CHOICE HOTELS INTERNATIONAL INC /DE 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the consolidated financial condition and results of operations of Choice Hotels International, Inc. and its subsidiaries (together "Choice" or the "Company", "we", "us", or "our") contained in this report. MD&A is provided as a supplement to — and should be read in conjunction with — our consolidated financial statements and the accompanying notes. 19 Table of Contents Overview We are primarily a hotel franchisor with franchise agreements and owned hotels representing 7,467 hotels open comprising 626,824 rooms and 988 hotels with 96,111 rooms under construction, awaiting conversion, approved for development or committed to future franchise development on outstanding master development agreements ("MDAs") as of March 31, 2023, located in 50 states, the District of Columbia and approximately 50 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 "legacy Choice brands"). Additionally, through the Radisson Hotels Americas acquisition completed on August 11, 2022, our brands expanded to include Radisson Blu®, Radisson RED®, Radisson®, Park Plaza®, Country Inn & Suites® by Radisson, Radisson Inn & Suites SM , Park Inn by Radisson®, Radisson Individuals®, and Radisson Collection® (collectively, the "legacy Radisson brands"), which are located across the United States, Canada, the Caribbean and Latin America. The hotel franchising business represents the Company's primary operations. The Company's domestic operations are conducted through direct franchising relationships, the ownership of six Cambria and three legacy Radisson Hotels Americas open and operating hotels, and the management of 13 legacy Radisson Hotels Americas hotels (inclusive of the Radisson Hotels Americas owned 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. As a result of master franchise relationships and international market conditions, our revenues are primarily concentrated in the United States. Therefore, our description of our business is primarily focused on the domestic operations, which encompasses the United States. Our Company generates revenues, income and cash flows primarily from our hotel franchising operations. Revenues are also generated from partnerships with qualified vendors and travel partners that provide value-added solutions to our platform of guests hotels, 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. Our principal source of revenue is franchise fees based on the gross room revenues or number of rooms of our franchised properties. The Company’s franchise and managed 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. With a primary focus on hotel franchising, we benefit from the economies of scale inherent in the franchising business. The fee and cost structure of our franchising business provides opportunities to improve operating results by increasing the number of franchised hotel rooms and effective royalty rates of our franchise contracts resulting in increased initial fee revenue, ongoing royalty fees, procurement services and licensing revenues. In addition, our operating results can also be improved through our company-wide efforts related to improving property-level performance and expanding the number of partnerships with travel-related and other companies with product and services that appeal to our guests. The principal factors that affect the Company’s results are: the number and relative mix of hotel rooms in the various hotel lodging price categories; growth in the number of hotel rooms owned and under franchise; occupancy and room rates achieved by the hotels in our system; the effective royalty rate achieved on our franchise agreements; the level of franchise sales and relicensing activity; the number of qualified vendor arrangements and partnerships and the level of engagement with these partners by our franchisees and guests; and our ability to manage costs. The number of rooms in our hotel system and the occupancy and room rates at those properties significantly affect the Company’s results because our fees are based upon room revenues or the number of rooms at owned and franchised hotels. The key industry standard for measuring hotel-operating performance is Revenue per Available Room ("RevPAR"), which is calculated by multiplying the percentage of occupied rooms by the average daily room rate realized. Our variable overhead costs associated with franchise system growth of our established brands have historically been less than incremental royalty fees generated from new franchises. Accordingly, over the long-term, continued growth of our franchise business should enable us to realize benefits from the operating leverage in place and improve operating results. We are required by our legacy Choice franchise agreements to use marketing and reservation system fees we collect for system-wide marketing and reservation system activities. These expenditures, which include advertising costs and costs to maintain our central reservations and property management systems, enhance awareness and consumer preference for our brands and deliver guests to our franchisees. Greater awareness and preference promotes long-term growth in business delivery to our franchisees and increases the desirability of our brands to hotel owners and developers, which ultimately increases franchise fees earned by the Company. The legacy Radisson Hotels Americas franchise agreements have similar provisions regarding marketing fees to be used for marketing activities. Additionally, the legacy Radisson Hotels Americas management agreements include cost reimbursements, primarily related to payroll costs at managed hotels where the Company is the employer. 20 Table of Contents Our Company articulates its mission as a commitment to our franchisees’ profitability by providing our franchisees with hotel franchises that strive to generate the highest return on investment of any hotel franchise. We have developed an operating system dedicated to our franchisees’ success that focuses on delivering guests to hotels and reducing hotel operating costs. We believe that executing our strategic priorities creates value for our shareholders. Our Company focuses on the following strategic priorities: Profitable Growth. Our success is dependent on improving the performance of our hotels, increasing our system size by selling additional hotel franchises with a focus on revenue-intense chain scales and markets, improving our effective royalty rate, expanding our qualified vendor and partnership platform programs and maintaining a disciplined cost structure. 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, 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 companies that provide services to our franchisees and guests. We believe that healthy brands, which deliver a compelling return on investment, will enable us to sell additional hotel franchises and raise royalty rates. We have multiple brands that meet the needs of many types of guests, and can be developed at various price points and applied to both new and existing hotels. This ensures that we have brands suitable for creating growth in a variety of market conditions. Improving the performance of the hotels in our system, strategically growing the system through additional franchise sales, and improving franchise agreement pricing while maintaining a disciplined cost structure are the keys to profitable growth. The addition of the legacy Radisson brands in the Americas increased Choice's footprint in the upper midscale and upscale chain scales and introduced presence in the upper upscale chain scale. We expect that the Radisson Americas acquisition will enable us to strengthen our presence in the upper midscale chain scale, expand our market presence in certain geographies in the United States and further build on our momentum in the upscale chain scale, accelerating the growth of our Cambria Hotels and Ascend Hotel Collection brands and allowing us to expand the Radisson portfolio. Maximizing Financial Returns and Creating Value for Shareholders. Our capital allocation decisions, including capital structure and uses of capital, are intended to maximize our return on invested capital and create value for our shareholders. Since our business has not historically required significant reinvestment of capital, we typically utilize cash in ways that management believes provides the greatest returns to our shareholders, which include acquisitions, share repurchases and dividends. Refer to the Liquidity and Capital Resources header of MD&A for more information regarding capital returns to shareholders. In addition to our hotel franchising business, we have also developed or acquired six Cambria and three legacy Radisson Hotels Americas open and operating 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. For legacy Choice 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 encumbered with a long-term Choice franchise agreement 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. We believe our growth investments and strategic priorities, when properly implemented, will enhance our profitability, maximize our financial returns and continue to generate value for our shareholders. The ultimate measure of our success will be reflected in the items below. Results of Operations: Royalty fees, licensing and management fees, operating income, net income and diluted EPS represent key measurements of our financial performance. These measurements are primarily driven by the operations of our hotel franchise system and therefore, our analysis of the Company's operations is primarily focused on the size, performance and potential growth of the hotel franchise system as well as our variable overhead costs. Our discussion of results generally excludes the Company’s other revenues and expenses from franchised and managed properties, which reflect franchise marketing and reservation system revenues and expenses and management agreement cost reimbursements. The Company's legacy Choice franchise agreements require the payment of marketing and reservation system fees to be used exclusively by the Company for expenses associated with providing franchise services such as national marketing, media advertising, and central reservation systems. The Company is obligated to expend the marketing and 21 Table of Contents reservation system fees it collects from franchisees in accordance with the franchise agreements. Furthermore, franchisees are required to reimburse the Company for any deficits generated by these marketing and reservation system activities. Over time, the Company expects cumulative revenues and expenses to break even and, therefore, no income or loss will be generated from marketing and reservation system activities. The franchised and management contracts acquired in the Radisson Hotels Americas acquisition have similar terms as those described above with the exceptions of certain contractual elements concerning reservation fees, which are not required to breakeven over time and which are insignificant to overall operating net income. As a result, the Company generally excludes the other revenues and expenses from franchised and managed properties from the analysis of its operations. Due to the seasonal nature of the Company’s hotel franchising and management business and the multi-year investments required to support franchise operations, quarterly and/or annual deficits may be generated. During the three months ended March 31, 2023 and 2022, other franchised and managed revenues exceeded expenses by $2.1 million and $13.0 million, respectively. Refer to the Operations Review header of MD&A for additional analysis of our results. Liquidity and Capital Resources: Historically, the Company has generated significant cash flows from operations . Since our business has not historically required significant reinvestment of capital, we typically utilize cash in ways that management believes provide the greatest returns to our shareholders, which include acquisitions, share repurchases and dividends. 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 Liquidity and Capital Resources header of MD&A for additional analysis. Inflation: 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 The Company utilizes certain measures which do not conform to generally accepted accounting principles accepted in the United States ("GAAP") when analyzing and discussing its results with the investment community. This information should not be considered as an alternative to any measure of performance as promulgated under GAAP. The Company’s calculation of these measurements may be different from the calculations used by other companies and therefore, comparability may be limited. We have included a reconciliation of these measures to the comparable GAAP measurement below as well as our reasons for reporting these non-GAAP measures. Revenues excluding reimbursable revenue from franchised and managed properties. The Company’s other revenues from franchised and managed properties financial statement line item reflect franchise marketing and reservation system revenues and management agreement cost reimbursements. The legacy Choice franchise marketing and reservation activities and legacy Radisson Hotels Americas franchise marketing activities and management agreement cost reimbursements operate at break-even based on the Company's contractual commitments regarding the manner such fees will be utilized. The legacy Radisson Hotels Americas reservation revenue, which is also recorded in the other revenues from franchised and managed properties, does not break even, based on the legacy Radisson Hotels Americas franchise contracts. As a result, the Company excludes reimbursable revenue from franchised and managed properties when analyzing the performance of the business. A similar 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 reimbursable revenue from franchised and managed properties Three Months Ended March 31, (in thousands) 2023 2022 Total revenues $ 332,792 $ 257,727 Adjustments: Reimbursable revenue from franchised and managed properties (157,782) (126,637) Revenues excluding reimbursable revenue from franchised and managed properties $ 175,010 $ 131,090 22 Table of Contents Operations Review Comparison of Operating Results for the Three-Month Periods Ended March 31, 2023 and 2022 Summarized financial results for the three months ended March 31, 2023 and 2022 are set forth in the table below. In accordance with GAAP, our income statements include Radisson Hotels Americas’ results of operations in the three months ended March 31, 2023, but do not include Radisson Hotels Americas' results of operations in the three months ended March 31, 2022, as we did not acquire Radisson Hotels America until August 11, 2022. (in thousands) 2023 2022 REVENUES Royalty, licensing and management fees $ 107,492 $ 90,739 Initial franchise fees 7,882 8,402 Platform and procurement services fees 13,843 11,683 Owned hotels 22,332 12,037 Other 10,627 8,229 Other revenues from franchised and managed properties 170,616 126,637 Total revenues 332,792 257,727 OPERATING EXPENSES Selling, general and administrative 59,283 30,324 Depreciation and amortization 10,023 6,231 Owned hotels 17,146 8,154 Other expenses from franchised and managed properties 168,489 113,650 Total operating expenses 254,941 158,359 Gain on sale of business and assets, net — 29 Operating income 77,851 99,397 OTHER INCOME AND EXPENSES, NET Interest expense 14,084 11,470 Interest income (1,883) (1,280) Other (gain) loss (1,908) 1,716 Equity in net loss (gain) of affiliates 63 (244) Total other income and expenses, net 10,356 11,662 Income before income taxes 67,495 87,735 Income tax expense 14,675 20,344 Net income $ 52,820 $ 67,391 Results of Operations The Company recorded income before income taxes of $67.5 million for the three-month period ended March 31, 2023, a $20.2 million decrease from the same period of the prior year. The decrease in income before income taxes primarily reflects a $21.5 million decrease in operating income and an increase in interest expense of $2.6 million, partially offset by a decrease in other (gain) loss of $3.6 million from the three-month period ended March 31, 2022. Operating income decreased $21.5 million primarily due to a $10.8 million decrease in the net surplus generated from other franchised and managed properties activities and a $10.4 million increase in selling, general and administrative ("SG&A") expense related to operational restructuring charges, consisting primarily of salary and benefit continuation payments, and transition costs related to integration of the Radisson Hotels Americas business acquired in August 2022. In addition, SG&A expenses increased $3.5 million related to increases in the Company's deferred compensation assets based on increases in the underlying investments. This increase as well as a $3.8 million increase in depreciation and amortization expense due to the acquisition of three hotels and identifiable intangible assets as part of the Radisson Hotels Americas transaction was partially offset by growth of the legacy Choice business and the operations of the newly acquired Radisson Hotels Americas business. 23 Table of Contents The primary reasons for these fluctuations, inclusive of the impact from the legacy Radisson brands as acquired on August 11, 2022, are described in more detail below. Royalty, licensing and management fees Domestic royalty fees increased $11.2 million to $98.2 million for the three months ended March 31, 2023 from $87.0 million for the three months ended March 31, 2022. The increase in domestic royalties is attributable to $9.4 million of fees from legacy Radisson brands in the three months ended March 31, 2023 and an overall domestic RevPAR increase of 5.9%. System-wide RevPAR increased due to a 5.2% increase in average daily rates and a 34 basis point increase in occupancy. The increase in domestic royalties is also due to a system-wide 6 basis point increase in the effective royalty rate from 4.93% for the three months ended March 31, 2022 to 4.99% for the three months ended March 31, 2023, and an 8.2% increase in the number of domestic franchised hotel rooms in the comparative period. A summary of the Company's domestic franchised hotels operating performance organized by chain scale is as follows. Three Months Ended Three Months Ended Change March 31, 2023 March 31, 2022 Average Daily Rate Occupancy RevPAR Average Daily Rate Occupancy RevPAR Average Daily Rate Occupancy RevPAR Upscale & Above (1) $ 139.86 51.2 % $ 71.59 $ 130.68 47.1 % $ 61.57 7.0 % 407 bps 16.3 % Midscale & Upper Midscale (2) 95.18 52.2 % 49.70 91.65 51.4 % 47.09 3.9 % 83 bps 5.5 % Extended Stay (3) 62.79 71.3 % 44.74 59.87 73.9 % 44.24 4.9 % (264) bps 1.1 % Economy (4) 67.71 44.8 % 30.34 65.97 45.7 % 30.16 2.6 % (89) bps 0.6 % Total (5) $ 91.21 52.7 % $ 48.08 $ 86.67 52.4 % $ 45.38 5.2 % 34 bps 5.9 % (1) Includes Cambria, Ascend, Radisson Blu, Radisson Red, Park Plaza, Radisson Individuals and Radisson brands. (2) Includes Country, Comfort, Clarion, Sleep, Quality and Park brands. (3) Includes WoodSpring, Mainstay, Suburban and Everhome brands. (4) Includes Econo Lodge and Rodeway brands. (5) Radisson Hotels Americas was acquired on August 11, 2022. To enhance comparability, ADR, Occupancy, and RevPAR reflect operating performance for the three months ended March 31, 2022 as if the legacy Radisson brands were acquired on January 1, 2022. A summary of domestic hotels and rooms in our franchise system at March 31, 2023 and 2022 by brand is as follows: March 31, 2023 March 31, 2022 Variance Hotels Rooms Hotels Rooms Hotels Rooms % % Ascend Hotel Collection 198 22,528 201 20,639 (3) 1,889 (1.5) % 9.2 % Cambria Hotels 66 9,000 58 7,996 8 1,004 13.8 % 12.6 % Radisson (1) 68 15,887 — — 68 15,887 NM NM Comfort (3) 1,684 132,264 1,659 130,644 25 1,620 1.5 % 1.2 % Country (2) 432 34,494 — — 432 34,494 NM NM Clarion (4) 179 19,707 188 21,464 (9) (1,757) (4.8) % (8.2) % Quality 1,622 120,136 1,641 122,576 (19) (2,440) (1.2) % (2.0) % Sleep 425 29,968 416 29,332 9 636 2.2 % 2.2 % Park 4 363 — — 4 363 NM NM Everhome 1 98 — — 1 98 NM NM MainStay 116 7,956 102 7,072 14 884 13.7 % 12.5 % WoodSpring 214 25,834 306 36,854 (92) (11,020) (30.1) % (29.9) % Suburban 75 6,700 70 6,246 5 454 7.1 % 7.3 % Econo Lodge 690 41,157 726 43,534 (36) (2,377) (5.0) % (5.5) % Rodeway 494 27,787 521 30,062 (27) (2,275) (5.2) % (7.6) % Total Domestic Franchises (5) 6,268 493,879 5,888 456,419 380 37,460 6.5 % 8.2 % (1) Includes Radisson Blu, Radisson Red, Radisson Individuals and Radisson brands. (2) Includes Country Inn & Suites and Park Plaza brands. (3) Includes Comfort family of brand extensions including Comfort and Comfort Suites. 24 Table of Contents (4) Includes Clarion family of brand extensions including Clarion and Clarion Pointe. (5) In 2022, the Company reclassified six properties located in the Caribbean from Domestic Franchises to International Franchises. International royalty fees increased $2.7 million to $6.4 million for the three months ended March 31, 2023 from $3.8 million three months ended March 31, 2022. The increase in international royalty fees is attributable to $1.8 million of fees from legacy Radisson brands in the three months ended March 31, 2023 and as a result of improvements in RevPAR performance and an increase of international franchise system size, inclusive of legacy Radisson brands, by 91 hotels (from 1,108 as of March 31, 2022 to 1,199 as of March 31, 2023) and 11,650 rooms (from 121,295 as of March 31, 2022 to 132,945 as of March 31, 2023). Initial Franchise Fees Initial franchise fee revenue decreased $0.5 million from $8.4 million to $7.9 million for the three months ended March 31, 2022 and March 31, 2023, respectively. The decline is primarily attributable to the timing of domestic franchise agreements awards, openings, and terminations for new construction hotels as well as domestic relicensing contracts compared to the prior year. Initial franchise fees are generally paid to the Company when a franchisee executes a franchise agreement for a new property entering the system or an existing franchised property at the time of an ownership change (referred to as a relicensing) or agreement renewal, however, the recognition of revenue is deferred until the hotel associated with the franchise agreement 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 franchise fees are recognized immediately in the period the agreement is terminated. At March 31, 2023, the Company had 988 franchised hotels with 96,111 rooms under construction, awaiting conversion, approved for development or committed to future franchise development on outstanding MDAs (collectively, "pipeline") in its global system, as compared to 925 franchised hotels and 84,210 rooms at March 31, 2022. Approximately 94% of our pipeline is located in the United States and approximately 77% of the domestic pipeline is new construction. After the execution of a franchise agreement, new construction hotels typically average 18 to 36 months to open, while conversion hotels typically average three to six months to open. Fluctuations in the Company’s pipeline are primarily due to the timing of hotel openings and the timing of awarding new franchise agreements. While the Company's hotel pipeline provides a strong platform for growth, a hotel in the pipeline does not always result in an open and operating hotel due to various macroeconomic factors which could impact items such as access to liquidity, availability of construction labor and materials, and local governmental approvals and entitlements. Platform and procurement services fees: Revenues increased $2.1 million from $11.7 million for the three months ended March 31, 2022 to $13.8 million the three months ended March 31, 2023. These results reflect an increase in fees generated from travel-related partnerships and qualified vendors driven by increased occupancy during the first quarter of 2023 at our franchised hotels, inclusive of activity from legacy Radisson brand hotels. Other Revenues: Other revenues increased $2.4 million from $8.2 million for the three months ended March 31, 2022 to $10.6 million for the three months ended March 31, 2023 driven by an increase in non-compliance fees and other franchising revenues, inclusive of activity from the newly acquired Radisson brand hotels. 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 $59.3 million and $30.3 million for the three months ended March 31, 2023, and 2022, respectively. SG&A expenses experienced an increase resulting from the acquisition of Radisson Hotels Americas, inclusive of $10.4 million of operational restructuring, consisting primarily of salary and benefit continuation payments, and transition related-costs incurred; general corporate purposes, including compensation, benefits, travel, and professional fees; and the provision for credit losses in accounts receivable in accordance with Topic 326. SG&A expenses reflect a $3.5 million increase in the Company's deferred compensation liabilities based on increases in the underlying investments. Depreciation and amortization : Depreciation and amortization expense was $10.0 million and $6.2 million for the three months ended March 31, 2023 and 2022, respectively, increasing primarily due to the acquisition of Radisson Hotels Americas and associated amortization from the portion of the purchase price allocated to contract asset acquisition costs as well as the three hotels acquired in the transaction. Interest expense: The Company recorded interest expense of $14.1 million for the three months ended March 31, 2023, an increase of $2.6 million from the comparable 2022 period. The increase in interest expense is a result of increased borrowings and interest rates on the Company's revolving credit facility; refer to discussion under the Liquidity and Capital Resources header of MD&A. 25 Table of Contents Other (gain) loss: The Company recorded other net gain of $1.9 million for the three months ended March 31, 2023, compared to other net loss of $1.7 million for the three months ended March 31, 2022. The current period gains relate to increases in the Company's deferred compensation assets based on increases in the underlying investments and foreign currency transaction gains. Income tax expense: The effective income tax rates were 21.7% and 23.2% for the three months ended March 31, 2023 and 2022, respectively. The effective income tax rates for the three months ended March 31, 2023 and 2022 were 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. Liquidity and Capital Resources Our Company historically generates strong and predictable operating cash flows primarily from our hotel franchising operations. 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 primary sources of liquidity as of March 31, 2023 consisted of $345.7 million in cash and available borrowing capacity through its senior unsecured revolving credit facility. As of March 31, 2023, 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 and available borrowing capacity and cash flows from operations provide sufficient liquidity to meet the expected future operating, investing and financing needs of the business. 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. With respect to these activities, the Company had approximately $502.0 million in support of the Cambria Hotels and Everhome Suites brands currently reflected on the balance sheet as of March 31, 2023, 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 Company also strategically deploys capital in the form of franchise agreement acquisition payments across our brands to incentivize franchise development. As of March 31, 2023, the Company had commitments to extend an additional $334.6 million for these purposes provided the conditions of the payment are met by its franchisees. The Company has historically generated cash flow from operating activities in excess of capital needed to invest in growth opportunities and service debt obligations. As a result, the Company maintains a share repurchase program and pays a quarterly dividend. As of March 31, 2023, the Company had 3.4 million shares remaining under the current share repurchase authorization. In addition, in March 2023, the Company's board of directors approved a 21% increase in the quarterly cash dividend to $0.2875 per share, effective with the dividend payable on April 18, 2023 to shareholders of record on April 3, 2023. This increase will result in a projected 2023 annual dividend rate of $1.15 per share or approximately $56.5 million in aggregate dividend payments, subject to future declarations by our board of directors. Operating Activities During the three months ended March 31, 2023 and 2022, net cash provided by operating activities totaled $12.0 million and $63.9 million, respectively. Operating cash flows decreased $51.9 million primarily due to a decrease in the net surplus generated from other franchised and managed properties activities; an increase in SG&A expenses related to operational restructuring charges; due diligence and transition costs related to the integration of the Radisson Hotels Americas business acquired in August 2022; an increase in franchise agreement acquisition cost payments; an increase in borrowing costs; and timing of working capital items. 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 and is terminated, the franchisee must repay the unamortized incentive payment plus interest. During the three months ended March 31, 2023 and 2022, the Company's net advances for these purposes totaled $28.1 million and $12.4 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 26 Table of Contents of franchise sales and the ability of our franchisees to complete construction or convert their hotels to one of the Company’s brands. At March 31, 2023, the Company had commitments to extend an additional $334.6 million for these purposes provided the conditions of the payment are met by its franchisees. The Company’s legacy Choice franchise agreements require the payment of marketing and reservation system fees. In accordance with the terms of our franchise agreements, the Company is obligated to use these marketing and reservation system fees to provide marketing and reservation services. To the extent revenues collected exceed expenditures incurred, the Company has a commitment to the franchisee system to make expenditures in future years. Conversely, to the extent expenditures incurred exceed revenues collected, the Company has the contractual enforceable right to recover such advances in future periods through additional fee assessments or reduced spending. The franchised and management contracts acquired in the Radisson Hotels Americas acquisition have similar terms as those described above with the exceptions of certain contractual elements concerning reservation fees, which are not required to breakeven over time and which are insignificant to overall operating net income. During the three months ended March 31, 2023 and 2022, net surplus generated from other franchised and managed properties activities was $2.1 million and $12.9 million, respectively. Investing Activities 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 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 $502.0 million outstanding in support of the Cambria Hotels and Everhome Suites brands currently reflected on the balance sheet as of March 31, 2023, 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. Cash utilized for investing activities totaled $29.5 million and $22.5 million for the three months ended March 31, 2023 and 2022, respectively. The change in cash utilized for investing activities for the three months ended March 31, 2023 primarily reflects the following: During the three months ended March 31, 2023 and 2022, capital expenditures in property and equipment totaled $19.6 million and $26.8 million, respectively. These capital expenditures primarily reflect costs incurred to support the continued growth of the Cambria Hotels and Everhome Suites brands, including ongoing construction and acquisition of land parcels for hotel development. 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 and Everhome Suites in strategic markets. During the three months ended March 31, 2023 and 2022, the Company invested $3.6 million and $0.3 million, respectively, to support these efforts. In addition, during the three months ended March 31, 2023, the Company received distributions and sales proceeds from these affiliates totaling $0.9 million. The Company received no distribution and sales proceeds from these affiliates for the three months ended March 31, 2022. To the extent that existing unconsolidated affiliates proceed to the hotel construction phase, the Company is committed to make additional capital contributions totaling $11.6 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, 2023 and 2022. 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 three months ended March 31, 2023, the Company advanced $3.7 million and received repayments totaling $0.3 million for these purposes. For the three months ended March 31, 2022, the Company advanced $1.2 million amounts and 27 Table of Contents received repayments totaling $0.1 million for these purposes. At March 31, 2023, the Company had commitments to extend an additional $0.7 million for these purposes provided certain conditions are met by its franchisees. Financing Activities Financing cash flows relate primarily to the Company's borrowings, open market treasury stock repurchases, acquisition of shares in connection with the exercise or vesting of equity awards, and dividends. Debt Restated Senior Unsecured Credit Facility On August 20, 2018, the Company entered into the Restated Senior Unsecured Credit Agreement (the "Restated Credit Agreement"), which amended and restated the Company’s existing senior unsecured revolving credit agreement, dated July 21, 2015. The Restated Credit Agreement provided for a $600 million unsecured credit facility with an original maturity date of August 20, 2023, subject to optional one-year extensions that could be requested by the Company prior to each of the first, second and third anniversaries of the closing date of the Restated Credit Agreement in exchange for fees. The Company has exercised multiple one-year extension options on the Restated Credit Agreement resulting in a new maturity date of August 20, 2026. The Restated Credit Agreement also provides that up to $35 million of borrowings under the Restated Credit Agreement may be used for alternative currency loans and up to $25 million of borrowings under the Restated Credit Agreement may be used for swingline loans. The Company may from time to time designate one or more wholly owned subsidiaries of the Company as additional borrowers under the Restated Credit Agreement, subject to the consent of the lenders and certain customary conditions. There are no subsidiary guarantors under the Restated Credit Agreement. On February 18, 2020, the Company entered into the First Amendment to the Amended and Restated Senior Unsecured Credit Agreement which, among other things, removed a springing guarantee (requiring subsidiaries to guarantee the Company's obligations under the Restated Credit Agreement if the subsidiary incurs certain recourse debt) and other provisions and references in the Restated Credit Agreement related to the potential existence of subsidiary guarantors. On February 14, 2023, the Company entered into a Third Amendment to the Amended and Restated Senior Unsecured Credit Agreement. This amendment provides, among other things, for (i) an increase in the aggregate amount of commitments under the Company's existing $600 million unsecured credit facility (the "Revolver") by $250 million (the “Increased Commitments”) to an aggregate amount of $850 million and (ii) the replacement of the interest reference rate for U.S. dollar-denominated borrowings under the Revolver from LIBOR to an adjusted Secured Overnight Financing Rate. The Restated Credit Agreement requires the Company to pay a fee on the total commitments, calculated on the basis of the actual daily amount of the commitments (regardless of usage) times a percentage per annum ranging from 0.075% to 0.25% (depending on the Company’s senior unsecured long-term debt rating or under circumstances as set forth in the Restated Credit Agreement, the Company’s total leverage ratio in the event that such total leverage ratio is less than 2.5 to 1.0). The Restated Credit Agreement requires that the Company and its restricted subsidiaries comply with various covenants, including with respect to restrictions on liens, incurring indebtedness, making investments and effecting mergers and/or asset sales. With respect to dividends, the Company may not declare or make any payment if there is an existing event of default or if the payment would create an event of default. The Restated Credit Agreement imposes financial maintenance covenants requiring the Company to maintain a consolidated fixed charge coverage ratio of at least 2.5 to 1.0 and a total leverage ratio of not more than 4.5 to 1.0 or, on up to two nonconsecutive occasions, 5.5 to 1.0 for up to three consecutive quarters following a material acquisition commencing with the fiscal quarter in which such material acquisition occurred. The Company maintains an Investment Grade Rating, as defined in the Restated Credit Agreement, and therefore is not currently required to comply with the consolidated fixed charge coverage ratio covenant. The Restated Credit Agreement includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Company under the Restated Credit Agreement to be immediately due and payable. At March 31, 2023, the Company maintained a total leverage ratio of 2.39x, including outstanding debt of approximately $533.6 million on the senior unsecured revolving credit facility, and was in compliance with all financial covenants under the Restated Credit Agreement. Debt issuance costs incurred in connection with the Restated Credit Agreement are amortized on a straight-line basis, which is not materially different than the effective interest method, through maturity. Amortization of these costs is included in interest expense in the consolidated statements of income. 28 Table of Contents The proceeds of the Restated Credit Agreement are generally expected to be used for general corporate purposes, including working capital, debt repayment, stock repurchases, dividends, investments and other permitted uses set forth in the Restated Credit Agreement. Senior Unsecured Notes Due 2031 On July 23, 2020, the Company issued unsecured senior notes in the principal amount of $450 million (the "2020 Senior Notes") bearing a coupon of 3.70%. The 2020 Senior Notes will mature on January 15, 2031, with interest to be paid semi-annually on January 15 th and July 15 th beginning January 15, 2021. The Company used the net proceeds of the 2020 Senior Notes, after deducting underwriting discounts, commissions and other offering expenses, to repay in full the $250 million Term Loan entered in April 2020 and fund the purchase price of the 2012 Senior Notes tendered and accepted by the Company for purchase pursuant to the tender offer (discussed below under "Senior Unsecured Notes due 2022"). The interest rate payable on the 2020 Senior Notes will be subject to adjustment based on certain rating events. The Company may redeem the 2020 Senior Notes, in whole or in part, at its option at the applicable redemption price before maturity. If the Company redeems the 2020 Senior Notes prior to October 15, 2030 (three months prior to the maturity date) (the “2020 Notes Par Call Date”), the redemption price will be equal to the greater of (a) 100% of the principal amount of the notes to be redeemed, or (b) the sum of the present values of the remaining scheduled principal and interest payments that would have been payable had the 2020 Senior Notes matured on the 2020 Notes Par Call Date, discounted to the redemption date on a semi-annual basis at the applicable Treasury Rate plus 50 basis points, plus accrued and unpaid interest. If the Company redeems the 2020 Senior Notes on or after the 2020 Notes Par Call Date, the redemption price will equal 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest. Additionally, at the option of the holders of the 2020 Senior Notes, the Company may be required to repurchase all or a portion of the 2020 Senior Notes of a holder upon the occurrence of a change of control event at a price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest, to the date of repurchase. Senior Unsecured Notes Due 2029 On November 27, 2019, the Company issued unsecured senior notes in the principal amount of $400 million (the "2019 Senior Notes") at a discount of $2.4 million, bearing a coupon of 3.70% with an effective rate of 3.88%. The 2019 Senior Notes will mature on December 1, 2029, with interest to be paid semi-annually on December 1 st and June 1 st . The Company used the net proceeds of this offering, after deducting underwriting discounts, commissions and other offering expenses, to repay 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. If the Company redeems the 2019 Senior Notes prior to September 1, 2029 (three months prior to the maturity date) (the “2019 Notes Par Call Date”), the redemption price will be equal to the greater of (a) 100% of the principal amount of the notes to be redeemed, or (b) the sum of the present values of the remaining scheduled principal and interest payments that would have been payable had the 2019 Senior Notes matured on the 2019 Notes Par Call Date, discounted to the redemption date on a semi-annual basis at the applicable Treasury Rate plus 30 basis points, plus accrued and unpaid interest. If the Company redeems the 2019 Senior Notes on or after the 2019 Notes Par Call Date, the redemption price will equal 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest. Additionally, at the option of the holders of the 2019 Senior Notes, the Company may be required to repurchase all or a portion of the 2019 Senior Notes of a holder upon the occurrence of a change of control event at a price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest, to the date of repurchase. Senior Unsecured Notes Due 2022 On June 27, 2012, the Company issued unsecured senior notes with a principal amount of $400 million (the "2012 Senior Notes") at par, bearing a coupon of 5.75% with an effective rate of 6.00%. The Company utilized the net proceeds of this offering, after deducting underwriting discounts, commissions and other offering expenses, together with borrowings under the Company's senior unsecured senior credit facility, to pay a special cash dividend to shareholders totaling approximately $600.7 million paid on August 23, 2012. On July 9, 2020, the Company commenced the tender offer (the "Tender Offer") to purchase up to $160.0 million aggregate principal amount of the 2012 Senior Notes subject to increase or decrease. The Tender Offer was subsequently upsized to $180.0 million aggregate principal amount of the 2012 Notes. On July 23, 2020, the Company amended the Tender Offer by increasing the aggregate principal maximum tender amount from $180.0 million to $183.4 million. The Tender Offer settled on July 24, 2020 for $197.8 million, including an early tender premium, settlement fees, and accrued interest paid. In combination with the early pay off of the Term Loan, the Company recorded a loss on extinguishment of debt of $16.0 million in the third quarter of 2020. 29 Table of Contents The 2012 Senior Notes matured on July 1, 2022. The outstanding principal of $216.6 million was re-paid at maturity. Economic Development Loans The Company entered into economic development agreements with various governmental entities in conjunction with the relocation of its corporate headquarters in April 2013. In accordance with these agreements, the governmental entities agreed to advance approximately $4.4 million to the Company to offset a portion of the corporate headquarters relocation and tenant improvement costs in consideration of the employment of permanent, full-time employees within the jurisdictions. At March 31, 2023, the Company had been fully advanced the amounts due pursuant to these agreements. These advances bear interest at a rate of 3% per annum. Repayment of the advances is contingent upon the Company achieving certain performance conditions. Performance conditions are measured annually on December 31 st and primarily relate to maintaining certain levels of employment within the various jurisdictions. If the Company fails to meet an annual performance condition, the Company may be required to repay a portion or all of the advances including accrued interest by April 30 th following the measurement date. Any outstanding advances at the expiration in 2023 of the Company's current ten-year corporate headquarters lease will be forgiven in full. The advances will be included in 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 material compliance with all applicable current performance conditions as of March 31, 2023. Dividends During the year ended December 31, 2022, the Company declared cash dividends at a quarterly rate of $0.2375 per share of common stock. In March 2023, the Company's board of directors approved a 21% increase in the quarterly cash dividend to $0.2875 per share, effective with the dividend payable on April 18, 2023 to shareholders of record on April 3, 2023. During the three months ended March 31, 2023, the Company paid $12.8 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 2023 are projected to be $1.15 per share or approximately $56.5 million in aggregate dividend payments. The Company may not declare or make any payment if there is an existing event of default under the Restated Credit Agreement or if the payment would create an event of default. Share Repurchases and Redemptions In 1998, we instituted a share repurchase program. Treasury stock activity is recorded at cost in the consolidated balance sheets. During the three months ended March 31, 2023, the Company repurchased 1.2 million shares of its common stock under the share repurchase program at a total cost of $146.8 million. In total through March 31, 2023, the Company repurchased 56.6 million shares of its common stock (including 33.0 million prior to the two-for-one stock split effected in October 2005) under the program at a total cost of $2.1 billion. Considering the effect of the two-for-one stock split, the Company has repurchased 89.6 million shares at an average price of $23.10 per share. As of March 31, 2023, the Company had 3.4 million shares remaining under the current share repurchase authorization. During the three months ended March 31, 2023, the Company redeemed 0.1 million shares of common stock at a total cost of $13.7 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. During the three months ended March 31, 2023, the Company received proceeds of $5.5 million from stock options exercised by employees. Critical Accounting Policies Our accounting policies comply with principles generally accepted in the United States. Discussion of these policies is included in Note 1 to our consolidated financial statements as of and for the year ended December 31, 2022 included in our Annual Report on Form 10-K, which incorporates description of our critical accounting policies that involve subjective and complex judgments that could potentially affect reported results. New Accounting Standards Refer to Note 1 for information related to our evaluation of new accounting standards. 30 Table of Contents FORWARD-LOOKING STATEMENTS Certain matters discussed in this quarterly report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as "expect," "estimate," "believe," "anticipate," "should," "will," "forecast," "plan," "project," "assume" or similar words of futurity. All statements other than historical facts are forward-looking statements. These forward-looking statements are based on management's current beliefs, assumptions and expectations regarding future events, which in turn are based on information currently available to management. Such statements may relate to projections of the Company's revenue, expenses, Adjusted EBITDA, earnings, debt levels, ability to repay outstanding indebtedness, payment of dividends, repurchases of common stock, and other financial and operational measures, including occupancy and open hotels, RevPAR, our ability to benefit from any rebound in travel demand, and our liquidity, among other matters. We caution you not to place undue reliance on any such forward-looking statements. Forward-looking statements do not guarantee future performance and involve known and unknown risks, uncertainties and other factors. Several factors could cause our actual results, performance or achievements to differ materially from those expressed in or contemplated by the forward-looking statements. Such risks include, but are not limited to, changes to general, domestic and foreign economic conditions, including access to liquidity and capital; the Company’s ability to successfully integrate Radisson Hotels Americas’ employees and operations; the ability to realize the anticipated benefits and synergies of the acquisition of Radisson Hotels Americas as rapidly or to the extent anticipated; the resurgence or worsening of the COVID-19 pandemic, including with respect to new strains or variants, and the related impact on the global hospitality industry, particularly but not exclusively the U.S. travel market; changes in consumer demand and confidence, including consumer discretionary spending and the demand for travel, transient and group business; the timing and amount of future dividends and share repurchases; future domestic or global outbreaks of epidemics, pandemics or contagious diseases or fear of such outbreaks; changes in law and regulation applicable to the travel, lodging or franchising industries, including with respect to the status of our relationship with employees of our franchisees; foreign currency fluctuations; impairments or declines in the value of our assets; operating risks common in the travel, lodging or franchising industries; changes to the desirability of our brands as viewed by hotel operators and customers; changes to the terms or termination of our contracts with franchisees and our relationships with our franchisees; our ability to keep pace with improvements in technology utilized for marketing and reservations systems and other operating systems; the commercial acceptance of our SaaS technology solutions division's products and services; our ability to grow our franchise system; exposure to risks related to our hotel development, financing, and ownership activities; exposures to risks associated with our investments in new businesses; fluctuations in the supply and demand for hotel rooms; our ability to realize anticipated benefits from acquired businesses; impairments or losses relating to acquired businesses; the level of acceptance of alternative growth strategies we may implement; the impact of inflation; cyber security and data breach risks; climate change and sustainability related concerns; ownership and financing activities; hotel closures or financial difficulties of our franchisees; operating risks associated with our international operations, especially in areas that continue to be affected by the COVID-19 pandemic; labor shortages; the outcome of litigation; and our ability to effectively manage our indebtedness and secure our indebtedness, including additional indebtedness incurred as a result of the acquisition of Radisson Hotels Americas. These and other risk factors are discussed in detail in the Risk Factors section of this Quarterly Report on Form 10-Q and of the Company's Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.