What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-08 compared with 2023-05-09 · 172 added, 87 removed, 334 unchanged (44% of the section changed)

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MD&A is provided as a supplement to — and should be read in conjunction with — our consolidated financial statements and the accompanying notes.

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.

We are primarily a hotel franchisor operating in 50 states, the District of Columbia and over 45 countries and territories.

At June 30, 2023, we had 7,472 hotels with 628,901 rooms open and operating, and 960 hotels with 93,646 rooms under construction, awaiting conversion, approved for development or committed to future franchise development on outstanding master development agreements (collectively, "pipeline") in its global system.

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").

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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.

These expenditures, which include advertising costs and costs to maintain our central reservations 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.

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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.

We intend to continue to strategically develop hotels to increase the presence of our newly introduced 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.

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 these 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.

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Results of Operations:

Royalty fees, licensing and management fees, operating income, net income and diluted EPS represent key measurements of our financial performance.

Royalty fees, licensing and management fees, operating income, net income and diluted Earnings per Share ("EPS") represent key measurements of our financial performance.

These measurements are primarily driven by the operations of our hotel franchise system and therefore, our analysis of the Company's operations is primarily focused on the size, performance and potential growth of the hotel franchise system as well as our variable overhead costs.

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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.

During the three months ended June 30, 2023 and 2022, other franchised and managed revenues exceeded expenses by $7.0 million and $35.5 million, respectively.

During the six months ended June 30, 2023 and 2022, other franchised and managed revenues exceeded expenses by $9.1 million and $48.5 million, respectively.

Refer to the Operations Review header of MD&A for additional analysis of our results.

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Calculation of Revenues excluding reimbursable revenue from franchised and managed properties

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2023 2022 2023 2022

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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.

Comparison of financial results for the three and six months ended June 30, 2023 and 2022 are set forth in the sections below.

In accordance with GAAP, our income statements include Radisson Hotels Americas’ results of operations in the three and six months ended June 30, 2023, but do not include Radisson Hotels Americas' results of operations in the three and six months ended June 30, 2022, as we did not acquire Radisson Hotels America until August 11, 2022.

Comparison of Operating Results for the Three-Month Periods Ended June 30, 2023 and 2022

Three Months Ended

(in thousands) 2023 2022

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Other (gain) loss (2,187) 5,559

Equity in net loss (gain) of affiliates 63 (244)

Equity in net (gain) loss of affiliates (185) 40

Total other income and expenses, net 11,842 15,223

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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.

The Company recorded income before income taxes of $112.5 million for the three-month period ended June 30, 2023, a $29.6 million decrease from the same period of the prior year.

The decrease in income before income taxes primarily reflects a $33.0 million decrease in operating income.

Operating income decreased $33.0 million primarily due to a $28.6 million decrease in the net surplus generated from other franchised and managed properties activities, a $3.1 million increase in selling, general and administrative ("SG&A") expense related to operational restructuring charges, consisting primarily of salary and benefit continuation payments, and $4.3 million of transition costs in SG&A expenses related to integration of the Radisson Hotels Americas business acquired in August 2022.

In addition, SG&A expenses increased $6.9 million related to increases in the Company's deferred compensation assets based on increases in the underlying investments.

This increase as well as a $4.3 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.

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.

The primary reasons for these fluctuations, inclusive of the impact from the legacy Radisson brands 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.

Domestic royalty fees increased $8.4 million to $125.1 million for the three months ended June 30, 2023 from $116.7 million for the three months ended June 30, 2022.

The increase in domestic royalties is attributable to an 8.8% increase in the number of domestic franchised hotel rooms as compared to the corresponding period in 2022 and a system-wide 6 basis point increase in the effective royalty rate from 4.93% for the three months ended June 30, 2022 to 4.99% for the three months ended June 30, 2023, with $11.7 million of fees attributed to legacy Radisson brands in the three months ended June 30, 2023.

The domestic system experienced a RevPAR increase of 0.5% due to a 2.8% increase in average daily rates, partially offset by a 130 basis point decrease in occupancy.

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

June 30, 2023 June 30, 2022

Rate Occupancy RevPAR Average

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(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

To enhance comparability, ADR, Occupancy, and RevPAR reflect operating performance for the three months ended June 30, 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 June 30, 2023 and 2022 by brand is as follows:

June 30, 2023 June 30, 2022 Variance

Hotels Rooms Hotels Rooms Hotels Rooms % %

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WoodSpring (6)

224 27,005 312 37,586 (88) (10,581) (28.2) % (28.2) %

Suburban 83 7,408 70 6,246 13 1,162 18.6 % 18.6 %

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(1) Includes Radisson Blu, Radisson Red, Radisson Individuals and Radisson brands.

(2) Includes Country Inn & Suites and Park Plaza brands.

(2) Includes Comfort family of brand extensions including Comfort and Comfort Suites.

(3) Includes Country Inn & Suites and Park Plaza brands.

(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).

(5) The Company reclassified six properties located in the Caribbean from Domestic Franchises to International Franchises as of June 30, 2022 to conform to current year presentation.

(6) In July 2022, the Company received notice from an ownership group of its intent to exit 110 WoodSpring properties from the Choice system, which occurred in September 2022.

International royalty fees increased $2.7 million to $7.5 million for the three months ended June 30, 2023 from $4.8 million three months ended June 30, 2022.

The increase in international royalty fees is attributable to $2.0 million of fees from the newly acquired Radisson brands in the three months ended June 30, 2023 and as a result of improvements in RevPAR performance and an increase of international franchise system size.

Inclusive of the Radisson brands, the international hotel system increased by 99 hotels (from 1,106 as of June 30, 2022 to 1,205 as of June 30, 2023) and 14,192 rooms (from 120,574 as of June 30, 2022 to 134,766 as of June 30, 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 fee revenue increased $1.0 million from $6.2 million to $7.2 million for the three months ended June 30, 2022 and June 30, 2023, respectively.

The increase is primarily attributable to the quantity of domestic franchise agreements awards, openings, and terminations 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.

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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.

At June 30, 2023, the Company had 960 hotels with 93,646 rooms in its global pipeline, as compared to 930 hotels and 85,314 rooms at June 30, 2022.

Approximately 94% of our pipeline is located in the United States and approximately 71% of the domestic pipeline is new construction.

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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.

Revenues increased $7.0 million from $21.8 million for the three months ended June 30, 2022 to $28.8 million the three months ended June 30, 2023.

These results reflect an increase in fees generated from travel-related partnerships and qualified vendors, and fees generated from the Company's convention, 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.

SG&A expenses increased $23.9 million from $43.9 million for the three months ended June 30, 2022 to $67.8 million for the three months ended June 30, 2023.

SG&A expenses increased $3.1 million related to operational restructuring charges, consisting primarily of salary and benefit continuation payments, and $4.3 million of transition costs related to integration of the Radisson Hotels Americas business acquired in August 2022;

$1.6 million accrued for costs related to potential performance under a financial guaranty;

and for general corporate purposes, including compensation, benefits, professional fees, travel, and conventions and meeting related expenses.

SG&A expenses also reflect a $6.9 million increase in the Company's deferred compensation liabilities based on increases in the underlying investments, compared to declines in the comparable period of the prior year.

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.

Depreciation and amortization expense was $9.8 million and $5.5 million for the three months ended June 30, 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 Company recorded interest expense of $16.3 million for the three months ended June 30, 2023, an increase of $5.0 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;

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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 Company recorded other net gain of $2.2 million for the three months ended June 30, 2023, compared to other net loss of $5.6 million for the three months ended June 30, 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.

The effective income tax rates were 24.7% and 25.3% for the three months ended June 30, 2023 and 2022, respectively.

The effective income tax rates for the three months ended June 30, 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.

Comparison of Operating Results for the Six-Month Periods Ended June 30, 2023 and 2022

Six Months Ended

(in thousands) 2023 2022

Royalty, licensing and management fees $ 247,991 $ 212,188

Initial franchise fees 15,046 14,624

Platform and procurement services fees 42,644 33,486

Owned hotels 47,836 29,228

Other 21,775 20,156

Other revenues from franchised and managed properties 384,920 316,019

Total revenues 760,212 625,701

OPERATING EXPENSES

Selling, general and administrative 127,087 74,212

Depreciation and amortization 19,835 11,710

Owned hotels 35,296 18,846

Other expenses from franchised and managed properties 375,754 267,496

Total operating expenses

557,972 372,264

Gain on sale of business and assets, net — 3,309

Operating income 202,240 256,746

OTHER INCOME AND EXPENSES, NET

Interest expense 30,354 22,722

Interest income (3,939) (2,908)

Other (gain) loss (4,095) 7,275

Equity in net (gain) loss of affiliates (122) (204)

Total other income and expenses, net 22,198 26,885

Income before income taxes 180,042 229,861

Income tax expense 42,512 56,302

Net income $ 137,530 $ 173,559

Results of Operations

The Company recorded income before income taxes of $180.0 million for the six-month period ended June 30, 2023, a $49.9 million decrease from the same period of the prior year.

The decrease in income before income taxes primarily reflects a $54.5 million decrease in operating income.

Operating income decreased $54.5 million primarily due to a $39.4 million decrease in the net surplus generated from other franchised and managed activities, and a $5.3 million increase in SG&A expenses related to operational restructuring charges, consisting primarily of salary and benefit continuation payments, and $12.0 million of transition costs in SG&A expenses related to integration of the Radisson Hotels Americas business acquired in August 2022.

In addition SG&A expenses increased $10.4 million related to increases in the Company's deferred compensation assets based on increases in underlying investments.

This increase as well as a $8.1 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.

The primary reasons for these fluctuations, inclusive of the impact from the legacy Radisson brands acquired on August 11, 2022, are described in more detail below.

Royalty fees, licensing and management fees

Domestic royalty fees increased $19.6 million to $223.2 million for the six months ended June 30, 2023 from $203.6 million for the six months ended June 30, 2022.

The increase in domestic royalties is attributable to an 8.8% increase in the number of domestic franchised hotel rooms as compared to the corresponding period in 2022 and a system-wide 6 basis point increase in the effective royalty rate from 4.93% for the six months ended June 30, 2022 to 4.99% for the six months ended June 30, 2023, with $21.1 million of fees attributed to legacy Radisson brands in the six months ended June 30, 2023.

The Choice system experienced a domestic RevPAR increase of 2.8% due to a 4.0% increase in average daily rates, partially offset by a 60 basis point decrease in occupancy.

A summary of the Company's domestic franchised hotels operating performance organized by chain scale is as follows.

Six Months Ended Six Months Ended Change

June 30, 2023 June 30, 2022

Rate Occupancy RevPAR Average

Rate Occupancy RevPAR

Upscale & Above (1)

$ 148.02 55.6 % $ 82.34 $ 141.20 52.6 % $ 74.32 4.8 % 300 bps 10.8 %

Midscale & Upper Midscale (2)

100.19 56.4 % 56.46 98.06 56.3 % 55.24 2.2 % 10 bps 2.2 %

Extended Stay (3)

64.07 72.9 % 46.73 60.88 76.7 % 46.67 5.2 % (380) bps 0.1 %

70.35 47.7 % 33.53 69.69 49.4 % 34.40 0.9 % (170) bps (2.5) %

$ 95.97 56.5 % $ 54.22 $ 92.30 57.1 % $ 52.73 4.0 % (60) bps 2.8 %

(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 six months ended June 30, 2022 as if the legacy Radisson brands were acquired on January 1, 2022.

International royalty fees for the six months ended June 30, 2023 increased $5.3 million to $13.9 million compared to the six months ended June 30, 2022.

The increase in international royalty fees is attributable to $3.8 million of fees from the newly acquired Radisson brands in the six months ended June 30, 2023 and as a result of increases in RevPAR performance and an increase of international franchise system size.

Initial franchise fees:

Initial franchise fee revenue increased $0.4 million from $14.6 million during the six months ended June 30, 2022 to $15.0 million during six months ended June 30, 2023.

The increase is primarily attributable to the quantity of domestic franchise agreements awards, openings, and terminations compared to the prior year.

Platform and procurement services fees:

Revenues increased $9.1 million from $33.5 million for the six months ended June 30, 2022 to $42.6 million for the six months ended June 30, 2023.

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 increased $52.9 million from $74.2 million for the six months ended June 30, 2022 to $127.1 million for the six months ended June 30, 2023.

SG&A expenses increased $5.3 million related to operational restructuring charges, consisting primarily of salary and benefit continuation payments, and a $12.0 million increase in transition costs related to integration of the Radisson Hotels Americas business acquired in August 2022;

$1.6 million accrued for costs related to the performance under a financial guaranty;

and for general corporate purposes, including compensation, benefits, professional fees, travel, and conventions and meeting related expenses.

SG&A expenses reflect a $10.4 million increase in the Company's deferred compensation liabilities based on increase in the underlying investments compared, to a decline in the comparable period of the prior year.

Depreciation and amortization :

Depreciation and amortization expense was $19.8 million and $11.7 million for the six months ended June 30, 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 $30.4 million for the six months ended June 30, 2023, an increase of $7.7 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.

Other (gain) loss :

The Company recorded other net gains of $4.1 million for the six months ended June 30, 2023, compared to other net losses of $7.3 million, a decrease of $11.4 million for the six months ended June 30, 2022.

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

Income tax expense:

The effective income tax rates were 23.6% and 24.5% for the six months ended June 30, 2023 and 2022, respectively.

The effective income tax rates for the six months ended June 30, 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.

Liquidity and Capital Resources

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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.

The Company's primary sources of liquidity as of June 30, 2023 consisted of $341.2 million in cash and available borrowing capacity through its senior unsecured revolving credit facility.

As of June 30, 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.

With respect to these activities, the Company had approximately $414.0 million in support of the Cambria Hotels and Everhome Suites brands currently reflected on the balance sheet as of June 30, 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.

As of June 30, 2023, the Company had commitments to extend an additional $336.0 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.

As of June 30, 2023, the Company had 2.8 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.

The Company's quarterly dividend rate remained unchanged for the second quarter 2023, with the dividend payable on July 19, 2023 to shareholders of record on July 5, 2023.

This increase will result in a projected 2023 annual dividend rate of $1.15 per share or approximately $56.6 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.

During the six months ended June 30, 2023 and 2022, net cash provided by operating activities totaled $125.7 million and $159.3 million, respectively.

Operating cash flows decreased $33.6 million primarily due to a decrease in the net surplus generated from other franchised and managed properties activities;

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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

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.

During the six months ended June 30, 2023 and 2022, the Company's net advances for these purposes totaled $46.2 million and $27.0 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

At June 30, 2023, the Company had commitments to extend an additional $336.0 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.

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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.

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.

During the six months ended June 30, 2023 and 2022, net surplus generated from other franchised and managed properties activities was $9.1 million and $48.5 million, respectively.

Investing Activities

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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.

With respect to our hotel development and ownership, affiliate investments, and lending, the Company had approximately $414.0 million outstanding in support of the Cambria Hotels and Everhome Suites brands currently reflected on the balance sheet as of June 30, 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.

Cash utilized for investing activities totaled $59.2 million and $24.0 million for the six months ended June 30, 2023 and 2022, respectively.

The change in cash utilized for investing activities for the six months ended June 30, 2023 primarily reflects the following:

During the six months ended June 30, 2023 and 2022, capital expenditures in property and equipment totaled $45.7 million and $49.9 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.

During the six months ended June 30, 2022, the Company realized net proceeds of $32.9 million from the sale of one Cambria hotel, one parcel of land, and a sale and conversion of an international direct franchising market to a master franchising market.

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.

During the six months ended June 30, 2023 and 2022, the Company invested $15.3 million and $0.7 million, respectively, to support these efforts.

In addition, during the six months ended June 30, 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 six months ended June 30, 2022.

To the extent that existing unconsolidated affiliates proceed to the hotel construction phase, the Company is committed to make additional capital contributions totaling $15.7 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

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.

During the six months ended June 30, 2023, the Company advanced $4.3 million and received repayments totaling $9.3 million for these purposes.

For the six months ended June 30, 2022, the Company advanced $2.0 million amounts and received repayments totaling $0.1 million for these purposes.

At June 30, 2023, the Company had commitments to extend less than $0.1 million for these purposes provided certain conditions are met by its franchisees.

Financing Activities

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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 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.

At June 30, 2023, the Company maintained a total leverage ratio of 2.36x, including outstanding debt of approximately $542.8 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.

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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 March 31, 2023, the Company had been fully advanced the amounts due pursuant to these agreements.

At June 30, 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.

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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.

The Company was in material compliance with all applicable current performance conditions as of June 30, 2023.

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.

In March 2023, the Company's board of directors approved a 21% increase in the quarterly cash dividend to $0.2875 per share, with the dividend payable on April 18, 2023 to shareholders of record on April 3, 2023.

The Company's quarterly dividend rate remained unchanged for the second quarter 2023, with the dividend payable on July 19, 2023 to shareholders of record on July 5, 2023.

During the six months ended June 30, 2023, the Company paid $27.5 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.

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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.

During the six months ended June 30, 2023, the Company repurchased 1.8 million shares of its common stock under the share repurchase program at a total cost, including accrued excise tax, of $222.4 million.

In total through June 30, 2023, the Company repurchased 57.2 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 90.2 million shares at an average price of $23.76 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.

As of June 30, 2023, the Company had 2.8 million shares remaining under the current share repurchase authorization.

During the six months ended June 30, 2023, the Company redeemed 0.1 million shares of common stock at a total cost of $14.0 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.

During the six months ended June 30, 2023, the Company received proceeds of $5.6 million from stock options exercised by employees.

Critical Accounting Policies

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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.

the resurgence 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;

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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;

operating risks associated with our international operations;

labor shortages;

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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