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☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, Par Value $0.01 per share

CHH

New York Stock Exchange

_____________________________________________  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒     No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐ No  ☒

As of April 30, 2024, the number of shares outstanding of Choice Hotels International, Inc.'s common stock was 48,162,146.

 

 

ITEM 1.FINANCIAL STATEMENTS

        

									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

        

			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

(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 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.

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.

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.

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:

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.

The following table presents the Company's revenues by over time and point in time recognition:

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.

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.

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.

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 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.

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, the Company recognized no impairment charges related to its equity method investments.

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.

The changes in accumulated other comprehensive loss, net of tax, for the three months ended March 31, 2024 and 2023 were as follows:

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.

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.

The 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.

The following table is a summary of the unrealized gains and losses of the investments in equity securities:

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.

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.

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:

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.

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:

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).

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

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.

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.

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.

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.

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.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the consolidated financial condition and the results of operations of Choice Hotels International, Inc. and its subsidiaries (collectively, "Choice" or the "Company", "we", "us", or "our") contained in this report. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes.

We are primarily a hotel franchisor operating in 50 states, the District of Columbia, and 45 countries and territories. As of March 31, 2024, we had 7,488 hotels with 630,128 rooms open and operating, and 1,012 hotels with 115,481 rooms under construction, awaiting conversion or approved for development, or committed to future franchise development on outstanding master development agreements (collectively, "pipeline") in our global system. Our brand names include Radisson Blu®, Park Plaza®, Cambria® Hotels, Ascend Hotel Collection®, Radisson RED®, Radisson Individuals®, Radisson®, Radisson Collection®, Clarion®, Clarion Pointe™, Comfort Inn®, Comfort Suites®, Country Inn & Suites® by Radisson, Radisson Inn & SuitesSM, Sleep Inn®, Quality®, Park Inn by Radisson®, Everhome Suites®, WoodSpring Suites®, MainStay Suites®, Suburban Studios™, Econo Lodge®, and Rodeway Inn®.

The hotel franchising business represents the Company's primary operations. The Company's domestic operations are conducted through direct franchising relationships, the ownership of ten open and operating hotels, and the management of 13 hotels (inclusive of four owned hotels), while its international franchise operations are conducted through a combination of direct franchising and master franchising relationships. Master franchising relationships are governed by master franchising agreements which generally provide the master franchisee with the right to use our brands and sub-license the use of our brands in a specific geographic region, usually for a fee. As a result of our master franchise relationships and international market conditions, our revenues are primarily concentrated in the United States. Therefore, our description of our business is primarily focused on the domestic operations, which encompasses the United States.

Our Company generates revenues, income, and cash flows primarily from our hotel franchising operations. Revenues are also generated from partnerships with qualified vendors and travel partners that provide value-added solutions to our platform of guests and hotels, hotel ownership, and other ancillary sources. Historically, the hotel industry has been seasonal in nature. For most hotels, demand is typically lower in November through February than during the remainder of the year. Our principal source of revenue is franchise fees, which is based on the gross room revenues or the number of rooms at our franchised properties. The Company’s franchise and managed fees, as well as its owned hotels' revenues, normally reflect the industry’s seasonality and historically have been lower in the first and fourth quarters than in the second and third quarters of the year.

Because our primary focus is hotel franchising, we benefit from the economies of scale inherent in the franchising business. The fee and cost structure of our franchising business provides opportunities to improve our operating results by increasing the number of franchised hotel rooms and the effective royalty rates in our franchise contracts resulting in increased initial franchise fees, ongoing royalty and licensing fees, and platform and procurement services fees. In addition, our operating results can also be improved through our company-wide efforts related to improving property-level performance and expanding the number of partnerships with travel-related and other companies with products and services that appeal to our guests.

The primary factors that affect the Company’s results are: the number and relative mix of hotel rooms in the various hotel lodging price categories, growth in the number of hotel rooms owned and under franchise, occupancy and room rates achieved by the hotels in our system, the effective royalty rate achieved in our franchise agreements, the level of franchise sales and relicensing activity, the number of qualified vendor arrangements and partnerships and the level of engagement with these partners by our franchisees and guests, and our ability to manage costs. The number of rooms in our hotel system and the occupancy and room rates at those hotel properties significantly affect the Company’s results because our fees are based upon room revenues or the number of rooms at owned and franchised hotels. The key industry standard for measuring hotel-operating performance is revenue per available room ("RevPAR"), which is calculated by multiplying the percentage of occupied rooms by the average daily room rate ("ADR") realized. Our variable overhead costs associated with the franchise system growth of our established brands have historically been less than the incremental royalty fees generated from new franchises. Accordingly, over the long-term, the continued growth of our franchise business should enable us to realize the benefits from the operating leverage in place and improve our operating results.

We are required by our franchise agreements to use the marketing and reservation system fees we collect for system-wide marketing and reservation system activities. These expenditures, which include advertising costs and the 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 promote long-term growth in business delivery to our franchisees and increases the desirability of our brands to hotel owners and developers, which ultimately increases the franchise fees earned by the Company.

Additionally, the Company's management agreements include cost reimbursements, which is primarily related to payroll costs at the managed hotels where the Company is the employer.

Our Company articulates its mission as a commitment to our franchisees’ profitability by providing our franchisees with hotel franchises that strive to generate the highest return on investment of any hotel franchise. We have developed an operating system dedicated to our franchisees’ success that focuses on delivering guests to their hotels and reducing hotel operating costs.

We believe that executing on our strategic priorities creates value for our shareholders. Our Company focuses on the following strategic priorities:

Profitable Growth - Our success is dependent on improving the performance of our hotels, increasing the size of our system by selling additional hotel franchises with a focus on revenue-intense chain scales and markets, improving our effective royalty rate, expanding our qualified vendor and partnership platform programs and maintaining a disciplined cost structure. We attempt to improve our revenues and overall profitability by providing a variety of products and services designed to increase business delivery and/or reduce operating and development costs. These products and services include national marketing campaigns, a guest loyalty program, a central reservation system, property and yield management programs and systems, revenue management services, quality assurance standards, and qualified vendor relationships and partnerships with companies that provide products and services to our franchisees and guests. We believe that healthy brands, which deliver a compelling return on investment, will enable us to sell additional hotel franchises and raise royalty rates. We have multiple brands that meet the needs of many different types of guests, and can be developed at various price points and applied to both new and existing hotels. This ensures that we have brands suitable for creating growth in a variety of market conditions. Improving the performance of the hotels in our system, strategically growing the system through additional franchise sales, and improving franchise agreement pricing while maintaining a disciplined cost structure are the keys to profitable growth.

Maximizing Financial Returns and Creating Value for Shareholders - Our capital allocation decisions, including our capital structure and the uses of capital, are intended to maximize our return on invested capital and create value for our shareholders. Since our business has not historically required significant reinvestment of capital, we typically utilize cash in ways that management believes provides the greatest returns to our shareholders, which include acquisitions, share repurchases and dividends. Refer to the Liquidity and Capital Resources section in MD&A for more information regarding our capital returns to shareholders.

In addition to our hotel franchising business, we have also developed or acquired ten open and operating hotels. 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. 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 the growth of these brands. We do not anticipate owning hotels on a permanent basis and we expect to target dispositions to a franchisee encumbered with a long-term Choice franchise agreement in the future.

A key component of our strategy for owned hotels is to maximize revenues and manage costs. We strive to optimize revenues by focusing on revenue management, increasing guest loyalty, expanding brand awareness with targeted customer groupings, and providing superior guest service. Other than four owned hotels, we currently do not manage our owned hotels but utilize the services of third-party hotel management companies that provide their own employees. We manage costs by setting performance goals for our hotel management companies and optimizing distribution channels.

The Company also allocates capital to financing, investment and guaranty support to incentivize franchise development for certain brands in strategic markets. The timing and amount of these investments are subject to market and other conditions.

We believe our growth investments and strategic priorities, when properly implemented, will enhance our profitability, maximize our financial returns, and continue to generate value for our shareholders. The ultimate measure of our success will be reflected in the items below.

Results of Operations - Royalty, licensing and management fees, operating income, net income, and diluted earnings per share represent the key measures of our financial performance. These measures 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 the potential growth of the hotel franchise system as well as our variable overhead costs.

Our discussion of our results of operations excludes reimbursable franchise marketing and reservation system revenues and expenses and the management agreement cost reimbursements and expenses included in the Company's other revenues from franchised and managed properties and other expenses from franchised and managed properties.

The Company's franchise agreements require the payment of marketing and reservation system fees to be used by the Company for the expenses associated with providing franchise services such as national marketing, media advertising, and central reservation systems. The Company is obligated to expend the marketing and reservation system fees it collects from its franchisees in accordance with the franchise agreements. Furthermore, the franchisees are required to reimburse the Company for any deficits generated by these marketing and reservation system activities. Over time, the Company expects the cumulative revenues and expenses of reimbursable components to break even and, therefore, no income or loss will be generated from the reimbursable marketing and reservation system activities. Additionally, the Company's management agreements include cost reimbursements, which is primarily related to payroll costs at the managed hotels where the Company is the employer. As a result, the Company generally excludes the other revenues and other expenses from franchised and managed properties from the analysis of its operations.

Due to the seasonal nature of the Company’s hotel franchising and management business and the multi-year investments required to support franchise operations, quarterly and/or annual deficits may be generated. During the three months ended March 31, 2024, other expenses from franchised and managed properties exceeded other revenues from franchised and managed properties by $12.4 million. During the three months ended March 31, 2023, other revenues from franchised and managed properties exceeded other expenses from franchised and managed properties by $2.1 million.

Refer to the Operations Review section in MD&A for additional analysis of our results of operations.

Liquidity and Capital Resources - Historically, the Company has generated significant cash flows from operations. Since our business has not historically required significant reinvestment of capital, we typically utilize cash in ways that management believes provide the greatest returns to our shareholders, which include acquisitions, share repurchases, and dividends.

We believe the Company’s cash on hand, available borrowing capacity under the senior unsecured revolving credit facility, cash flows from operations, and access to additional capital in the debt markets is sufficient to meet the expected future operating, investing, and financing needs of the business. Refer to the Liquidity and Capital Resources section in MD&A for additional analysis.

Inflation - We believe that moderate increases in the rate of inflation will generally result in comparable or greater increases in hotel room rates. We continue to monitor future inflation trends along with the corresponding impacts to our business.

As previously disclosed, the Company publicly announced the expiration of the exchange offer to acquire all of the outstanding shares of Wyndham Hotels & Resorts, Inc. ("Wyndham") at a price of $90.00 per share, payable in a mix of cash and stock. The exchange offer expired on March 8, 2024. The Company instructed the exchange agent to return all tendered shares of Wyndham stock to the tendering stockholders. In addition, the Company announced the withdrawal of its nomination of director candidates for election at Wyndham's 2024 Annual Meeting of Stockholders.

The summarized financial results were as follows:

For the three months ended March 31, 2024, the Company recognized income before income taxes of $40.2 million, which is a $27.3 million decrease from the same period in the prior year. The decrease in income before income taxes is primarily due to a $17.7 million decrease in operating income and a $6.1 million increase in interest expense.

Operating income decreased $17.7 million primarily due to a $14.5 million decrease in the net activity generated from other revenues from franchised and managed properties and other expenses from franchised and managed properties and a $5.4 million increase in business combination, diligence and transition costs, partially offset by a $5.8 million increase in other revenues.

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

Domestic royalty fees decreased $5.2 million to $92.9 million for the three months ended March 31, 2024 from $98.2 million for the three months ended March 31, 2023. The decrease in domestic royalty fees is primarily due to a 5.9% domestic system-wide RevPAR decrease as a result of a 2.1% decrease in average daily rates and a 200 basis points decrease in occupancy during the current period, all of which was partially offset by a system-wide 4 basis points increase in the effective royalty rate from 4.99% for the three months ended March 31, 2023 to 5.03% for the three months ended March 31, 2024.

A summary of the operating performance for the Company's domestic franchised hotels, organized by chain scale, was as follows:

(1) Includes Ascend Hotel Collection, Cambria, Radisson, Radisson Blu, Radisson Individuals, and Radisson RED brands.

(2) Includes Clarion, Comfort Inn, Country Inn & Suites, Park Inn, Park Plaza, Quality, and Sleep Inn brands.

(3) Includes Everhome Suites, Mainstay Suites, Suburban Studios, and WoodSpring Suites brands.

(4) Includes Econo Lodge and Rodeway brands.

A summary of the domestic hotels and rooms by brand in our franchise system as of March 31, 2024 and 2023 was as follows: