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Choice Hotels Reports Third Quarter 2009 Adjusted Diluted EPS of $0.56, Domestic Unit Growth of 4.9% |
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Domestic unit and room growth increased 4.9 percent and 4.8 percent, respectively, from September 30, 2008. |
Choice Hotels International, Inc., (NYSE:CHH) today reported the following highlights for third quarter 2009:
• Adjusted diluted earnings per share ("EPS") for third quarter 2009 were $0.56, compared to $0.57 for the same period of the prior year. Diluted EPS were $0.55 for third quarter 2009 compared to $0.57 for third quarter 2008. Adjusted diluted EPS for third quarter 2009 exclude certain special items, as described below, totaling $0.01.
• Excluding special items, adjusted earnings before interest, taxes and depreciation ("EBITDA") were $51.7 million for the three months ended September 30, 2009, compared to $64.4 million for the same period of 2008. Operating income for the three months ended September 30, 2009 was $48.1 million compared to $61.9 million for the same period of 2008.
• Adjusted selling, general and administrative ("SG&A") costs for the third quarter of 2009 totaled $23.0 million which represented an 8% decline from the same period of the prior year. Adjusted SG&A costs exclude special items totaling $1.5 million and $0.5 million for the three months ended September 30, 2009 and 2008, respectively.
• Domestic unit and room growth increased 4.9 percent and 4.8 percent, respectively, from September 30, 2008.
• Domestic system-wide revenue per available room ("RevPAR") declined 15.9% for the third quarter of 2009 compared to the same period of 2008.
• The effective royalty rate increased 4 basis points to 4.23% for the three months ended September 30, 2009 compared to 4.19% for the same period of the prior year.
• Franchising revenues declined 16% from $89.0 million for the three months ended September 30, 2008 to $74.6 million for the same period of 2009. Total revenues for the three months ended September 30, 2009 declined 13% compared to the same period of 2008.
• The company executed 79 new domestic hotel franchise contracts for the three months ended September 30, 2009, a decline of 51% compared to the 160 contracts executed in the same period of the prior year.
• The number of domestic hotels under construction, awaiting conversion or approved for development declined 22% from September 30, 2008 to 744 hotels representing 59,121 rooms; the worldwide pipeline declined 20% from September 30, 2008 to 860 hotels representing 68,541 rooms.
• Interest and other investment income for the three months ended September 30, 2009 improved by approximately $5.4 million from the same period of the prior year primarily due to the appreciation in the fair value of investments held in the Company's non-qualified employee benefit plans during the current period compared to a decline in the fair value of these investments in the prior year.
"Our well-known diversified brands and our unrelenting focus on our owners' property-level profitability and return on investment has fueled our continued unit and room growth in the face of a continued difficult economic and lodging industry environment," said Stephen P. Joyce, president and chief executive officer. "Recently, we announced that we reached the 6,000 property milestone and we remain confident that the strength of brands will allow us to continue to attract hotels into our global distribution system."
Special Items
During the three and nine months ended September 30, 2009, the company recorded employee termination benefits of approximately $1.5 million and $2.3 million, respectively. In addition, during the nine months ended September 30, 2009, the company recorded a $1.5 million charge related to the sublease of a portion of its office space. These special items represent diluted EPS of $0.01 and $0.03 for the three and nine months ended September 30, 2009, respectively.
During the three and nine months ended September 30, 2008, the company recorded employee termination benefits of approximately $0.5 million and $0.8 million, respectively. Furthermore, the company incurred $6.1 million of benefit costs during the nine months ended September 30, 2008 resulting from the acceleration of the company's management succession plan. These special items represented diluted EPS of $0.07 for the nine months ended September 30, 2008.
Outlook for 2009
The uncertainty around the current economic environment and credit market conditions and their impact on travel patterns and hotel development activities makes it difficult to predict future results, particularly as they relate to underlying assumptions for RevPAR, new hotel franchise and relicensing sales and interest and investment income and expense.
The company's fourth quarter 2009 adjusted diluted EPS is expected to be $0.40. The company expects full-year 2009 adjusted diluted EPS of $1.68. Adjusted EBITDA for full-year 2009 are expected to be approximately $164.5 million. These estimates include the following assumptions:
• The company expects net domestic unit growth of approximately 4.0% in 2009;
• RevPAR is expected to decline approximately 12% for the fourth quarter of 2009 and decline between 13% and 14% for full-year 2009;
• The effective royalty rate is expected to increase 5 basis points for full-year 2009;
• All figures assume the existing share count and an effective tax rate of 36.3% and 36.0% for the fourth quarter and full-year 2009, respectively;
• Adjusted diluted EPS for fourth quarter 2009 exclude approximately $0.01 diluted EPS related to employee termination benefits.
• Adjusted EBITDA and adjusted diluted EPS for full year 2009 exclude $4.8 million ($3.0 million after tax and approximately $0.05 diluted EPS) of operating expenses related to employee termination benefits and a loss on the sublease of office space.
Use of Free Cash Flow
The company has historically used its free cash flow (cash flow from operations less capital expenditures) to return value to shareholders, primarily through share repurchases and dividends.
For the nine months ended September 30, 2009 the company paid $33.3 million of cash dividends to shareholders. The current quarterly dividend rate per common share is $0.185, subject to declaration by our board of directors.
During the three months ended September 30, 2009, the company purchased approximately 0.7 million shares of its common stock at an average price of $27.37 for a total cost of $20.5 million under the share repurchase program. During the nine months ended September 30, 2009, the company purchased approximately 2.1 million shares of its common stock at an average price of $26.90 for a total cost of $55.3 million and has authorization to purchase up to an additional 3.9 million shares under this program. We expect to continue making repurchases in the open market and through privately negotiated transactions, subject to market and other conditions. No minimum number of share repurchases has been fixed. Since Choice announced its stock repurchase program on June 25, 1998, the company has repurchased 42.8 million shares of its common stock for a total cost of $1 billion through September 30, 2009. Considering the effect of a two-for-one stock split in October 2005, the company has repurchased 75.8 million shares under the share repurchase program at an average price of $13.26 per share.
Our Board has authorized us to enter into programs which permit us to offer financing, investment and guaranty support to qualified franchisees to incent multi-unit franchise development in top markets. We expect to opportunistically deploy this capital over the next several years. Our annual investment in these programs is dependent on market and other conditions. Notwithstanding these programs, the company expects to continue to return value to its shareholders through a combination of share repurchases and dividends, subject to market and other conditions.
Impact of the Adoption of New Accounting Pronouncements on Earnings Per Share
In June 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position Emerging Issues Task Force No. 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 clarified that all share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders. Therefore, awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied rather than the treasury stock method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. In addition, once effective, all prior period earnings per share data presented must be adjusted retrospectively to conform to the provisions of FSP EITF 03-6-1.
The Company's outstanding unvested restricted stock awards contain rights to non-forfeitable dividends and as a result, the Company applied this guidance in the first quarter of 2009. The two-class method of calculating earnings per share is more dilutive to both basic and diluted shares outstanding than the previously utilized treasury stock method. In accordance with FSP EITF 03-6-1, the Company has retrospectively adjusted its basic and diluted shares outstanding for the three and nine months ended September 30, 2008 under the two-class method which resulted in a reduction of the Company's basic and diluted earnings per share for the nine months ended September 30, 2008 from $1.31 to $1.30 and $1.30 to $1.29 per share, respectively. In addition, basic earnings per share for the three months ended September 30, 2008 has been revised from $0.58 to $0.57 per share.
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