continuation or resurgence of the COVID-19 pandemic, including with respect to new strains or variants;

the rate and pace of vaccination in the broader population;

the rate, pace and effectiveness of vaccination in the broader population;

changes in consumer demand and confidence, including the impact of the COVID-19 pandemic on unemployment rates, consumer discretionary spending and the demand for travel, transient and group business;

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis