CHOICE HOTELS INTERNATIONAL INC /DE 10-Q

ITEM 1. FINANCIAL STATEMENTS CHOICE HOTELS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Three Months Ended March 31, 2024 2023 REVENUES Royalty, licensing and management fees $ 105,467 $ 107,492 Initial franchise fees 6,705 7,882 Platform and procurement services fees 13,756 13,843 Owned hotels 24,991 22,332 Other 16,357 10,627 Other revenues from franchised and managed properties 164,673 170,616 Total revenues 331,949 332,792 OPERATING EXPENSES Selling, general and administrative 48,625 48,921 Business combination, diligence and transition costs 15,844 10,362 Depreciation and amortization 10,935 10,023 Owned hotels 19,323 17,146 Other expenses from franchised and managed properties 177,073 168,489 Total operating expenses 271,800 254,941 Operating income 60,149 77,851 OTHER EXPENSES AND INCOME, NET Interest expense 20,181 14,084 Interest income ( 1,731 ) ( 1,883 ) Other loss (gain) 1,336 ( 1,908 ) Equity in net loss of affiliates 155 63 Total other expenses and income, net 19,941 10,356 Income before income taxes 40,208 67,495 Income tax expense 9,199 14,675 Net income $ 31,009 $ 52,820 Basic earnings per share $ 0.63 $ 1.02 Diluted earnings per share $ 0.62 $ 1.02 Cash dividends declared per share $ 0.2875 $ 0.2875 The accompanying notes are an integral part of these consolidated financial statements. 3 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) (UNAUDITED) Three Months Ended March 31, 2024 2023 Net income $ 31,009 $ 52,820 Other comprehensive income, net of tax: Foreign currency translation adjustment 454 394 Other comprehensive income, net of tax 454 394 Comprehensive income $ 31,463 $ 53,214 The accompanying notes are an integral part of these consolidated financial statements. 4 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) March 31, 2024 December 31, 2023 ASSETS Current assets Cash and cash equivalents $ 42,111 $ 26,754 Accounts receivable (net of allowance for credit losses of $ 40,547 and $ 39,265 , respectively) 225,173 195,896 Income taxes receivable 8,559 14,283 Notes receivable (net of allowance for credit losses of $ 2,643 and $ 3,035 , respectively) 22,012 20,766 Prepaid expenses and other current assets 40,646 38,831 Total current assets 338,501 296,530 Property and equipment (net of accumulated depreciation and amortization of $ 292,791 and $ 280,499 , respectively) 517,903 493,478 Operating lease right-of-use assets 84,869 85,101 Goodwill 220,187 220,187 Intangible assets (net of accumulated amortization of $ 267,311 and $ 252,342 , respectively) 821,029 811,075 Notes receivable (net of allowance for credit losses of $ 6,013 and $ 5,581 , respectively) 77,336 78,900 Investments in equity securities, at fair value 109,861 116,374 Investments for employee benefit plans, at fair value 43,747 39,751 Investments in affiliates 78,782 70,579 Deferred income taxes 90,167 89,535 Other assets 92,696 93,289 Total assets $ 2,475,078 $ 2,394,799 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable $ 135,297 $ 131,284 Accrued expenses and other current liabilities 70,164 109,248 Deferred revenue 116,003 108,316 Current portion of long-term debt 499,471 499,268 Liability for guest loyalty programs 98,577 94,574 Total current liabilities 919,512 942,690 Long-term debt 1,195,730 1,068,751 Long-term deferred revenue 132,274 133,501 Deferred compensation and retirement plan obligations 49,021 45,657 Income taxes payable 8,601 8,601 Operating lease liabilities 110,529 109,483 Liability for guest loyalty programs 45,292 43,266 Other liabilities 7,392 7,252 Total liabilities 2,468,351 2,359,201 Commitments and contingencies (Note 12) Common stock, $ 0.01 par value; 160,000,000 shares authorized; 95,065,638 shares issued at March 31, 2024 and December 31, 2023; 49,284,204 and 49,526,245 shares outstanding at March 31, 2024 and December 31, 2023, respectively 951 951 Additional paid-in-capital 335,612 330,750 Accumulated other comprehensive loss ( 5,217 ) ( 5,671 ) Treasury stock, at cost; 45,781,434 and 45,539,393 shares at March 31, 2024 and December 31, 2023, respectively ( 2,097,840 ) ( 2,046,791 ) Retained earnings 1,773,221 1,756,359 Total shareholders’ equity 6,727 35,598 Total liabilities and shareholders’ equity $ 2,475,078 $ 2,394,799 The accompanying notes are an integral part of these consolidated financial statements. 5 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Three Months Ended March 31, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 31,009 $ 52,820 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,935 10,023 Depreciation and amortization – other expenses from franchised and managed properties 7,028 9,276 Franchise agreement acquisition cost amortization 6,185 4,637 Non-cash share-based compensation and other charges 10,597 10,630 Non-cash interest, investments, and affiliate loss (income), net 2,510 ( 1,442 ) Deferred income taxes ( 736 ) 7,566 Equity in net loss of affiliates, less distributions received 1,200 421 Franchise agreement acquisition costs, net of reimbursements ( 33,486 ) ( 28,092 ) Change in working capital and other ( 33,501 ) ( 53,806 ) Net cash provided by operating activities 1,741 12,033 CASH FLOWS FROM INVESTING ACTIVITIES Investments in property and equipment ( 32,777 ) ( 19,566 ) Investments in intangible assets ( 1,439 ) ( 1,097 ) Contributions to investments in affiliates ( 9,317 ) ( 3,620 ) Proceeds from the sale of affiliates — 868 Purchases of investments for employee benefit plans ( 1,633 ) ( 2,670 ) Proceeds from sales of investments for employee benefit plans 1,591 716 Proceeds from sales of equity securities 1,230 — Issuances of notes receivable ( 1,042 ) ( 3,660 ) Collections of notes receivable 884 337 Other items, net ( 233 ) ( 771 ) Net cash used in investing activities ( 42,736 ) ( 29,463 ) CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings pursuant to revolving credit facilities 126,500 176,000 Debt issuance costs — ( 755 ) Purchases of treasury stock ( 59,459 ) ( 160,488 ) Dividends paid ( 14,728 ) ( 12,821 ) Proceeds from the exercise of stock options 4,160 5,504 Net cash provided by financing activities 56,473 7,440 Net change in cash and cash equivalents 15,478 ( 9,990 ) Effect of foreign exchange rate changes on cash and cash equivalents ( 121 ) 103 Cash and cash equivalents, beginning of period 26,754 41,566 Cash and cash equivalents, end of period $ 42,111 $ 31,679 Supplemental disclosure of cash flow information: Cash payments during the period for Income taxes, net of refunds $ 2,327 $ 1,603 Interest, net of capitalized interest $ 19,596 $ 13,396 Non-cash investing and financing activities Dividends declared but not paid $ 14,147 $ 14,985 Investments in property, equipment, and intangible assets recognized in accounts payable and accrued expense liabilities $ 14,020 $ 6,704 The accompanying notes are an integral part of these consolidated financial statements. 6 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) Common Stock - Shares Outstanding Common Stock - Par Value Additional Paid-in- Capital Accumulated Other Comprehensive Income (Loss) Treasury Stock Retained Earnings Total Balance as of December 31, 2022 52,200,903 $ 951 $ 298,053 $ ( 5,211 ) $ ( 1,694,857 ) $ 1,555,724 $ 154,660 Net income — — — — — 52,820 52,820 Other comprehensive income, net of tax — — — 394 — — 394 Share-based payment activity (1) 315,049 — 1,899 — 13,497 — 15,396 Dividends declared ($ 0.2875 per share) — — — — — ( 14,709 ) ( 14,709 ) Treasury purchases (2) ( 1,341,520 ) — — — ( 161,553 ) — ( 161,553 ) Balance as of March 31, 2023 51,174,432 $ 951 $ 299,952 $ ( 4,817 ) $ ( 1,842,913 ) $ 1,593,835 $ 47,008 Common Stock - Shares Outstanding Common Stock - Par Value Additional Paid-in- Capital Accumulated Other Comprehensive Income (Loss) Treasury Stock Retained Earnings Total Balance as of December 31, 2023 49,526,245 $ 951 $ 330,750 $ ( 5,671 ) $ ( 2,046,791 ) $ 1,756,359 $ 35,598 Net income — — — — — 31,009 31,009 Other comprehensive income, net of tax — — — 454 — — 454 Share-based payment activity (1) 252,869 — 4,862 — 6,323 — 11,185 Dividends declared ($ 0.2875 per share) — — — — — ( 14,147 ) ( 14,147 ) Treasury purchases (2) ( 494,910 ) — — — ( 57,372 ) — ( 57,372 ) Balance as of March 31, 2024 49,284,204 $ 951 $ 335,612 $ ( 5,217 ) $ ( 2,097,840 ) $ 1,773,221 $ 6,727 (1) During certain periods presented, accumulated dividends were paid to certain shareholders upon vesting of their performance vested restricted stock units ("PVRSU"), which are presented in Share-based payment activity. (2) Beginning January 1, 2023, Treasury purchases include a 1% excise tax as imposed by the Inflation Reduction Act of 2022. The accompanying notes are an integral part of these consolidated financial statements. 7 Table of Contents CHOICE HOTELS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation and Significant Accounting Policies Basis of Presentation The accompanying unaudited consolidated financial statements of Choice Hotels International, Inc. and subsidiaries (collectively, "Choice" or the "Company") have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America ("GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments that are necessary to fairly present the Company's financial position and results of operations. Except as otherwise disclosed, all adjustments are of a normal recurring nature. Certain prior year amounts in our consolidated financial statements have been reclassified in order to maintain comparability with the current year presentation. Business combination, diligence and transition costs, which were previously presented in selling, general and administrative expenses, are now presented within a standalone financial statement line item in the consolidated statements of income. The reclassification had no effect on the Company’s previously reported operating income or net income. Certain information and footnote disclosures normally included in the consolidated financial statements presented in accordance with GAAP have been omitted. Although the Company believes the disclosures made are adequate to prevent the information presented from being misleading, these consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2023 and the notes thereto included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on February 20, 2024. The interim results are not necessarily indicative of the entire year's results. Summary of Significant Accounting Policies The Company’s significant accounting policies are included in the “Significant Accounting Policies” section of Note 1 in the Annual Report on Form 10-K for the year ended December 31, 2023. Recently Issued Accounting Standards In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07, Improvements to Reportable Segment Disclosures ("ASU 2023-07"). ASU 2023-07 requires public entities to disclose significant segment expenses by reportable segment if they are regularly provided to the CODM and included in each reported measure of segment profit or loss on both an annual and an interim basis. ASU 2023-07 is effective for the annual reporting period beginning after December 15, 2023 and the interim periods within the annual reporting period beginning after December 15, 2024. The Company is currently evaluating the potential impact that ASU 2023-07 will have on the Company's consolidated financial statements. In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures ("ASU 2023-09"). ASU 2023-09 is designed to provide additional information to financial statement users in regards to how an entity's operations, risks, and planning affect its tax rate, opportunities, and future cash flows. ASU 2023-09 is effective for the annual reporting period beginning after December 15, 2024. Based on the Company's assessment, the adoption of this standard is not expected to have an impact on the Company's consolidated financial statements, but it will require enhanced income tax disclosures in the notes to the consolidated financial statements. 8 Table of Contents 2. Revenue Contract Liabilities Contract liabilities relate to (i) advance consideration received related to services considered to be a part of the brand intellectual property performance obligation, such as initial franchise fees that are paid when a franchise agreement is executed and system implementation fees that are paid at the time of installation, and (ii) amounts received when loyalty points are issued but the associated revenue has not yet been recognized because the related loyalty points have not been redeemed. Deferred revenues from initial franchise fees and system implementation fees are typically recognized over a ten-year period, unless the franchise agreement is terminated and the hotel exits the franchise system whereby the remaining deferred revenue amounts are recognized to revenue in the period of termination. Loyalty points are typically redeemed within three years of issuance. The following table summarizes the significant changes in the contract liabilities balances during the period from December 31, 2023 to March 31, 2024: (in thousands) Balance as of December 31, 2023 $ 209,895 Increases to the contract liability balance due to cash received 26,183 Revenue recognized in the period ( 26,273 ) Balance as of March 31, 2024 $ 209,805 Remaining Performance Obligations The aggregate amount of the transaction price that is allocated to unsatisfied, or partially unsatisfied, performance obligations was $ 209.8 million as of March 31, 2024. This amount represents the fixed transaction price that will be recognized as revenue in future periods, which is presented as current and non-current deferred revenue in the consolidated balance sheets. Based on the practical expedient elections permitted by ASU 2014-09, Revenue From Contracts with Customers (Topic 606) and subsequent amendments ("Topic 606"), the Company does not disclose the value of unsatisfied performance obligations for (i) variable consideration subject to the sales or usage-based royalty constraint or comprising a component of a series (including franchise, partnership, qualified vendor, and software as a service ("SaaS") agreements), (ii) variable consideration for which the Company recognizes revenue at the amount to which it has the right to invoice for the services performed, or (iii) contracts with an expected original duration of one year or less. Disaggregation of Revenue The following table presents the Company's revenues by over time and point in time recognition: Three Months Ended Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Over time Point in time Total Over time Point in time Total Royalty, licensing and management fees $ 103,107 $ 2,360 $ 105,467 $ 107,492 $ — $ 107,492 Initial franchise fees 6,705 — 6,705 7,882 — 7,882 Platform and procurement services fees 13,177 579 13,756 13,239 604 13,843 Owned hotels 18,081 6,910 24,991 16,893 5,439 22,332 Other 16,357 — 16,357 10,627 — 10,627 Other revenues from franchised and managed properties 148,082 16,591 164,673 155,438 15,178 170,616 Total revenues $ 305,509 $ 26,440 $ 331,949 $ 311,571 $ 21,221 $ 332,792 The owned hotels revenues that are recognized at a point in time represent the goods and services that are purchased independently of the hotel stay, such as food and beverage, incidentals, and parking fees. The remaining revenues that are recognized at a point in time represent the loyalty points that are redeemed by members for benefits (with both franchisees and third-party partners), net of the cost of redemptions. For the three months ended March 31, 2024 and 2023, the loyalty net revenues, inclusive of adjustments to the estimated redemption rates, were $ 19.5 million and $ 15.8 million, respectively. As presented in Note 11, the Corporate & Other segment revenue amounts were $ 35.1 million and $ 26.1 million for the three months ended March 31, 2024 and 2023, respectively, which are presented in other revenues and owned hotels revenues in the consolidated statements of income. The remaining revenues relate to the Hotel Franchising & Management reportable segment. Royalty, licensing and management fees and other revenues from franchised and managed properties are presented net of intersegment revenues of $ 2.5 million and $ 2.3 million for the three months ended March 31, 2024 and 2023, respectively. 3. Receivables and Allowance for Credit Losses Notes Receivable The Company has provided financing in the form of notes receivable loans to franchisees in order to support the development of hotel properties in strategic markets. The Company's credit quality indicator is the level of security in the note receivable. The following table summarizes the composition of the notes receivable balances by credit quality indicator and the allowance for credit losses: (in thousands) March 31, 2024 December 31, 2023 Senior $ 87,055 $ 85,919 Subordinated 16,339 17,004 Unsecured 4,610 5,359 Total notes receivable $ 108,004 $ 108,282 Less: allowance for credit losses 8,656 8,616 Total notes receivable, net of allowance for credit losses $ 99,348 $ 99,666 Current portion, net of allowance for credit losses $ 22,012 $ 20,766 Long-term portion, net of allowance for credit losses $ 77,336 $ 78,900 The following table summarizes the amortized cost basis of the notes receivable by the year of origination and credit quality indicator: (in thousands) 2024 2023 2022 2021 2020 Prior Total Senior $ 945 $ — $ — $ — $ — $ 86,110 $ 87,055 Subordinated — 3,497 — — — 12,842 16,339 Unsecured — — 194 1,291 856 2,269 4,610 Total notes receivable $ 945 $ 3,497 $ 194 $ 1,291 $ 856 $ 101,221 $ 108,004 The following table summarizes the activity related to the Company’s notes receivable allowance for credit losses: (in thousands) March 31, 2024 December 31, 2023 Beginning balance $ 8,616 $ 10,172 Provision for credit losses 690 763 Recoveries ( 650 ) ( 2,319 ) Ending balance $ 8,656 $ 8,616 As of March 31, 2024 and December 31, 2023, two and one note receivable loans, respectively, with senior credit quality indicators met the definition of collateral-dependent and are collateralized by the membership interests in the borrowing entities and either the associated land parcel or the operating hotel. The Company used a discounted cash flow income approach or a market approach using quoted market prices to value the underlying collateral. The Company reviewed the borrower's financial statements, economic trends, industry projections for the market, and comparable sales capitalization rates, which represent significant inputs to the cash flow projections. These nonrecurring fair value measurements are classified as Level 3 in the fair value measurement hierarchy because they are unobservable inputs which are significant to the overall fair value. Based on the Company's analysis, the fair value of the collateral secures substantially all of the carrying value of the respective note receivable loan. The allowance for credit losses attributable to the collateral-dependent note receivable loans was $ 3.2 million and $ 2.2 million as of March 31, 2024 and December 31, 2023, respectively. 9 Table of Contents During the three months ended March 31, 2024 and during the year ended December 31, 2023, the recoveries were primarily associated with cash collections pursuant to a settlement agreement with a borrower. The following table summarizes the past due balances by credit quality indicator of the notes receivable: (in thousands) 1- 30 days Past Due 31-89 days Past Due > 90 days Past Due Total Past Due Current Total Notes Receivable As of March 31, 2024 Senior $ — $ — $ 15,200 $ 15,200 $ 71,855 $ 87,055 Subordinated — — 2,936 2,936 13,403 16,339 Unsecured — — 400 400 4,210 4,610 $ — $ — $ 18,536 $ 18,536 $ 89,468 $ 108,004 As of December 31, 2023 Senior $ — $ — $ 15,200 $ 15,200 $ 70,719 $ 85,919 Subordinated — 2,936 — 2,936 14,068 17,004 Unsecured — — 400 400 4,959 5,359 $ — $ 2,936 $ 15,600 $ 18,536 $ 89,746 $ 108,282 The amortized cost basis of the notes receivable in a non-accrual status was $ 31.1 million and $ 15.9 million as of March 31, 2024 and December 31, 2023, respectively. Variable Interest through Notes Receivable The Company has issued notes receivable loans to certain entities that have created variable interests in the associated borrowers totaling $ 94.8 million and $ 95.1 million as of March 31, 2024 and December 31, 2023, respectively. The Company has determined that it is not the primary beneficiary of these variable interest entities ("VIEs"). For collateral-dependent loans, the Company has no exposure to the borrowing VIE beyond the respective note receivable and the limited commitments which are addressed in Note 12. Accounts Receivable Accounts receivable consists primarily of franchise and related fees due from the hotel franchisees and are recorded at the invoiced amount. During the three months ended March 31, 2024, the Company recognized provisions for credit losses on accounts receivable of $ 1.1 million in selling, general and administrative expenses, and $ 1.6 million in other expenses from franchised and managed properties, in the consolidated statements of income. During the three months ended March 31, 2023, the Company recognized provisions for credit losses on accounts receivable of $ 1.8 million in selling, general and administrative expenses, and $ 2.1 million in other expenses from franchised and managed properties, in the consolidated statements of income. During the three months ended March 31, 2024 and 2023, the Company recorded write-offs, net of recoveries, through the accounts receivable allowance for credit losses of $ 1.5 million and $ 2.8 million, respectively. 4. Investments in Affiliates The Company has equity method investments in affiliates primarily 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. As of March 31, 2024 and December 31, 2023, the Company had total investments in affiliates in the consolidated balance sheets of $ 78.8 million and $ 70.6 million, respectively, which included investments in affiliates that represent VIEs of $ 67.8 million and $ 59.4 million, respectively. The Company has determined that it is not the primary beneficiary of any of these VIEs, however the Company does exercise significant influence through its equity ownership and as a result, the investments in these affiliates are accounted for under the equity method of accounting. During the three months ended March 31, 2024 and 2023, the Company recognized losses totaling $ 1.2 million and $ 1.4 million, respectively, from these investments that represent VIEs. The Company's maximum exposure to losses related to its investments in the VIEs is limited to the total of its respective equity investment as well as certain limited payment guaranties, which are described in Note 12 to these consolidated financial statements. During the three months ended March 31, 2024 and 2023, t he Company recognized no impairment charges related to its equity method investments. 10 Table of Contents 5. Debt Debt consisted of the following: March 31, 2024 December 31, 2023 (in thousands) $ 500 million unsecured term loan due 2024 ("2023 Term Loan") with an effective interest rate of 6.79 %, less a discount and deferred issuance costs of $ 0.5 million and $ 0.7 million at March 31, 2024 and December 31, 2023, respectively (1) $ 499,471 $ 499,268 $ 450 million senior unsecured notes due 2031 ("2020 Senior Notes") with an effective interest rate of 3.86 %, less a discount and deferred issuance costs of $ 4.2 million and $ 4.3 million at March 31, 2024 and December 31, 2023, respectively 445,842 445,690 $ 400 million senior unsecured notes due 2029 ("2019 Senior Notes") with an effective interest rate of 3.88 %, less a discount and deferred issuance costs of $ 3.4 million and $ 3.6 million at March 31, 2024 and December 31, 2023, respectively 396,590 396,440 $ 850 million senior unsecured revolving credit facility with an effective interest rate of 6.48 %, less deferred issuance costs of $ 1.7 million and $ 1.9 million at March 31, 2024 and December 31, 2023, respectively 353,298 226,621 Total debt $ 1,695,201 $ 1,568,019 Less: current portion (1) 499,471 499,268 Long-term debt $ 1,195,730 $ 1,068,751 (1) The 2023 Term Loan has a maturity date of December 16, 2024. The maturity date may be extended for a one-year term at the Company's option, subject to the consent of the lenders and certain customary conditions. Refer to Note 12 and the Liquidity and Capital Resources section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information. 6. Accumulated Other Comprehensive Loss The changes in accumulated other comprehensive loss, net of tax, for the three months ended March 31, 2024 and 2023 were as follows: (in thousands) Balance as of December 31, 2023 $ ( 5,671 ) Other comprehensive income before reclassification 454 Balance as of March 31, 2024 $ ( 5,217 ) (in thousands) Balance as of December 31, 2022 $ ( 5,211 ) Other comprehensive income before reclassification 394 Balance as of March 31, 2023 $ ( 4,817 ) Other comprehensive income, net of tax, for both the three months ended March 31, 2024 and 2023 relates entirely to foreign currency items, and there were no amounts reclassified from accumulated other comprehensive loss during either period. 7. Fair Value Measurements The Company estimates the fair value of its financial instruments utilizing a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The following summarizes the three levels of inputs, as well as the assets that the Company values using those levels of inputs on a recurring basis. Level 1 - Quoted prices in active markets for identical assets and liabilities. The Company’s Level 1 assets consist of equity securities and mutual funds held in the Company's Deferred Compensation Plan. Level 2 - Observable inputs, other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable. The Company’s Level 2 assets consist of money market funds held in the Company's Deferred Compensation Plan. Level 3 - Unobservable inputs, supported by little or no market data available, where the reporting entity is required to develop its own assumptions to determine the fair value of the instrument. The Company does not currently have any assets recorded at fair value on a recurring basis whose fair value was determined using Level 3 inputs and there were no transfers of Level 3 assets during the three months ended March 31, 2024 and during the year ended December 31, 2023. T he Company recognized the following assets at fair value on a recurring basis in the consolidated balance sheets: Fair Value Measurements at Reporting Date Using (in thousands) Total Level 1 Level 2 Level 3 As of March 31, 2024 Equity securities $ 109,861 $ 109,861 $ — $ — Mutual funds (1) 40,413 40,413 — — Money market funds (1) 4,653 — 4,653 — Total $ 154,927 $ 150,274 $ 4,653 $ — As of December 31, 2023 Equity securities $ 116,374 $ 116,374 $ — $ — Mutual funds (1) 36,810 36,810 — — Money market funds (1) 4,767 — 4,767 — Total $ 157,951 $ 153,184 $ 4,767 $ — (1) The current assets at fair value noted above are presented in prepaid expenses and other current assets in the consolidated balance sheets. The long-term assets at fair value noted above are presented in investments for employee benefit plans, at fair value in the consolidated balance sheets. Investments in Equity Securities The following table is a summary of the unrealized gains and losses of the investments in equity securities: As of March 31, 2024 As of December 31, 2023 (in thousands) Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Equity securities $ 111,190 $ — $ ( 1,329 ) $ 109,861 $ 112,420 $ 3,954 $ — $ 116,374 Other Financial Instruments Disclosure The Company believes that the fair values of its current assets and current liabilities approximate their reported carrying amounts due to the short-term nature of these items. In addition, the interest rate on the senior unsecured revolving credit facility and the 2023 Term Loan adjusts frequently based on current market interest rates; therefore, the Company believes the carrying amount approximates the fair value. The fair values of the Company's senior unsecured notes are classified as Level 2 because the significant inputs are observable in an active market. Refer to Note 5 for additional information on debt. As of March 31, 2024 and December 31, 2023, the carrying amounts and the fair values were as follows: March 31, 2024 December 31, 2023 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value 2020 Senior Notes $ 445,842 $ 395,127 $ 445,690 $ 389,241 2019 Senior Notes $ 396,590 $ 358,660 $ 396,440 $ 355,068 The fair value estimates are made at a specific point in time, are subjective in nature, and involve uncertainties and matters of significant judgment. The settlement of such fair value amounts may not be possible or a prudent management decision. 8. Income Taxes The Company's effective income tax rates were 22.9 % and 21.7 % for the three months ended March 31, 2024 and 2023, respectively. The effective income tax rates were higher than the U.S. federal income tax rate of 21% primarily due to the impact of state income taxes. 11 Table of Contents 9. Share-Based Compensation The components of the Company’s share-based compensation expense were as follows: Three Months Ended March 31, (in thousands) 2024 2023 Stock options $ 1,346 $ 1,388 Restricted stock 3,477 3,699 Performance vested restricted stock units 4,271 4,684 Total share-based compensation expense $ 9,094 $ 9,771 A summary of the share-based award activity during the three months ended March 31, 2024 is presented below: Stock Options Restricted Stock Performance Vested Restricted Stock Units Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Outstanding as of January 1, 2024 943,641 $ 102.90 361,668 $ 136.05 458,495 $ 136.14 Granted 78,988 111.94 49,333 111.94 143,312 111.94 Performance-based leveraging (1) — — — — — — Exercised/vested ( 87,240 ) 71.74 ( 37,307 ) 105.52 ( 146,675 ) 107.54 Expired — — — — — — Forfeited ( 440 ) 123.71 ( 2,433 ) 119.50 ( 10,940 ) 115.62 Outstanding as of March 31, 2024 934,949 $ 106.56 6.2 years 371,261 $ 135.99 444,192 $ 138.29 Options exercisable as of March 31, 2024 639,175 $ 99.47 5.2 years (1) During the three months ended March 31, 2024, there were no revisions to the outstanding PVRSUs as a result of a change in the Company's targeted performance conditions. The fair value of the restricted stock and the PVRSUs with performance conditions that were granted during the three months ended March 31, 2024 was equal to the market price of the Company’s common stock on the date of the grant. The fair value of the PVRSUs with market conditions that are based on the Company’s total shareholder return relative to a predetermined peer group was estimated using a Monte Carlo simulation method as of the date of the grant. The requisite service periods for the restricted stock and the PVRSUs was between 9 months and 48 months. The PVRSUs have vesting ranges generally between 0 % and 230 % of the initial units granted. The stock options granted by the Company had an exercise price that is equal to the market price of the Company's common stock on the date of grant. The fair value of the stock options granted during the three months ended March 31, 2024 was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions: Risk-free interest rate 4.27 % Expected volatility 31.34 % Expected life of the stock option 6 years Dividend yield 1.03 % Requisite service period 4 years Contractual life 10 years Weighted average fair value of the stock options granted (per stock option) $ 38.85 10. Earnings Per Share The Company’s shares of restricted stock contain rights to receive nonforfeitable dividends and thus are participating securities that require the computation of basic earnings per share using the two-class method. The shares of restricted stock are both potential shares of common stock and participating securities so the Company calculates diluted earnings per share by using the more dilutive of the treasury stock method or the two-class method. The calculation of earnings per share for the net income available to common shareholders excludes the distribution of dividends and the undistributed earnings attributable to the participating securities from the numerator. The diluted earnings per share includes stock options, PVRSUs, and RSUs in the calculation of the weighted average shares of common stock outstanding. 12 Table of Contents The computation of basic and diluted earnings per share was as follows: Three Months Ended March 31, (in thousands, except per share amounts) 2024 2023 Numerator: Net income $ 31,009 $ 52,820 Income allocated to participating securities ( 158 ) ( 272 ) Net income available to common shareholders $ 30,851 $ 52,548 Denominator: Weighted average shares of common stock outstanding – basic 49,302 51,269 Basic earnings per share $ 0.63 $ 1.02 Numerator: Net income $ 31,009 $ 52,820 Income allocated to participating securities ( 158 ) ( 272 ) Net income available to common shareholders $ 30,851 $ 52,548 Denominator: Weighted average shares of common stock outstanding – basic 49,302 51,269 Dilutive effect of stock options, PVRSUs, and RSUs 338 445 Weighted average shares of common stock outstanding – diluted 49,640 51,714 Diluted earnings per share $ 0.62 $ 1.02 The following securities have been excluded from the calculation of diluted weighted average shares of common stock outstanding because the inclusion of these securities would have an anti-dilutive effect: Three Months Ended March 31, (in thousands) 2024 2023 Stock options 231 240 PVRSUs 49 — 11. Reportable Segments The Hotel Franchising & Management reportable segment includes the Company's hotel franchising operations, which consists of its 22 brands and brand extensions and the hotel management operations of 13 hotels (inclusive of four owned hotels). The 22 brands and brand extensions and hotel management operations are aggregated together within this reportable segment because they have similar economic characteristics, types of customers, distribution channels, and regulatory business environments. The revenues from the hotel franchising and management business include royalty fees, initial franchise fees and relicensing fees, cost reimbursement revenues, platform and procurement services fees revenue, base and incentive management fees, and other hotel franchising and management-related revenue. The Company provides certain services under its franchise and management agreements which result in direct and indirect reimbursements. The cost reimbursement revenues received from the franchisees are included in Hotel Franchising & Management revenues and are offset by the related expenses in order to calculate Hotel Franchising & Management operating income. The equity in the earnings or losses from the hotel franchising-related investment in affiliates is allocated to the Hotel Franchising & Management reportable segment. The Company evaluates its Hotel Franchising & Management reportable segment based primarily on the results of the segment without allocating corporate expenses, indirect general and administrative expenses, interest expense, interest income, and other gains and losses, all of which are included in the Corporate & Other column in the tables presented below. The Corporate & Other column also reflects the operations of the Company's owned hotels. Intersegment Eliminations to revenues is the elimination of Hotel Franchising & Management revenue which includes royalty fees, management and cost reimbursement fees charged to our owned hotels against the franchise and management fee expense that is recognized by our owned hotels in Corporate & Other operating income (loss). 13 Table of Contents Our President and Chief Executive Officer, who is our chief operating decision maker, does not use assets by operating segment when assessing the performance or when making operating segment resource allocation decisions and therefore, assets by segment are not disclosed below. The following table presents the financial information for the Company's segments: Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 (in thousands) Hotel Franchising & Management Corporate & Other Intersegment Eliminations Consolidated Hotel Franchising & Management Corporate & Other Intersegment Eliminations Consolidated Revenues $ 299,359 $ 35,137 $ ( 2,547 ) $ 331,949 $ 309,047 $ 26,064 $ ( 2,319 ) $ 332,792 Operating income (loss) $ 94,848 $ ( 34,699 ) $ — $ 60,149 $ 105,491 $ ( 27,640 ) $ — $ 77,851 Income (loss) before income taxes $ 94,693 $ ( 54,485 ) $ — $ 40,208 $ 105,428 $ ( 37,933 ) $ — $ 67,495 12. Commitments and Contingencies The Company is not a party to any litigation other than litigation in the ordinary course of business. The Company's management and legal counsel do not expect that the ultimate outcome of any of its current legal proceedings, individually or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations, or cash flows. Contingencies The Company entered into various limited payment guaranties with regards to the Company’s VIEs in order to support their efforts to develop and own hotels that are franchised under the Company’s brands. Under these limited payment guaranties, the Company has agreed to guarantee a portion of the outstanding debt until certain conditions are met, such as (a) the loan matures, (b) certain debt covenants are achieved, (c) the maximum amount guaranteed by the Company is paid in full, or (d) the Company, through its affiliates, ceases to be a member of the VIE. As of March 31, 2024, the maximum unrecorded exposure of the principal associated with these limited payment guaranties is $ 8.8 million, plus unpaid expenses and accrued but unpaid interest. The Company believes the likelihood of having to perform under these guaranties is remote. In the event of performance, the Company has recourse for certain of the guaranties in the form of partial guaranties from third parties. Commitments The Company has the following outstanding commitments as of March 31, 2024: • As part of the acquisition of Radisson Hotels Americas in August 2022, the Company entered into a long-term management arrangement, with an expiration date of July 31, 2031, to manage eight hotels owned by a third-party. As of March 31, 2024, the Company managed seven hotels pursuant to the long-term management arrangement. In conjunction with the management arrangement, the Company entered into a guarantee with the third-party to fund any shortfalls in the payment of the third-party owner’s priority that is stipulated in the management agreement. The maximum guarantee under the agreement is $ 22 million. The Company believes the future performance of the hotels is expected to be sufficient on both an annual basis and over the duration of the agreement. Accordingly, no liability was recognized as of March 31, 2024 in the consolidated balance sheets. • The Company strategically deploys capital in the form of franchise agreement acquisition cost payments across our brands to incentivize franchise development. These payments are typically made at the commencement of construction or the hotel's opening, in accordance with agreed upon provisions in the individual franchise agreements. The timing and the amount of the franchise agreement acquisition cost payments 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. • The Company committed to provide financing in the form of loans or credit facilities to franchisees for Choice brand development efforts. As of March 31, 2024, the Company had remaining commitments of up to $ 9.0 million, if certain conditions are met. • The Company’s franchise agreements require the payment of franchise fees, which include marketing and reservation system fees. In accordance with the terms of our franchise agreements, the Company is obligated to use the marketing and reservation system revenues it collects from the current franchisees to provide marketing and reservation services that are appropriate to support the operation of the overall system. To the extent the revenues collected exceed the expenditures incurred, the Company has a commitment to the franchisee system to make expenditures in future years. 14 Table of Contents Conversely, to the extent the expenditures incurred exceed the revenues collected, the Company has the contractual enforceable right to assess and collect such amounts from the franchisees. In the ordinary course of business, the Company enters into numerous agreements that contain standard indemnities whereby the Company indemnifies another party for breaches of representations and warranties. Such indemnifications are granted under various agreements, including those governing (i) purchases or sales of assets or businesses, (ii) leases of real estate, (iii) licensing of trademarks, (iv) access to credit facilities, (v) issuances of debt or equity securities, and (vi) certain operating agreements. The indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords in lease contracts, (iii) franchisees in licensing agreements, (iv) financial institutions in credit facility arrangements, (v) underwriters in debt or equity security issuances, and (vi) parties under certain operating agreements. In addition, these parties are also generally indemnified against any third-party claim resulting from the transaction that is contemplated in the underlying agreement. While some of these indemnities extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of the future payments that the Company could be required to make under these indemnities, nor is the Company able to develop an estimate of the maximum potential amount of the future payments that could be made under these indemnifications as the triggering events are not subject to predictability. With respect to certain of the aforementioned indemnities, such as the indemnifications of the landlords against third-party claims for the use of real estate property leased by the Company, the Company maintains insurance coverage that mitigates any potential liability. 13. Transactions with Unconsolidated Affiliates The Company has extended loans to various unconsolidated affiliates or members of our unconsolidated affiliates. The Company has a total principal balance on these loans of $ 66.8 million and $ 64.5 million as of March 31, 2024 and December 31, 2023, respectively. These loans mature at various dates and bear interest at fixed and variable rates. The Company has management fee arrangements with certain of its unconsolidated affiliates. The fees earned and the payroll costs reimbursed under these arrangements totaled $ 1.6 million and $ 0.7 million for the three months ended March 31, 2024 and 2023, respectively. The Company has entered into franchise agreements with certain of its unconsolidated affiliates. Pursuant to these franchise agreements, the Company recognized royalty fees and marketing and reservation system fees of approximately $ 6.3 million and $ 5.8 million for the three months ended March 31, 2024 and 2023, respectively. The Company has $ 6.7 million and $ 4.9 million of gross accounts receivables in the consolidated balance sheets from these unconsolidated affiliates as of March 31, 2024 and December 31, 2023, respectively. 15 Table of Contents