CHH 12.31.2011 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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(Mark One)
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ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the year ended December 31, 2011
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-13393
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CHOICE HOTELS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE | | 52-1209792 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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10750 Columbia Pike, Silver Spring, Maryland | | 20901 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code (301) 592-5000
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Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Name of Each Exchange on Which Registered |
Common Stock, Par Value $0.01 per share | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
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Large accelerated filer x | | Accelerated filer o | | Smaller reporting company o | | Non-accelerated filer o |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No ý
The aggregate market value of common stock of Choice Hotels International, Inc. held by non-affiliates was $972,511,421 as of June 30, 2011 based upon a closing price of $33.36 per share.
The number of shares outstanding of Choice Hotels International, Inc.’s common stock at February 15, 2012 was 58,096,972.
DOCUMENTS INCORPORATED BY REFERENCE.
Certain portions of our definitive proxy statement, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the Annual Meeting of Shareholders to be held on April 30, 2012, are incorporated by reference under Part III.
CHOICE HOTELS INTERNATIONAL, INC.
Form 10-K
Table of Contents
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Part I | | | |
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| Item 3. | | |
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Part II | | | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
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| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
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Part III | | | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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Part IV | | | |
| Item 15. | | |
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PART I
Throughout this report, we refer to Choice Hotels International, Inc., together with its subsidiaries as “we”, “us” or “the Company”.
Forward-Looking Statements
Certain matters discussed in this report constitute forward-looking statements within the meaning of the federal securities law. Generally, our use of words such as “expect,” “estimate,” “believe,” “anticipate,” “will,” “forecast,” “plan,” “project,” “assume” or similar words of futurity identify statements that are forward-looking and that we intend to be included within the safe harbor protections provided by Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are based on management’s current beliefs, assumptions and expectations regarding future events, which in turn are based on information currently available to management. Such statements may relate to projections for the Company’s revenue, earnings, cash flows and other financial and operational measures, Company debt levels, payment of stock dividends, and future operations. We caution you not to place undue reliance on any forward-looking statements, which are made as of the date of this report. Forward-looking statements do not guarantee future performance and involve known and unknown risks, uncertainties and other factors.
Several factors could cause actual results, performance or achievements of the Company to differ materially from those expressed in or contemplated by the forward-looking statements. Such risks include, but are not limited to, changes to general, domestic and foreign economic conditions; operating risks common in the lodging and franchising industries; changes to the desirability of our brands as viewed by hotel operators and customers; changes to the terms or termination of our contracts with franchisees; our ability to keep pace with improvements in technology utilized for reservations systems and other operating systems; fluctuations in the supply and demand for hotel rooms; and our ability to effectively manage our indebtedness. These and other risk factors are discussed in detail in Item 1A “Risk Factors” of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public over the internet at the SEC’s web site at http://www.sec.gov. Our SEC filings are also available free of charge on our website at http://www.choicehotels.com as soon as reasonably practicable following the time that they are filed with or furnished to the SEC. You may also read and copy any document we file with the SEC at its public reference room located at 100 F Street, NE Washington DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on its public reference room.
We are one of the largest hotel franchisors in the world with 6,178 hotels open and 490 hotels under construction, awaiting conversion or approved for development as of December 31, 2011 representing 497,205 rooms open and 39,675 rooms under construction, awaiting conversion or approved for development in 49 states, the District of Columbia and over 35 countries and territories outside the United States. Choice franchises lodging properties under the following proprietary brand names: Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay Suites®, Suburban Extended Stay Hotel®, Cambria Suites® and Ascend Collection® (collectively, the “Choice brands”). We operate in a single reportable segment encompassing our franchising business.
The Company's domestic operations are conducted solely through direct franchising relationships while its international franchise operations are conducted through a combination of direct franchising and master franchising relationships. With a focus on hotel franchising instead of ownership, we benefit from the economies of scale inherent in the franchising business. The fee and cost structure of our business provides opportunities to improve operating results by increasing the number of franchised hotel rooms and effective royalty rates of our franchise contracts resulting in increased initial fee revenue, ongoing royalty fees and procurement services revenues. In addition to these revenues, we also collect marketing and reservation system fees to provide support activities for the franchise system. Our operating results can also be improved through our company-wide efforts related to improving property level performance. As a lodging franchisor, the Company currently has relatively low capital expenditure requirements.
The principal factors that affect the Company’s results are: the number and relative mix of franchised hotel rooms;
growth in the number of hotel rooms under franchise; occupancy and room rates achieved by the hotels under franchise; the effective royalty rate achieved; the level of franchise sales and relicensing activity; and our ability to manage costs. The number of rooms at franchised properties and occupancy and room rates at those properties significantly affect the Company’s results because our fees are based upon room revenues or the number of rooms at franchised hotels. The key industry standard for measuring hotel-operating performance is revenue per available room (“RevPAR”), which is calculated by multiplying the percentage of occupied rooms by the average daily room rate realized. Our variable overhead costs associated with franchise system growth have historically been less than incremental royalty fees generated from new franchises. Accordingly, continued growth of our franchise business should enable us to realize benefits from the operating leverage in place and improve operating results.
We are contractually required by our franchise agreements to use the marketing and reservation system fees we collect for system-wide support activities. These expenditures help to enhance awareness and increase consumer preference for our brands. Greater awareness and preference promotes long-term growth in business delivery to our franchisees, which ultimately increases franchise fees earned by the Company.
Our Company articulates its mission as a commitment to our franchisees’ profitability by providing them 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 our franchised hotels and reducing costs for our hotel owners.
Our capital allocation decisions, including capital structure and uses of capital, are intended to maximize our return on invested capital and create value for our shareholders. We believe our strong and predictable cash flows create a strong financial position that provides us a competitive advantage. Currently, our business does not require significant capital to operate and grow; therefore, we can maintain a capital structure that generates high financial returns and use our excess cash flow to provide returns to our shareholders. Historically, we have returned value to our shareholders in two primary ways: share repurchases and dividends. In 1998, we instituted a share repurchase program which has generated substantial value for our shareholders. Through December 31, 2011, we repurchased 44.8 million shares (including 33.0 million prior to the two-for-one stock split affected in October 2005) of common stock at a total cost of $1.1 billion since the program’s inception. Considering the effect of the two-for-one stock split, the Company has repurchased 77.8 million shares at an average price of $13.73 per share. At December 31, 2011, we had approximately 2.0 million shares remaining under the current stock repurchase authorization. Upon completion of the current authorization, our board of directors will evaluate the advisability of additional share repurchases. In 2011, we paid cash dividends totaling approximately $43.7 million and we presently expect to continue to pay dividends in the future, subject to future business performance, economic conditions, changes in income tax regulations and other factors. Based on our present dividend rate and outstanding share count, we expect that aggregate annual dividends for 2012 would be approximately $42.9 million.
Our board of directors has authorized us to enter into programs which permit us to offer investment, financing and guaranty support to qualified franchisees as well as acquire and resell real estate to incent franchise development in strategic markets for certain brands. Over the next several years, we expect to deploy capital opportunistically to these programs to promote growth of our emerging brands. The amount and timing of the investment in these programs will be 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 business performance, economic conditions, changes in income tax regulations and other factors.
Our direct lodging property real estate exposure is limited to activity in the United States and consists of three company-owned MainStay Suites hotels and five parcels of real estate that the Company has acquired or leased and intends to resell or lease to incent franchise development in strategic markets. In addition, our development activities that involve financing and guaranty support to hotel developers create exposure to the real estate markets.
The Lodging Industry(1)
Companies participating in the lodging industry primarily do so through a combination of one or more of the three primary lodging industry activities: ownership, franchising and management. A company’s relative reliance on each of these activities determines which drivers most influence its profitability.
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• | Ownership requires a substantial capital commitment and involves the most risk but offers high returns due to the owner’s ability to influence margins by driving RevPAR, managing operating expenses and financial leverage. The ownership model has a high fixed-cost structure that results in a high degree of operating leverage relative to RevPAR performance. As a result, profits escalate rapidly in a lodging up-cycle but erode quickly in a downturn as costs rarely decline as fast as revenue. Profits from an ownership model increase at a greater rate from RevPAR growth attributable to average daily rate (“ADR”) growth, than from occupancy gains since there are more incremental costs associated with higher guest volumes compared to higher pricing. |
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• | Franchisors license their brands to a hotel owner, giving the hotel owner the right to use the brand name, logo, operating practices, and reservations systems in exchange for a fee and an agreement to operate the hotel in accordance with the franchisor’s brand standards. Under a typical franchise agreement, the hotel owner pays the franchisor an initial fee, a percentage-of-revenue royalty fee and a marketing/reservation reimbursement. A franchisor’s revenues are dependent on the number of rooms in its system and the top-line performance of those hotels. Earnings drivers include RevPAR increases, unit growth and effective royalty rate improvement. Franchisors enjoy significant operating leverage in their business model since it costs little to add a new hotel franchise to an existing system. Franchisors normally benefit from higher industry supply growth, because unit growth usually outpaces lower RevPAR resulting from excess supply. As a result, franchisors benefit from both RevPAR growth and supply increases which aids in reducing the impact of lodging industry economic cycles. |
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• | Management companies operate hotels for owners that do not have the expertise and/or the desire to self-manage. These companies collect management fees predominately based on revenues earned and/or profits generated. Similar to franchising activities, the key drivers of revenue based management fees are RevPAR and unit growth and similar to ownership activities, profit based fees are driven by improved hotel margins and RevPAR growth. |
Similarly to other industries, lodging experiences both positive and negative operating cycles. Positive cycles are characterized as periods of sustained occupancy growth, increasing room rates and hotel development. These cycles usually continue until either the economy sustains a prolonged downturn, excess supply conditions exist or some external factor occurs such as war, terrorism or natural resource shortages. Negative cycles are characterized by hoteliers reducing room rates to stimulate occupancy and a reduction of hotel development. Industry recovery usually begins with an increase in occupancy followed by hoteliers increasing room rates. As demand begins to exceed room supply, occupancies and rates continue to improve. These factors result in increased hotel development.
Hotel room supply growth is cyclical as hotel construction responds to interest rates, construction and material supply conditions, capital availability and industry fundamentals. Historically, the industry has added hotel rooms to its inventory through new construction due largely to favorable lending environments that encouraged hotel development. Typically, hotel development continues during favorable lending environments until the increase in room supply outpaces demand. The excess supply eventually results in lower occupancies, which results in hoteliers reducing room rates to stimulate demand, and reduced hotel development. Over time, the slow growth in hotel supply results in increased occupancy rates and allows hotels to again raise room rates. The increase in occupancy and room rates serves as a catalyst for increased hotel development.
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(1) | Certain industry statistics included in this section, such as the number of hotel rooms, number of affiliated and non-affiliated rooms, US Lodging Industry Trends From 1997 – 2011, etc. were obtained from Smith Travel Research |
The following chart demonstrates these trends:
US Lodging Industry Trends—1997 - 2011
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Year | Occupancy Rates | | Average Daily Room Rates (ADR) | | Change in ADR Versus Prior Year | | Change in CPI Versus Prior Year | | Revenue Per Available Room (RevPAR) | | New Rooms Added (Gross) |
1997 | 64.5 | % | |
| $75.16 |
| | 6.1 | % | | 1.9 | % | |
| $48.50 |
| | 128,000 |
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1998 | 64.0 | % | |
| $78.62 |
| | 4.6 | % | | 2.3 | % | |
| $50.29 |
| | 143,000 |
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1999 | 63.3 | % | |
| $81.27 |
| | 3.4 | % | | 2.7 | % | |
| $51.44 |
| | 143,148 |
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2000 | 63.5 | % | |
| $85.24 |
| | 4.9 | % | | 3.4 | % | |
| $54.13 |
| | 121,476 |
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2001 | 60.1 | % | |
| $84.85 |
| | (0.5 | )% | | 2.9 | % | |
| $50.99 |
| | 101,279 |
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2002 | 59.2 | % | |
| $83.15 |
| | (2.0 | )% | | 1.6 | % | |
| $49.22 |
| | 86,366 |
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2003 | 59.1 | % | |
| $83.19 |
| | 0.1 | % | | 2.3 | % | |
| $49.20 |
| | 65,876 |
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2004 | 61.3 | % | |
| $86.41 |
| | 3.9 | % | | 2.7 | % | |
| $52.93 |
| | 55,245 |
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2005 | 63.1 | % | |
| $90.84 |
| | 5.1 | % | | 3.4 | % | |
| $57.34 |
| | 65,900 |
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2006 | 63.4 | % | |
| $97.31 |
| | 7.1 | % | | 3.2 | % | |
| $61.69 |
| | 73,308 |
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2007 | 63.1 | % | |
| $104.04 |
| | 6.9 | % | | 2.8 | % | |
| $65.61 |
| | 94,541 |
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2008 | 60.3 | % | |
| $106.96 |
| | 2.8 | % | | 3.8 | % | |
| $64.49 |
| | 146,312 |
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2009 | 54.5 | % | |
| $98.17 |
| | (8.2 | )% | | (0.4 | )% | |
| $53.50 |
| | 142,287 |
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2010 | 57.5 | % | |
| $98.06 |
| | (0.1 | )% | | 1.6 | % | |
| $56.43 |
| | 73,976 |
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2011 | 60.1 | % | |
| $101.64 |
| | 3.7 | % | | 3.2 | % | |
| $61.06 |
| | 38,409 |
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(Source: Smith Travel Research and US Department of Labor)
As a franchisor, we believe we are well positioned in any stage of the lodging cycle as our fee-for-service business model has historically delivered predictable, profitable, long-term growth in a variety of lodging and economic environments. We have historically benefited from both the RevPAR gains typically experienced in the early stages of recovery, as our revenues are based on our franchisees’ gross room revenues, and the supply growth normally occurring in the later stages as we increase our portfolio size.
The Company’s portfolio of brands offers both new construction and conversion opportunities. Our new construction brands typically benefit from periods of supply growth and favorable capital availability and pricing. Our conversion brands also benefit from periods of supply growth as the construction of new hotels increases the need for existing hotels to seek new brand affiliations as their product moves through the hotel life cycle. Furthermore, the Company's conversion brands benefit from lodging cycle downturns as our unit growth has been historically driven from the conversion of independent and other hotel chain affiliates into our system as these hotels endeavor to improve their performance.
The lodging industry can be divided into chain scale categories or groupings of generally competitive brands as follows:
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Chain Scale | | Brand Examples | | Room Count | | % of Total | | Avg. Hotel Room Size |
Luxury | | Four Seasons, Ritz Carlton, W Hotel | | 122,731 |
| | 2.5 | % | | 329.0 |
Upper Upscale | | Marriott, Hilton, Hyatt, Sheraton | | 553,928 |
| | 11.4 | % | | 366.4 |
Upscale | | Hilton Garden Inn, Courtyard, Cambria Suites | | 572,797 |
| | 11.7 | % | | 153.9 |
Upper Midscale | | Comfort Inn, Holiday Inn, Hampton Inn | | 824,129 |
| | 16.9 | % | | 99.0 |
Midscale | | Quality, Best Western, Ramada, La Quinta | | 511,666 |
| | 10.5 | % | | 87.9 |
Economy | | Econo Lodge, Days Inn, Super 8, Red Roof Inn | | 790,181 |
| | 16.2 | % | | 75.9 |
Sub-Total Brand Affiliated | | | | 3,375,432 |
| | 69.2 | % | | 111.9 |
Independents | | | | 1,499,405 |
| | 30.8 | % | | 68.0 |
Total All Hotels | | | | 4,874,837 |
| | 100 | % | | 93.4 |
According to Smith Travel Research, the lodging industry consisted of 52,214 hotels representing 4.9 million rooms open and operating in the United States at December 31, 2011. The lodging industry consists of independent operators of hotels and those that have joined national hotel franchise chains. Independent operators of hotels not owned or managed by major lodging companies have increasingly joined national hotel franchise chains as a means of remaining competitive with hotels owned by or affiliated with national lodging companies. Over the years, the industry has seen a significant movement of hotels from independent to chain affiliation, with affiliated hotels increasing from 46% of the rooms in the market in 1990 to 69% of the market in 2011.
Due to the fact that a significant portion of the costs of owning and operating a hotel are generally fixed, increases in revenues generated by affiliation with a franchise lodging chain can improve a hotel’s financial performance. The large franchise lodging chains, including us, generally provide a number of support services to hotel operators to improve the financial performance of their properties including central reservation and property management systems, marketing and advertising programs, training and education programs, revenue enhancement services and relationships with qualified vendors to streamline purchasing processes and make lower cost products available. We believe that national franchise chains with a large number of hotels enjoy greater brand awareness among potential guests than those with fewer hotels, and that greater brand awareness can increase the desirability of a hotel to its potential guests. Furthermore, we believe that hotel operators choose lodging franchisors based primarily on the perceived value and quality of each franchisor’s brand and its services, and the extent to which affiliation with that franchisor may increase the hotel operator profitability.
Choice’s Franchising Business
Choice operates primarily as a hotel franchisor offering 11 brands. This family of well-known and diversified new construction and conversion brands competes at various hotel consumer and developer price points.
Economics of Franchising Business. The fee and cost structure of our business provides opportunities for us to improve operating results by increasing the number of franchised hotel rooms, improving RevPAR performance and increasing the effective royalty rates of our franchise contracts. As a hotel franchisor, we derive our revenue primarily from various franchise fees. Our franchise fees consist primarily of an initial fee and ongoing royalty, marketing and reservation system fees that are typically based on a percentage of the franchised hotel’s gross room revenues. The initial fee and on-going royalty portion of the franchise fees are intended to cover our operating expenses, such as expenses incurred in business development, quality assurance, administrative support, certain franchise services and to provide us with operating profits. The marketing and reservation system fees are used for the expenses associated with marketing, media, advertising, providing a central reservation system, property management systems, e-commerce initiatives and certain franchise services.
Our fee stream depends on the number of rooms in our system, the gross room revenues generated by our franchisees and effective royalty rates under our franchise contracts. We enjoy significant operating leverage since the variable operating costs associated with the franchise system growth of our established brands have historically been less than incremental royalty fees generated from new franchises. Our business is well positioned in the lodging industry since we benefit from both increases in RevPAR and unit growth from new hotel construction or conversion of existing hotel assets into our system.
Our family of well-known and diversified brand offerings positions us well within the lodging industry. Our Cambria Suites, Comfort Inn, Comfort Suites, Sleep Inn, Suburban Extended Stay Hotel and MainStay Suites are primarily new build brands which offer hotel developers an array of choices at various price points for transient and extended stay business during periods of supply growth. Our Ascend Collection, Clarion, Quality, Econo Lodge and Rodeway Inn brands offer conversion opportunities during both industry contraction and growth cycles to independent operators and non-Choice affiliated hotels who desire to affiliate with our brands and take advantage of the services we have to offer.
Strategy. Our mission is a commitment to franchisee profitability by providing our franchisees with hotel franchises that strive to generate the highest return on investment of any hotel franchise. Our business strategy is to create franchise system growth by leveraging Choice’s large and well-known hotel brands, franchise sales capabilities, effective marketing and reservation delivery efforts, training and education programs, RevPAR enhancing services and technologies, and financial strength created by our significant free cash flow. We believe our brands’ growth will be driven by our ability to create a compelling return on investment for franchisees. Our strategic objective is to improve our franchisee’s profitability by providing services which increase business delivery, reduce hotel operating and development costs, and/or improve guest satisfaction. Specific elements of our strategy include: building strong brands, delivering exceptional services, reaching more consumers and leveraging our size, scale and distribution to reduce costs for hotel owners.
Building Strong Brands. Each of our brands has particular attributes and strengths, including awareness with both consumers and developers. Our strategy is to utilize the strengths of each brand for room growth, RevPAR gains and royalty rate improvement that create revenue growth. We believe brand consistency, brand quality and guest satisfaction are critical in improving brand performance and building strong brands.
We have multiple brands that are positioned to meet the needs of many types of guests. These brands can be developed at various price points and are suitable for both new construction properties and existing hotels. This flexibility ensures that we have brands suitable for creating room growth in various types of markets, with various types of customers, and during both industry contraction and growth cycles. During times of lower industry supply growth and tighter capital markets, we can target conversions of existing non-Choice affiliated hotels seeking the awareness and proven performance provided by our brands. During periods of strong industry supply growth, we expect a greater portion of our room growth to come from our new construction brands. We believe that a large number of markets can still support our hotel brands, and that the growth potential for our brands, as well as new brands we may yet introduce, remains strong.
We believe each of our brands appeals to targeted hotel owners and guests because of unique brand standards, reservation delivery, service levels and pricing.
Delivering Exceptional Services. We provide a combination of services and technology based offerings to help our franchisees improve performance. We have field services staff members located nationwide that help franchisees improve RevPAR performance and guest satisfaction. In addition, we provide our franchisees with education and training programs as well as technology products designed to improve property level performance. These services and products promote revenue gains for franchisees and improve guest satisfaction which translate into both higher royalties for the Company and improved returns for owners, leading to further room growth by making our brands even more attractive to prospective franchisees. We develop our services based on customer needs and focus on activities that generate high return on investment for our franchisees.
Reaching More Consumers. We believe hotel owners value the large volume of guests we deliver through a mix of activities including brand marketing, reservation systems, key account sales, and the Company’s loyalty program, Choice Privileges®. Our strategy is to maximize the effectiveness of these activities in delivering both leisure and business travelers to Choice-branded hotels.
The Company intends to continue to increase awareness of its brands through its national marketing campaigns and its Choice Privileges loyalty program promotions. These campaigns are intended to generate a compelling message to consumers to create even greater awareness for our brands with the ultimate goal of driving business through our central reservation system, which delivers the highest average daily rate. Local and regional co-op marketing campaigns will continue to be utilized to leverage the national marketing programs to drive business to our franchised properties at a local level. We expect our efforts at marketing directly to individual guests will continue to be enhanced through the use of our customer relationship management technology and programs. Our continued focus on overall brand quality coupled with our marketing initiatives is designed to stimulate room demand for our franchised hotels through improved guest awareness and satisfaction.
Our central reservations system is a critical technology used to deliver guests to our franchisees through multiple channels, including our call centers, proprietary websites, and global distribution systems (e.g., SABRE, Amadeus, and internet distribution sites). We believe our well-known brands, combined with our relationships with many internet distribution web sites benefits our franchisees, by facilitating increased rate and reservations delivery, and reducing costs and operational
complexity.
Leveraging Size, Scale and Distribution. We continually focus on identifying methods for utilizing the significant number of hotels in our system to reduce costs and increase returns for our franchisees. For example, we create relationships with qualified vendors to: (i) make low-cost products available to our franchisees; (ii) streamline the purchasing process; and (iii) maintain brand standards and consistency. We plan to expand this business and identify new methods for decreasing hotel-operating costs by increasing penetration within our existing franchise system and enhancing our existing vendor relationships and/or creating new vendor relationships. We believe our efforts to leverage the Company’s size, scale and distribution benefit the Company by enhancing brand quality and consistency, improving our franchisees returns and satisfaction, and creating procurement services revenues.
Franchise System
Total revenues from our domestic operations comprised 91% and 92% for our total revenues in 2011 and 2010, respectively. As a result, our description of the franchise system is primarily focused on the domestic operations.
Our standard domestic franchise agreements grant franchisees the non-exclusive right to use certain of our trademarks and receive other benefits of our franchise system to facilitate the operation of their franchised hotel at a specified location. The majority of our standard domestic franchise agreements are 20 years in duration (excluding contracts for MainStay Suites, Suburban Extended Stay Hotel branded hotels and beginning in 2008 Comfort Inn branded hotels which run for 10 years), with certain rights for each of the franchisor and franchisee to terminate their franchise agreement, such as upon designated anniversaries of the agreement, before the 20th (or 10th, as applicable) year.
Our franchises operate domestically under one of eleven Choice brand names: Comfort Inn, Comfort Suites, Cambria Suites, Quality, Clarion, Ascend Collection, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites and Suburban Extended Stay Hotel. The following table presents key statistics related to our domestic franchise system over the five years ended December 31, 2011.
COMBINED DOMESTIC FRANCHISE SYSTEM
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| As of and For the Year Ended December 31, |
| 2007 | | 2008 | | 2009 | | 2010 | | 2011 |
Number of properties, end of period | 4,445 |
| | 4,716 |
| | 4,906 |
| | 4,993 |
| | 5,001 |
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Number of rooms, end of period | 354,139 |
| | 373,884 |
| | 388,594 |
| | 393,535 |
| | 392,826 |
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Royalty fees ($000) | $ | 212,519 |
| | $ | 220,411 |
| | $ | 196,406 |
| | $ | 206,049 |
| | $ | 220,047 |
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Average royalty rate(1) | 4.14 | % | | 4.20 | % | | 4.25 | % | | 4.29 | % | | 4.32 | % |
Average occupancy percentage(1) | 57.9 | % | | 55.3 | % | | 49.4 | % | | 51.3 | % | | 53.5 | % |
Average daily room rate (ADR)(1) | $ | 72.07 |
| | $ | 74.11 |
| | $ | 71.24 |
| | $ | 70.50 |
| | $ | 71.83 |
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Revenue per available room (RevPAR)(1),(2) | $ | 41.75 |
| | $ | 40.98 |
| | $ | 35.18 |
| | $ | 36.18 |
| | $ | 38.44 |
|
____________________________
| |
(1) | Amounts exclude results from Cambria Suites properties open during all periods presented and Ascend Collection properties open during 2008. |
| |
(2) | The Company calculates RevPAR based on information as reported to the Company by its franchisees. |
According to Smith Travel Research, the total rooms open and operating in the United States at December 31, 2011 totaled approximately 4.9 million rooms of which 8.1% were affiliated with the Choice Brands. Choice branded system-wide United States market share as of December 31, 2011 has increased 52 basis points over the past 5 years representing a cumulative annual growth rate of 3.0% compared to the total industry domestic growth rate of 1.6%.
Currently, no individual franchisee or international master franchisee accounts for more than 3% of the Company's total revenues.
Industry Positioning
Our brands offer consumers and developers a wide range of choices from economy hotels to lower upscale, full service properties. Our brands are as follows:
Cambria Suites: Cambria Suites is a new construction select service hotel chain with an upscale image and distinctive styling. Cambria offers well-appointed suites that emulate the “best of a modern home.” In-room amenities include luxury
bedding, stereo with CD player, cordless phone and mini-refrigerator with microwave. Principal competitor brands include Courtyard by Marriott and Hilton Garden Inn. The Cambria Suites brand was launched in January 2005 and the first properties opened during 2007.
Ascend Collection: Ascend Collection is an innovative membership program that is not positioned as a traditional franchise concept. The Ascend Collection includes individual properties that are historic, boutique and/or unique and desire to retain their independent brand identity but have access to Choice’s marketing and distribution channels. The Ascend Collection offers the best of both worlds: Independence backed up by a powerful global distribution network. Principal competitors include Sterling Hotels, Summit Hotel & Resorts, Small Luxury Hotels and Historic Hotels of America. The Ascend Collection membership was launched in October 2008. In conjunction with the launch of the Ascend Collection, 21 properties that were previously affiliated with our Clarion brand were repositioned into this brand.
Comfort Inn: Comfort Inn and Comfort Inn and Suites hotels are primarily upper mid-scale limited service hotels that offer rooms and modest food and beverage facilities such as breakfast buffets. One of the original brands in the limited service category, Comfort has built a reputation for consistent high-value accommodations for both business and leisure travelers. Comfort offers complimentary breakfast with fresh waffles, a swimming pool and/or exercise room, and free high-speed internet access. Principal competitor brands include Holiday Inn Express, Fairfield Inn and LaQuinta.
Comfort Suites: Comfort Suites is an extension of the highly regarded Comfort Inn brand, Comfort Suites hotels have a focus on serving the business traveler. Hotels are 100% smoke free and rooms are oversized with separate areas for working and sleeping. In addition, each room features a sleeper sofa, refrigerator and microwave. Comfort Suites hotels offer a complimentary hot breakfast and free high-speed internet access. The brand competes with Hampton, Holiday Inn Express, Fairfield Inn and Country Inn & Suites.
Sleep Inn: Sleep Inn is a new construction brand that operates in the moderate tier of the mid-scale lodging category. Sleep Inn delivers consistent product offerings, providing both business and leisure travelers with free high-speed internet access, an exercise room and/or pool, and our complimentary Morning Medley breakfast. Sleep Inn’s principal competitors include Microtel and La Quinta.
Clarion: Clarion helps owners of existing mid-scale assets with food and beverage achieve strong returns with reasonable investment. To consumers, Clarion “helps people get together” by providing the amenities and food and beverage services essential to serving the huge midscale business and leisure gatherings market. For owners, Clarion allows a more focused and efficient food and beverage operational model that works well with a variety of conversion property configurations. Clarion hotels provide meeting/banquet facilities with catering, hot breakfast, a simplified menu of basic evening meals, and lounge with at least beer/wine selections. Amenities include a pool, business center, and fitness center. Principal competitor brands include Four Points by Sheraton and Radisson.
Quality: Quality helps both guests and owners “get your money's worth” in the mid-scale category. Quality hotels provide clean, comfortable, and affordable accommodations, as well as the “Value Qs:” amenities and services that typically include a signature Q Bed, Q Breakfast, Q Service, and the Q Value of free high-speed internet access, a swimming pool and/or an exercise room, and free newspaper. Principal competitor brands include Best Western and Ramada.
MainStay Suites: MainStay Suites hotels compete in the mid-scale extended stay category. Complete with a residential feel and value-added amenities, the MainStay brand is designed as a more practical lodging option for guests whose stays are longer than a few nights. Typically, longer hotel stays involve relocation, training, or temporary job assignments. MainStay guest rooms feature free high-speed internet access, fully equipped kitchens with a two-burner range, dishes, utensils, dishwasher, sink with disposal, microwave, and full size refrigerator. All suites include a sleeper sofa, comfortable work area with ergonomic chair and large walk-in closets. MainStay Suites' principal competitors include TownePlace Suites and Candlewood Suites.
Suburban Extended Stay Hotel: Suburban Extended Stay Hotel suites are built with today’s value-conscious extended stay guest in mind. All suites provide kitchens, internet connections, and access to on-site laundry facilities. Suburban’s “just what you need” philosophy matches attractive weekly pricing with weekly housekeeping to provide extended stay guests with the all-suite accommodations they want without the cost of services they do not need. All hotels offer complimentary high-speed internet access. Principal competitors include Extended Stay America, InTown Suites, Studio 6 and Value Place.
Econo Lodge: Econo Lodge is the premier brand in the economy hotel category that is an easy stop on the road for value-oriented travelers. Free wireless internet hot spots and complimentary continental breakfast are just some of the amenities that position Econo Lodge as a great value in the economy category. The brand competes primarily with Days Inn, Super 8 and Red Roof Inn.
Rodeway Inn: Rodeway Inn is a brand also operating in the economy hotel category that offers sensible lodging for travelers on a budget. As part of one of the largest franchise systems in the world, Rodeway offers a welcoming environment at an affordable rate. With free coffee to get guests started in the morning and a free premium cable station, Rodeway is a great option for practical travelers. Principal competitor brands include Travelodge and Motel 6.
The following table presents key statistics related to the domestic system for our brands over the five years ended December 31, 2011:
|
| | | | | | | | | | | | | | | | | | | |
| As of and For the Year Ended December 31, |
| 2007 | | 2008 | | 2009 | | 2010 | | 2011 |
COMFORT INN DOMESTIC SYSTEM | | | | | | | | | |
Number of properties, end of period | 1,434 |
| | 1,462 |
| | 1,447 |
| | 1,435 |
| | 1,399 |
|
Number of rooms, end of period | 112,042 |
| | 114,573 |
| | 113,633 |
| | 112,169 |
| | 109,330 |
|
Royalty fees ($000) | $ | 91,131 |
| | $ | 91,913 |
| | $ | 80,059 |
| | $ | 82,233 |
| | $ | 86,107 |
|
Average occupancy percentage | 63.1 | % | | 60.1 | % | | 54.1 | % | | 55.6 | % | | 57.5 | % |
Average daily room rate (ADR) | $ | 77.14 |
| | $ | 79.84 |
| | $ | 77.10 |
| | $ | 77.21 |
| | $ | 79.41 |
|
RevPAR | $ | 48.70 |
| | $ | 48.01 |
| | $ | 41.74 |
| | $ | 42.93 |
| | $ | 45.62 |
|
COMFORT SUITES DOMESTIC SYSTEM | | | | | | | | | |
Number of properties, end of period | 481 |
| | 541 |
| | 608 |
| | 623 |
| | 616 |
|
Number of rooms, end of period | 37,358 |
| | 42,152 |
| | 47,301 |
| | 48,246 |
| | 47,738 |
|
Royalty fees ($000) | $ | 35,775 |
| | $ | 38,202 |
| | $ | 35,134 |
| | $ | 38,100 |
| | $ | 41,934 |
|
Average occupancy percentage | 65.5 | % | | 61.3 | % | | 53.3 | % | | 55.2 | % | | 58.6 | % |
Average daily room rate (ADR) | $ | 87.23 |
| | $ | 89.49 |
| | $ | 84.79 |
| | $ | 82.48 |
| | $ | 83.72 |
|
RevPAR | $ | 57.11 |
| | $ | 54.82 |
| | $ | 45.17 |
| | $ | 45.53 |
| | $ | 49.09 |
|
QUALITY DOMESTIC SYSTEM | | | | | | | | | |
Number of properties, end of period | 828 |
| | 908 |
| | 979 |
| | 1,012 |
| | 1,047 |
|
Number of rooms, end of period | 79,276 |
| | 85,055 |
| | 89,336 |
| | 89,185 |
| | 91,502 |
|
Royalty fees ($000) | $ | 34,310 |
| | $ | 37,658 |
| | $ | 33,725 |
| | $ | 35,749 |
| | $ | 38,032 |
|
Average occupancy percentage | 54.2 | % | | 52.0 | % | | 46.0 | % | | 48.1 | % | | 50.0 | % |
Average daily room rate (ADR) | $ | 70.30 |
| | $ | 71.42 |
| | $ | 68.00 |
| | $ | 66.81 |
| | $ | 67.75 |
|
RevPAR | $ | 38.09 |
| | $ | 37.15 |
| | $ | 31.31 |
| | $ | 32.11 |
| | $ | 33.86 |
|
CLARION DOMESTIC SYSTEM(1) | | | | | | | | | |
Number of properties, end of period | 167 |
| | 150 |
| | 172 |
| | 192 |
| | 189 |
|
Number of rooms, end of period | 23,319 |
| | 21,497 |
| | 24,636 |
| | 28,711 |
| | 27,527 |
|
Royalty fees ($000) | $ | 10,388 |
| | $ | 10,733 |
| | $ | 8,549 |
| | $ | 8,948 |
| | $ | 9,708 |
|
Average occupancy percentage | 51.7 | % | | 50.0 | % | | 42.2 | % | | 43.7 | % | | 46.9 | % |
Average daily room rate (ADR) | $ | 80.86 |
| | $ | 84.48 |
| | $ | 77.79 |
| | $ | 75.15 |
| | $ | 73.89 |
|
RevPAR | $ | 41.79 |
| | $ | 42.21 |
| | $ | 32.86 |
| | $ | 32.86 |
| | $ | 34.64 |
|
SLEEP INN DOMESTIC SYSTEM | | | | | | | | | |
Number of properties, end of period | 346 |
| | 365 |
| | 392 |
| | 398 |
| | 394 |
|
Number of rooms, end of period | 25,728 |
| | 26,867 |
| | 28,599 |
| | 28,957 |
| | 28,568 |
|
Royalty fees ($000) | $ | 16,605 |
| | $ | 16,437 |
| | $ | 14,614 |
| | $ | 15,050 |
| | $ | 15,838 |
|
Average occupancy percentage | 62.5 | % | | 58.5 | % | | 51.5 | % | | 51.6 | % | | 53.6 | % |
Average daily room rate (ADR) | $ | 69.67 |
| | $ | 71.91 |
| | $ | 69.64 |
| | $ | 68.82 |
| | $ | 69.96 |
|
RevPAR | $ | 43.52 |
| | $ | 42.10 |
| | $ | 35.86 |
| | $ | 35.52 |
| | $ | 37.49 |
|
MAINSTAY SUITES DOMESTIC SYSTEM | | | | | | | | | |
Number of properties, end of period | 30 |
| | 35 |
| | 37 |
| | 37 |
| | 40 |
|
Number of rooms, end of period | 2,258 |
| | 2,694 |
| | 2,866 |
| | 2,868 |
| | 3,093 |
|
Royalty fees ($000) | $ | 1,603 |
| | $ | 1,760 |
| | $ | 1,607 |
| | $ | 1,715 |
| | $ | 2,018 |
|
Average occupancy percentage | 68.5 | % | | 64.2 | % | | 57.9 | % | | 63.6 | % | | 67.7 | % |
Average daily room rate (ADR) | $ | 70.04 |
| | $ | 73.72 |
| | $ | 70.55 |
| | $ | 65.60 |
| | $ | 66.16 |
|
RevPAR | $ | 47.98 |
| | $ | 47.34 |
| | $ | 40.82 |
| | $ | 41.71 |
| | $ | 44.80 |
|
ECONO LODGE DOMESTIC SYSTEM | | | | | | | | | |
Number of properties, end of period | 825 |
| | 816 |
| | 792 |
| | 784 |
| | 797 |
|
|
| | | | | | | | | | | | | | | | | | | |
Number of rooms, end of period | 50,403 |
| | 50,812 |
| | 48,996 |
| | 48,728 |
| | 49,483 |
|
Royalty fees ($000) | $ | 17,266 |
| | $ | 17,400 |
| | $ | 15,025 |
| | $ | 15,068 |
| | $ | 15,655 |
|
Average occupancy percentage | 48.0 | % | | 46.9 | % | | 43.5 | % | | 45.8 | % | | 47.5 | % |
Average daily room rate (ADR) | $ | 54.40 |
| | $ | 55.58 |
| | $ | 54.66 |
| | $ | 54.10 |
| | $ | 54.71 |
|
RevPAR | $ | 26.10 |
| | $ | 26.05 |
| | $ | 23.78 |
| | $ | 24.80 |
| | $ | 25.96 |
|
RODEWAY INN DOMESTIC SYSTEM | | | | | | | | | |
Number of properties, end of period | 276 |
| | 346 |
| | 372 |
| | 387 |
| | 388 |
|
Number of rooms, end of period | 16,523 |
| | 20,302 |
| | 21,392 |
| | 21,261 |
| | 21,627 |
|
Royalty fees ($000) | $ | 2,865 |
| | $ | 3,397 |
| | $ | 3,819 |
| | $ | 4,257 |
| | $ | 4,541 |
|
Average occupancy percentage | 47.6 | % | | 47.5 | % | | 43.0 | % | | 45.8 | % | | 48.7 | % |
Average daily room rate (ADR) | $ | 53.24 |
| | $ | 55.04 |
| | $ | 52.48 |
| | $ | 51.07 |
| | $ | 51.87 |
|
RevPAR | $ | 25.32 |
| | $ | 26.16 |
| | $ | 22.54 |
| | $ | 23.38 |
| | $ | 25.27 |
|
SUBURBAN EXTENDED STAY HOTEL DOMESTIC SYSTEM | | | | | | | | | |
Number of properties, end of period | 54 |
| | 60 |
| | 61 |
| | 64 |
| | 60 |
|
Number of rooms, end of period | 6,773 |
| | 7,256 |
| | 7,416 |
| | 7,685 |
| | 7,126 |
|
Royalty fees ($000) | $ | 2,535 |
| | $ | 2,444 |
| | $ | 2,275 |
| | $ | 2,353 |
| | $ | 2,537 |
|
Average occupancy percentage | 67.3 | % | | 62.4 | % | | 56.3 | % | | 63.8 | % | | 67.5 | % |
Average daily room rate (ADR) | $ | 40.13 |
| | $ | 42.93 |
| | $ | 41.51 |
| | $ | 39.23 |
| | $ | 40.26 |
|
RevPAR | $ | 27.01 |
| | $ | 26.80 |
| | $ | 23.35 |
| | $ | 25.03 |
| | $ | 27.15 |
|
CAMBRIA SUITES DOMESTIC SYSTEM | | | | | | | | | |
Number of properties, end of period | 4 |
| | 12 |
| | 18 |
| | 23 |
| | 19 |
|
Number of rooms, end of period | 459 |
| | 1,323 |
| | 2,073 |
| | 2,700 |
| | 2,215 |
|
Royalty fees ($000) | $ | 41 |
| | $ | 374 |
| | $ | 920 |
| | $ | 1,447 |
| | $ | 2,022 |
|
Average occupancy percentage(2) | — |
| | — |
| | — |
| | — |
| | — |
|
Average daily room rate (ADR)(2) | — |
| | — |
| | — |
| | — |
| | — |
|
RevPAR(2) | — |
| | — |
| | — |
| | — |
| | — |
|
ASCEND COLLECTION DOMESTIC SYSTEM | | | | | | | | | |
Number of properties, end of period | — |
| | 21 |
| | 28 |
| | 38 |
| | 52 |
|
Number of rooms, end of period | — |
| | 1,353 |
| | 2,346 |
| | 3,025 |
| | 4,617 |
|
Royalty fees ($000) | — |
| | $ | 93 |
| | $ | 679 |
| | $ | 1,129 |
| | $ | 1,655 |
|
Average occupancy percentage(2) | — |
| | — |
| | 49.4 | % | | 57.6 | % | | 60.3 | % |
Average daily room rate (ADR)(2) | — |
| | — |
| | $ | 115.97 |
| | $ | 112.50 |
| | $ | 113.59 |
|
RevPAR(2) | — |
| | — |
| | $ | 57.24 |
| | $ | 64.81 |
| | $ | 68.44 |
|
____________________________
| |
(1) | Statistics for the Clarion brand reflect the repositioning of 20 units in the fourth quarter of 2008 and 1 unit in the first quarter of 2009 from the Clarion brand to the Ascend Collection. |
| |
(2) | Statistics for average occupancy percentage, ADR and RevPAR have been excluded for years in which the brand did not have at least 25 units open and operating. |
International Franchise Operations
The Company conducts its international franchise operations 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 in a specific geographic region, usually for a fee.
Our business philosophy has been to conduct direct franchising in those international markets where both franchising is an accepted business model and we believe our brands can achieve significant distribution. We typically elect to enter into master franchise agreements in those markets where direct franchising is currently not a prevalent or viable business model. When entering into master franchising relationships, we strive to select partners that have professional hotel and asset management capabilities together with the financial capacity to invest in building the Choice brands in their respective markets. Master franchising relationships typically provide lower revenues to the Company as the master franchisees are responsible for managing certain necessary services (such as training, quality assurance, reservations and marketing) to support the franchised hotels in the master franchise area and therefore retain a larger percentage of the hotel franchise fees to cover their expenses. In certain circumstances, the Company has and may continue to make equity investments in our master franchisees.
As a result of our use of master franchising relationships and international market conditions, total revenues from international franchising operations comprised 9% and 8% of our total revenues in 2011 and 2010, respectively while
representing approximately 19% of our franchise system hotels open at both December 31, 2011 and 2010.
In some territories outside the United States hotel franchising is less prevalent, and many markets are served primarily by independent operators. We believe that chain and franchisor affiliation will increase in certain international markets as local economies grow and hotel owners seek the economies of centralized reservations systems and marketing programs. We believe that international franchise operations will provide a significant long-term growth opportunity for the Company and as a result have initiated a multi-year investment in information technology and marketing which is expected to enhance the value proposition for prospective international franchisees.
As of December 31, 2011, we had 1,177 franchise hotels open and operating in over 30 countries and territories outside of the United States. The following chart summarizes our franchise system outside of the United States.
COMBINED INTERNATIONAL FRANCHISE SYSTEM(1)
|
| | | | | | | | | | | | | | | | | | | |
| As of and For the Year Ended December 31, |
| 2007 | | 2008 | | 2009 | | 2010 | | 2011 |
Number of properties, end of period | 1,125 |
| | 1,111 |
| | 1,115 |
| | 1,149 |
| | 1,177 |
|
Number of rooms, end of period | 97,888 |
| | 98,642 |
| | 98,816 |
| | 101,610 |
| | 104,379 |
|
Royalty fees ($000) | $ | 22,234 |
| | $ | 25,599 |
| | $ | 20,984 |
| | $ | 23,765 |
| | $ | 26,989 |
|
____________________________
| |
(1) | Reporting of operating statistics (e.g. average occupancy percentage and average daily room rate) of international franchisees is not required by all master franchise contracts, thus these statistics and RevPAR are not presented for international franchisees. |
Scandinavia. We conduct our operations in Scandinavia through a master franchise relationship with Nordic Choice Commercial Services A/S ("NCH"), formerly known as Choice Hotels Scandinavia. As of December 31, 2011, NCH had 160 open properties in its development territory, which includes Denmark, Norway and Sweden on an exclusive basis and Estonia, Finland, Iceland, Latvia and Lithuania on a non-exclusive basis. The Company’s master franchise agreement with NCH grants rights to the Comfort, Quality, Sleep and Clarion brand and expires in 2023. Through a separate agreement signed in 2010, we have also granted NCH limited rights to franchise Ascend Collection Hotels in its territory.
Japan. The Company conducts its operations in Japan through a master franchise relationship with Choice Hotels Japan Co. Ltd (“CHJ”). CHJ possesses exclusive rights to develop the Comfort and Quality brands and non-exclusive rights to the Sleep and Clarion brands. The Company’s master franchise agreement with CHJ expires in 2014 with CHJ possessing a conditional option to renew the agreement one time for an additional term of ten years. As of December 31, 2011, CHJ had 52 open properties.
Continental Europe. The Company conducts franchising operations in continental Europe through two wholly-owned subsidiaries, Choice Hotels Franchise GmbH and Choice Hotels France SAS in the Czech Republic, France, Germany, Italy, Portugal and Switzerland. At December 31, 2011, the Company’s subsidiaries had 204 properties open and operating in continental Europe.
Ireland. In August 2007, the Company entered into a ten year master franchising agreement with Ireland-based Cordelle Enterprises, doing business as Choice Hotels Ireland (“CHR”), for the exclusive right to develop our Clarion, Quality and Comfort brands in Ireland and Northern Ireland. Prior to acquiring the master franchising rights directly from the Company, CHR operated the Company’s brands under an area representative agreement with The Real Hotel Company PLC ("RHC"), which previously held the master franchise rights in Ireland. The master franchise agreement with CHR expires in 2022. As of December 31, 2011, CHR had 10 properties open and operating.
United Kingdom. In 2007, the Company entered into a definitive agreement with RHC to transfer United Kingdom franchising operations, which were previously operated under a master franchise agreement with RHC, to the Company on January 31, 2008. On that date, the master franchise agreement was terminated and the existing franchise agreements were assigned to a wholly-owned subsidiary, Choice Hotels Licensing B.V. (“Choice BV”). At December 31, 2011, the Company’s subsidiary had 39 properties open and operating in the United Kingdom.
Canada. We conduct our operations in Canada for all of our brands except Cambria Suites, MainStay Suites and Suburban Extended Stay Hotel through Choice Hotels Canada Inc. (“CHC”) a joint venture owned 50% by us and 50% by InnVest Management Holdings Ltd. CHC is one of the largest lodging organizations in Canada with 303 of our franchised properties open and operating as of December 31, 2011. The Company conducts direct franchising operations for its extended
stay and Cambria Suites brands in Canada through its wholly-owned subsidiary, Choice Hotels International Licensing ULC, and had four properties open and operating at December 31, 2011.
India. Prior to 2010, the Company had a 40% equity interest in our master franchisee, Choice Hospitality (India) Ltd (“CHN”). In the first quarter of 2010, we acquired the remaining 60% ownership interest in CHN. Prior to our acquisition, CHN conducted franchising operations for our Quality, Comfort, Clarion and Sleep brands in the Republics of India, Sri Lanka, Maldives and the Kingdom of Nepal under a master franchise agreement. In connection with our acquisition, CHN was converted into a private company, Choice Hospitality (India) Private Ltd, the master franchise agreement was terminated and all future franchise development rights possessed by CHN reverted to Choice BV. Choice BV now acts as the franchisor of our Comfort, Quality and Sleep brands in India. Furthermore, Choice BV entered into a 20-year master franchise agreement with Inovoa Hotels and Resorts Private Limited (“IHR”) to franchise our Clarion brand in India. As of December 31, 2011, Choice BV/CHN and IHR had 25 and 2 properties open and operating, respectively.
Australasia. The Company conducts direct franchising operations in Australia, New Zealand, Singapore and Papau New Guinea through a wholly-owned subsidiary, Choice Hotels Australasia Pty. Ltd. (“CHA”). As of December 31, 2011, CHA had 275 franchised properties open and operating in Australasia.
Mexico. The Company’s wholly-owned subsidiary Choice Hotels Mexico S. de R.L. de C.V. (“CHM”) conducts direct franchising operations in Mexico on behalf of Choice BV, which acts as the franchisor in Mexico. CHM is focused on establishing Clarion, Quality, Sleep and Comfort brands through conversion of hotels in Mexico. At December 31, 2011, the Company’s subsidiary had 23 properties open and operating.
South America. We conduct our operations in Brazil and certain other South American territories through a non-exclusive master franchise relationship with Atlantica Holdings International, Ltd. (“Atlantica”). As of December 31, 2011, Atlantica had 60 open properties in its development territory, which in addition to Brazil includes Argentina, Chile and Uruguay. The Company’s master franchise agreement with Atlantica grants rights to the Comfort, Quality, Sleep and Clarion brands. The agreement was executed in 2001 and has a term of twenty years with certain rights by both parties to terminate the contract on the 15th anniversary.
Central America. We conduct our operations in certain Central American territories through an exclusive master franchise relationship with Real Hotels and Resorts, Inc. (“Real”). As of December 31, 2011, Real had 15 open properties in its development territory which consists of Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama. The Company’s master franchise agreement with Real grants rights to the Comfort, Quality, Sleep and Clarion brands. The agreement was executed in 1994 and has a term of twenty years. Through a separate agreement signed in 2011, we have also granted Real limited non-exclusive rights to franchise Ascend Collection hotels in Costa Rica, Honduras and Panama.
Other International Relationships. We also have non-exclusive master development and area representative arrangements in place with local hotel management and franchising companies doing business in China. In addition, the Company has direct franchise relationships with properties in Malaysia and Jordan.
The following table summarizes Choice’s non-domestic franchise system as of December 31, 2011:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comfort | | Comfort Suites | | Quality | | Clarion | | Sleep | | Ascend | | Mainstay | | Suburban | | Econo Lodge | | Rodeway | | Total |
Australia | 133 |
| | — |
| | 70 |
| | 17 |
| | — |
| | — |
| | — |
| | — |
| | 18 |
| | — |
| | 238 |
|
Canada | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
| | — |
| | — |
| | 4 |
|
Czech Republic | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7 |
|
France | 83 |
| | 1 |
| | 35 |
| | 8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 127 |
|
Germany | 18 |
| | — |
| | 17 |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 39 |
|
India | 12 |
| | — |
| | 13 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 25 |
|
Italy | 5 |
| | — |
| | 11 |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 20 |
|
Jordan | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Malaysia | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Mexico | 9 |
| | — |
| | 13 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 23 |
|
New Zealand | 14 |
| | — |
| | 14 |
| | 5 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 36 |
|
Portugal | 4 |
| | — |
| | 2 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7 |
|
Singapore | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Switzerland | 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
|
United Kingdom | 20 |
| | — |
| | 16 |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 39 |
|
Direct Franchise Agreements | 302 |
| | 1 |
| | 194 |
| | 49 |
| | 1 |
| | — |
| | 2 |
| | 2 |
| | 21 |
| | — |
| | 572 |
|
Brazil | 19 |
| | 7 |
| | 25 |
| | 3 |
| | 6 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 60 |
|
Canada* | 149 |
| | 3 |
| | 78 |
| | 9 |
| | 2 |
| | 5 |
| | — |
| | — |
| | 54 |
| | 3 |
| | 303 |
|
China | 2 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
Costa Rica | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
Denmark | 1 |
| | — |
| | 1 |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
|
Dominican Republic | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
El Salvador | 3 |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
|
Estonia | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Guatemala | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Honduras | — |
| | — |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
|
India | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
Ireland | — |
| | — |
| | 3 |
| | 7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10 |
|
Japan | 50 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 52 |
|
Latvia | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Norway | 17 |
| | — |
| | 40 |
| | 25 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 83 |
|
Sweden | 11 |
| | — |
| | 24 |
| | 31 |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | 70 |
|
Master Franchise Agreements | 252 |
| | 11 |
| | 176 |
| | 89 |
| | 9 |
| | 11 |
| | — |
| | — |
| | 54 |
| | 3 |
| | 605 |
|
Total Number of Properties | 554 |
| | 12 |
| | 370 |
| | 138 |
| | 10 |
| | 11 |
| | 2 |
| | 2 |
| | 75 |
| | 3 |
| | 1,177 |
|
____________________________
| |
* | The Company has made an equity investment in this master franchisor. |
The following table presents key worldwide system size statistics as of and for the year ended December 31, 2011:
|
| | | | | | | | | | | | | | | | | | | | |
| Open and Operational | | Approved for Development | | |
| Hotels | | Rooms | | Hotels | | Rooms | | Additions | | Repositionings | | Terminations |
Comfort | 1,953 |
| | 149,752 |
| | 94 |
| | 6,894 |
| | 76 |
| | (21 | ) | | (88 | ) |
Comfort Suites | 628 |
| | 49,379 |
| | 98 |
| | 7,263 |
| | 13 |
| | (1 | ) | | (19 | ) |
Quality | 1,417 |
| | 129,701 |
| | 58 |
| | 4,596 |
| | 100 |
| | 16 |
| | (88 | ) |
Ascend Collection | 63 |
| | 6,120 |
| | 15 |
| | 1,466 |
| | 22 |
| | — |
| | (1 | ) |
Clarion | 327 |
| | 45,245 |
| | 25 |
| | 3,916 |
| | 38 |
| | (3 | ) | | (28 | ) |
Sleep Inn | 404 |
| | 29,654 |
| | 56 |
| | 3,555 |
| | 8 |
| | (4 | ) | | (8 | ) |
MainStay Suites | 42 |
| | 3,311 |
| | 31 |
| | 2,445 |
| | 5 |
| | — |
| | (1 | ) |
Econo Lodge | 872 |
| | 52,801 |
| | 33 |
| | 1,992 |
| | 65 |
| | 1 |
| | (42 | ) |
Rodeway Inn | 391 |
| | 21,742 |
| | 24 |
| | 1,436 |
| | 25 |
| | 12 |
| | (35 | ) |
Suburban | 62 |
| | 7,285 |
| | 25 |
| | 2,136 |
| | 4 |
| | — |
| | (6 | ) |
Cambria Suites | 19 |
| | 2,215 |
| | 31 |
| | 3,976 |
| | — |
| | — |
| | (4 | ) |
Totals | 6,178 |
| | 497,205 |
| | 490 |
| | 39,675 |
| | 356 |
| | — |
| | (320 | ) |
Franchise Sales
Brand growth is important to our business model. We have identified key market areas for hotel development based on supply/demand relationships and our strategic objectives. Development opportunities are typically offered to: (i) existing franchisees; (ii) developers of hotels; (iii) owners of independent hotels and motels; (iv) owners of hotels leaving other franchisors’ brands; and, (v) franchisees of non-hotel related products such as restaurants.
Our franchise sales organization is structured to support the Company’s efforts to leverage its core strengths in order to take advantage of opportunities for further growth. The franchise sales organization employs both sales managers as well as franchise sales directors. This organization emphasizes the benefits of affiliating with the Choice system, our commitment to improving hotel profitability, our central reservation delivery services, our training and support systems (including our proprietary property management systems) and our Company’s track record of growth and profitability to potential franchisees. Franchise sales directors are assigned to specific brands to leverage their brand expertise to enhance product consistency and deal flow. Our sales managers ensure each prospective hotel is placed in the appropriate brand, facilitate teamwork and information sharing amongst the sales directors and provide better service to our potential franchisees. The structure of this organization supports the Company’s efforts to leverage its core strengths in order to take advantage of opportunities for further growth. Integrating our brands and strategies allow our brand teams to focus on understanding, anticipating and meeting the unique needs of our customers.
Our objective is to continue to grow our portfolio by continuing to sell our existing brands, creating extensions of our existing brands and introducing new brands, either organically or via acquisition, within the various lodging chain categories. Based on market conditions and other circumstances, we may offer certain incentives to developers to increase development of our brands such as discounting various fees such as the initial franchise fee and royalty rates as well as provide financing for property improvements and other purposes.
Because retention of existing franchisees is important to our growth strategy, we have a formal impact policy. This policy offers existing franchisees protection from the opening of a same-brand property within a specified distance, depending upon the market in which the property is located.
Investment, Financing and Guaranty Franchisee Support
Our board of directors previously authorized us to enter into programs which permit us to offer financing, investment, and guaranty support to qualified franchisees as well as to acquire and resell real estate to incent franchise development for certain brands in strategic markets. We expect to opportunistically deploy capital over the next several years and our annual investment in these programs will be dependent on market and other conditions.
Franchise Agreements
Our standard domestic franchise agreements grant franchisees the non-exclusive right to use certain of our trademarks and receive other benefits of our franchise system to facilitate the operation of their franchised hotel at a specified location. Each of our standard domestic franchise agreements is 20 years in duration (excluding contracts for Suburban Extended Stay Hotel and MainStay Suites branded hotels and beginning in 2008 Comfort branded hotels which run for ten years), with certain rights for each of the franchisor and franchisee to terminate their franchise agreement, such as upon designated anniversaries of the agreement, before the 20th (or 10th, as applicable) year.
The Company may also enter into master development agreements with developers that grant limited exclusive development rights in geographical areas and preferential franchise agreement terms for one-time, non-refundable fees. These agreements typically grant developers exclusivity in various markets and favorable franchise agreement terms provided that they adhere to an agreed upon development schedule.
Either party to our standard domestic franchise agreement can terminate the agreement prior to the conclusion of the agreement’s term under certain circumstances, such as upon designated anniversaries of the agreement. Early termination options give us flexibility in eliminating or re-branding properties for reasons other than contractual failure by the franchisee. This allows us the opportunity to strengthen our brand portfolio in various markets by replacing weaker performing hotels. We also have the right to terminate a franchise agreement if a franchisee fails to bring the property into compliance with contractual or quality standards within specified periods of time. The franchise agreements also typically contain liquidated damage provisions which represent a fair measure of compensation that our franchisee and we agree should be paid to us upon a specific breach of the franchise agreement. Master franchise agreements typically contain provisions permitting us to terminate the agreement for failure to meet a specified development schedule.
When the responsibility for development is transferred to an international master franchisee, that party has the responsibility to develop and grow our brands in the master franchise area. Additionally, the master franchisee generally must manage the delivery of certain necessary services (such as training, quality assurance, reservations and marketing) to support the franchised hotels in the master franchise area. The master franchisee collects the fees paid by the local franchisee and remits an agreed upon share to us. Master franchise agreements generally have a term of at least ten years. We have only entered into master franchise agreements with respect to franchised hotels outside the United States.
Franchise agreements are individually negotiated and vary among the different Choice brands and franchises, but generally are competitive with the industry average within their market group. Franchise fees usually have three primary components: an initial, one-time affiliation fee; a royalty fee; and a marketing and reservation system fee. In prior years, the Company’s standard franchise agreements contained a separate marketing and reservation fee for the Cambria Suites, Comfort, Quality, Clarion and Sleep Inn brands. Since 2007, the Company's standard franchise agreements has combined these two fees into one System Fee which is used to fund both the Company’s marketing and reservation activities that support all of the Choice brands. Our standard franchise fees are as follows:
QUOTED FEES BY BRAND AS OF DECEMBER 31, 2011
|
| | | | | | | |
Brand | Initial Fee Per Room/Minimum | | Royalty Fees | | Combined Marketing and Reservation System Fee |
Cambria Suites | 500/$60,000 | | 5.00 | % | | 4.00 | % |
Comfort Inn | 500/$50,000 | | 5.65 | % | | 3.85 | % |
Comfort Suites | 500/$50,000 | | 5.65 | % | | 3.85 | % |
Quality Inn | 300/$35,000 | | 4.65 | % | | 3.85 | % |
Quality Suites | 300/$50,000 | | 4.65 | % | | 3.85 | % |
Ascend Collection | 375/$30,000 | | 4.00 | % | | 2.50 | % |
Clarion | 300/$40,000 | | 4.25 | % | | 3.25 | % |
Sleep Inn | 300/$40,000 | | 4.65 | % | | 3.85 | % |
MainStay Suites | 300/$30,000 | | 5.00 | % | | 2.50 | % |
Econo Lodge | 250/$25,000 | | 4.50 | % | | 3.50 | % |
Rodeway Inn | 125/$10,000 | | (1 | ) | | (2 | ) |
Suburban Extended Stay Hotel | 225/$30,000 | | 5.00 | % | | 2.50 | % |
____________________________
| |
(1) | Royalty rate is $31.00 per room per month with an estimated annual minimum fee between $12,500 and $25,000 per property. |
| |
(2) | Combined marketing and reservation system fees are $19.00 per room per month with an estimated annual minimum fee between 12,500 and $20,000 per property. |
As previously noted, the Company’s franchise agreements are individually negotiated and therefore actual fees may differ from those noted above. From time to time, the Company may discount the standard royalty fees in the initial years of the agreement as a franchisee acquisition tactic. Typically, these discounts expire as the contract matures until the contractual royalty fees reach the standard franchise fee in effect at the time the agreement was executed.
Franchise Operations
Our operations are designed to improve RevPAR and lower operating and development costs for our franchisees, as these are the measures of performance that most directly impact franchisee profitability. We believe that by helping our franchisees become more profitable we will enhance our ability to both retain our existing franchisees and attract new franchisees. The key aspects of our franchise operations are:
Central Reservation System (“CRS”). On average, approximately one-third of the gross room revenue booked at domestic franchised properties is reserved through our central reservation system, which consists of our toll-free telephone reservation system, our proprietary internet site, mobile phone reservation applications, interfaces with global distribution systems, and other internet reservations sites. Our toll-free telephone reservation system utilizes a combination of company operated as well as third party call center service providers. Reservation agents trained on the reservation system can match each caller with a Choice-branded hotel meeting the caller’s needs. Our CRS provides a data link to our franchised properties as well as to airline reservation systems such as Amadeus, Galileo, SABRE and Worldspan that facilitate the reservation process for travel agents. We also offer our rooms for sale on our own proprietary internet site (www.choicehotels.com) as well as those of other travel companies.
We also operate a call forwarding program through which our franchisees can leverage our central reservation system capabilities by forwarding reservation calls received directly by the property to one of our reservation centers. Typically, this reduces the hotel’s front desk staffing needs, improves customer service and results in a higher average daily rate than reservations booked directly through the property.
We continue to implement our integrated reservation and distribution strategy to improve reservations delivery, reduce franchisee costs and improve franchisee satisfaction by enhancing our website, choicehotels.com. We also design our marketing campaigns to drive reservation traffic directly to our proprietary channels to minimize the impact that third party reservation sites may have on the pricing of our inventory. In addition, we have introduced programs such as our Best Internet Rate Guarantee program which has greatly reduced the ability of the travel intermediaries to undercut the published rates at our hotels. We do selectively distribute our inventory to key third party travel intermediaries that we have established agreements with to drive additional business to the Company and its brands. These agreements typically offer our brands preferred placement on these third party sites at reduced transaction fees. We also continue to educate our individual franchisees about the unfavorable impact to their business of contracting with sites with which we do not have preferred agreements. We currently have agreements with many but not all major online third party sites.
Property Management Systems. Our proprietary property and yield management systems, Profit Manager by Choice Hotels and choiceADVANTAGE, are designed to help franchisees maximize profitability and compete more effectively by managing their room inventory, rates and reservations. These systems synchronize each hotel’s inventory with our central reservation system, giving our reservation sales agents last room sell capabilities at every hotel. Our property management systems include a revenue management feature that calculates and suggests optimum rates based on each hotel’s past performance and projected occupancy. These tools are critical to business delivery and yield improvement as they facilitate a franchisees’ ability to effectively manage hotel operations, determine appropriate rates, drive occupancy and participate in our marketing programs. As a pure web-based solution, the choiceADVANTAGE system reduces each hotel’s investment in on-site computer equipment resulting in a lower total cost of ownership for property management systems. As a result, new hotels to our system are utilizing choiceADVANTAGE and the Company is currently in the process of migrating all existing hotels utilizing the Profit Manager system to choiceADVANTAGE. This process is expected to be completed over the next year.
Brand Name Marketing and Advertising. Our marketing and advertising programs are designed to heighten consumer awareness and preference for our brands as offering the greatest value and convenience in the lodging categories in which we compete. Marketing and advertising efforts include national television, internet and radio advertising, on-line advertising, print advertising in consumer and trade media and promotional events, including joint marketing promotions with qualified vendors and corporate partners. We also actively seek to maximize our presence on the internet by purchasing key search related terms
from the various search engine providers to ensure that our hotels are prominently displayed to all potential guests.
Numerous marketing and sales programs are conducted which target specific groups, including business travelers, senior citizens, automobile club members, families, government and military employees, educational organizations and meeting planners. Other marketing efforts include domestic and international trade show programs, publication of group and tour rate directories, direct-mail programs, electronic direct marketing e-mail programs, centralized commissions for travel agents, fly-drive programs in conjunction with major airlines, and an annual publication of a travel and vacation directory.
We operate a loyalty program, Choice Privileges, for all of the Choice brands to attract and retain travelers by rewarding frequent stays with points towards free hotel stays and other rewards. Choice Privileges participants earn points redeemable for free stays in Choice brand properties. The Company also offered guests the ability to earn airline miles for qualifying stays redeemable for flights with various airline partners as well as redeem points for gift certificates at participating retailers. These programs allow us to conduct lower cost, more targeted marketing campaigns to our consumers, deliver incremental business to our franchised hotels and is an important selling point for our franchise sales personnel. Choice Privileges members contribute over a quarter of the Company’s domestic gross room revenues and the program had more than 14.1 million members worldwide as of December 31, 2011. Growing the membership of the Choice Privileges program will continue to be a focus of the Company.
Marketing and advertising programs are directed by our marketing department, which utilizes the services of independent advertising agencies. We also employ home-based sales personnel geographically located across the United States using personal sales calls, telemarketing and other techniques to target specific customer groups, such as potential corporate clients in areas where our franchised hotels are located, the motor coach market, and meeting planners.
Our field based brand performance consultants work with franchisees to maximize RevPAR. These coordinators advise franchisees on topics such as marketing their hotels, improving quality and maximizing the benefits offered by the Choice reservations system. In addition, we recently launched a new rate and selling management tool to help our franchisees better manage rates and inventory which should help them improve RevPAR by optimizing ADR and occupancy.
Quality Assurance Programs. Consistent quality standards are critical to the success of a hotel franchise. We have established quality standards for all of our franchised brands that cover housekeeping, maintenance, brand identification and minimum service offerings. We inspect properties for compliance with our quality standards when application is made for admission to the franchise system. The compliance of existing franchisees with quality standards is monitored through scheduled and unannounced quality assurance reviews conducted periodically at the property and through the use of guest surveys. Properties that fail to maintain a minimum score are reinspected on a more frequent basis until deficiencies are cured, or until such properties are terminated. To encourage compliance with quality standards, various brand-specific incentives and awards are used to reward franchisees that maintain consistent quality standards. We identify franchisees whose properties operate below minimum quality standards and assist them to comply with brand specifications. Franchisees who fail to improve on identified quality matters may be subject to consequences ranging from written warnings, the payment of re-inspection fees, attendance at mandatory training programs and ultimately to the termination of the franchise agreement. Actual consequences, if any, are determined in the Company’s discretion on a case-by-case basis and may take into account a variety of factors apart from a franchisee’s level of compliance with our quality standards and brand specifications.
Training. We maintain a training department that conducts mandatory training programs for all franchisees and their employees. Regularly scheduled regional and national training meetings are also conducted for both property-level staff and managers. Training programs teach franchisees how to best use the Choice reservation system and marketing programs and fundamental hotel operations.
Training is conducted by a variety of methods, including group instruction seminars and on-line programs. We have also developed an interactive computer-based training system that will train hotel employees at their own pace.
Opening Services. We maintain an opening services department who ensure that incoming hotels meet or exceed brand standards and to ensure that each incoming hotel opens successfully. We also maintain a design and construction department to assist franchisees in refurbishing, renovating, or constructing their properties prior to or after joining the system. Department personnel assist franchisees in meeting our brand specifications by providing technical expertise and cost-savings suggestions.
Competition
Competition among franchise lodging chains is intense in attracting potential franchisees, retaining existing franchisees and generating reservations for franchisees. Franchise contracts are typically long-term in nature, but most allow the hotel owner to opt-out of the agreement at mutually agreed upon anniversary dates.
We believe that hotel operators choose lodging franchisors based primarily on the value and quality of each franchisor’s brand(s) and services and the extent to which affiliation with that franchisor may increase the franchisee’s reservations and profits. We also believe that hotel operators select a franchisor in part based on the franchisor’s reputation among other franchisees and the success of its existing franchisees.
Since our franchise system revenues are based on franchisees’ gross room revenues, our prospects for growth are largely dependent upon the ability of our franchisees to compete in the lodging market, our ability to convert competitor franchises and independent hotels to our brands and the ability of existing and potential franchisees to obtain financing to construct new hotels.
The ability of a hotel to compete may be affected by a number of factors, including the location and quality of the property, the number and quality of competing lodging facilities nearby, its affiliation with a recognized name brand and general regional and local economic conditions. We believe the effect of local economic conditions on our results is substantially reduced by our range of products and room rates and the geographic diversity of our franchised properties, which are open and operating in 49 states, the District of Columbia and over 30 countries and territories outside the United States.
We believe that our focus on core business strategies, combined with our financial strength and size, geographic diversity, scale and distribution will enable us to remain competitive.
Service Marks and Other Intellectual Property
The service marks Choice Hotels International, Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Cambria Suites, Suburban Extended Stay Hotel, Ascend Collection, Choice Privileges and related marks and logos are material to our business. We, directly and through our franchisees, actively use these marks. All of the material marks are registered with the United States Patent and Trademark Office. In addition, we have registered certain of our marks with the appropriate governmental agencies in over 100 countries where we are doing business or anticipate doing business in the foreseeable future. We seek to protect our brands and marks throughout the world, although the strength of legal protection available varies from country to country. Depending on the jurisdiction, trademarks and other registered marks are valid as long as they are in use and/or their registrations are properly maintained and they have not been found to have become generic.
Seasonality
The hotel industry is seasonal in nature. For most hotels, demand is lower in December through March than during the remainder of the year. Our principal source of revenues is franchise fees based on the gross room revenues of our franchised properties. The Company’s franchise fee revenues and operating income reflect the industry’s seasonality and historically have been lower in the first quarter than in the second, third or fourth quarters.
Regulation
The Federal Trade Commission (the “FTC”), various states and certain other foreign jurisdictions (including Australia, France, Germany, Canada, and Mexico) regulate the sale of franchises. The FTC requires franchisors to make extensive disclosure to prospective franchisees but does not require registration. A number of states in which our franchises operate require registration or disclosure in connection with franchise offers and sales. In addition, several states have “franchise relationship laws” or “business opportunity laws” that limit the ability of the franchisor to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. While our franchising operations have not been materially adversely affected by such regulations, we cannot predict the effect of future regulation or legislation.
Our franchisees are responsible for compliance with all laws and government regulations applicable to the hotels they own or operate. The lodging industry is subject to numerous federal, state and local government regulations, including those relating to the preparation and sale of food and beverage (such as health and liquor license laws), building and zoning requirements and laws governing employee relations, including minimum wage requirements, overtime, working conditions and work permit requirements.
Impact of Inflation and Other External Factors
Franchise fees can be impacted by external factors including, in particular, the supply of hotel rooms within the lodging industry relative to the demand for rooms by travelers and inflation.
We expect to benefit in the form of increased franchise fees from future growth in consumer demand for hotel rooms as well as growth in the supply of hotel rooms, to the extent it does not result in excess lodging industry capacity. However, a prolonged decline in demand for hotel rooms would negatively impact our business.
Although we believe that increases in the rate of inflation will generally result in comparable increases in hotel room rates, severe inflation could contribute to a slowing of the national economy. Such a slowdown could result in reduced travel by both business and leisure travelers, potentially resulting in less demand for hotel rooms, which could result in a reduction in room rates and fewer room reservations, negatively impacting our revenues. A weak economy could also reduce demand for new hotels, negatively impacting the franchise fees received by us.
Among other unpredictable external factors, which may negatively impact us, are wars, acts of terrorism, airline strikes, gasoline shortages, severe weather and the risks described below under the Item 1A. Risk Factors.
Employees
We employed approximately 1,431 people in our domestic operations as of February 15, 2012. None of our employees are represented by unions or covered by collective bargaining agreements. We consider our relations with our employees to be good.
EXECUTIVE OFFICERS OF CHOICE HOTELS INTERNATIONAL, INC.
The name, age, title, present principal occupation, business address and other material occupations, positions, offices and employment of each of the executive officers of the Company as of December 31, 2011 are set forth below. The business address of each executive officer is 10750 Columbia Pike, Silver Spring, Maryland 20901.
|
| | | |
Name | Age | | Position |
Stewart W. Bainum, Jr. | 65 | | Chairman of the Board of Directors |
Stephen P. Joyce | 51 | | President and Chief Executive Officer |
David L. White | 43 | | Senior Vice President, Chief Financial Officer & Treasurer |
Bruce N. Haase* | 50 | | Executive Vice President, Global Brands, Marketing & Operations
|
Patrick S. Pacious | 45 | | Executive Vice President, Global Strategy, Distribution & Technology
|
David A. Pepper | 44 | | Senior Vice President, Global Development |
Patrick J. Cimerola | 43 | | Senior Vice President, Human Resources and Administration |
Scott E. Oaksmith | 40 | | Controller |
* Effective January 31, 2012, Mr. Haase no longer serves as an Executive Officer of the Company
Stewart Bainum, Jr. Director from 1977 to 1996 and since 1997. Chairman of the Board of Choice Hotels from March 1987 to November 1996 and since October 1997; Chairman of the Board of Realty Investment Company, Inc. since December 2005; Chairman of the Board of Sunburst Hospitality Corporation since November 1996. He was a director of Manor Care, Inc. from September 1998 to September 2002, serving as Chairman from September 1998 until September 2001. From March 1987 to September 1998, he was Chairman and Chief Executive Officer of Manor Care, Inc. He served as President of Manor Care of America, Inc. and Chief Executive Officer of ManorCare Health Services, Inc. from March 1987 to September 1998, and as Vice Chairman of Manor Care of America, Inc. from June 1982 to March 1987.
Stephen P. Joyce. President & Chief Executive Officer since June 2008 and President & Chief Operating Officer from May 2008 until June 2008. Prior to joining the Company, he was employed by Marriott as Executive Vice President, Global Development/Owner and Franchise Services from 2005 until 2008 and Executive Vice President, Owner and Franchise Services/North American Full Service Development from 2003 until 2005.
David L. White. Senior Vice President, Chief Financial Officer & Treasurer since December 2007. He was Chief Financial Officer & Treasurer from September 2006 to December 2007; Vice President, Finance & Controller of Choice from December 2002 to September 2006; and was Vice President, Financial/SEC Reporting from September 2002 to December 2002. He was Senior Manager, Ernst & Young, LLP from May 2002 to September 2002. He was employed by Arthur Andersen LLP as Senior Manager from May 1999 to May 2002, and manager from October 1998 to May 1999. He served as Assistant Controller for the energy marketing division of Statoil Energy, Inc. from May 1997 to September 1998.
Bruce N. Haase. Executive Vice President, Global Brands, Marketing and Operations since October 2009. He was Executive Vice President, Global Operations from March 2008 to October 2009. Mr. Haase was Senior Vice President, Brand Operations & International from July 2007 to March 2008. He was Senior Vice President and Division President, Select Market Brands from January 2007 to July 2007 and was Senior Vice President, International of the Company from October 2000 to January 2007. He was Vice President – Finance and Treasurer from April 2000 until October 2000. He was Vice President,
Finance and Treasurer of The Ryland Group, Inc., in Columbia, Maryland, from August 1999 until March 2000 and Vice President and Treasurer from October 1995 until August 1999.
Patrick S. Pacious. Executive Vice President, Global Strategy, Distribution & Technology since February 2011. He was Senior Vice President Corporate Strategy and Information Technology from August 2009 to February 2011. He was Senior Vice President, Corporate Development and Strategy from December 2007 to August 2009. He was Vice President, Corporate Development and Innovation from May 2006 to December 2007 and was Senior Director of Corporate Strategy from July 2005 to May 2006. Prior to joining the Company, he was employed by Bearingpoint Inc. as a Senior Manager from 2002 until 2005 and Arthur Andersen Business Consulting LLP as a Senior Manager from 1996 until 2002.
David A. Pepper. Senior Vice President, Global Development since October 2009. He was Senior Vice President, Franchise Development & Emerging Brands from July 2007 to October 2009. He was Senior Vice President and Division President Cambria Suites and Extended Stay Market Brands from January 2007 to July 2007 and was Senior Vice President, Franchise Growth and Performance of Choice from December 2005 until January 2007. He was Senior Vice President, Development of Choice from January 2005 until December 2005. He was Vice President, Franchise Sales from June 2002 until January 2005. He was Vice President, Franchise Sales with USFS in Atlanta, Georgia from 1996 through June 2002.
Patrick J. Cimerola. Senior Vice President, Human Resources and Administration since September 2009. He was Vice President of Human Resources from January 2003 to September 2009. He was Sr. Director of Human Resources from January 2002 to January 2003.
Scott E. Oaksmith. Controller of the Company since September 2006. He was Senior Director & Assistant Controller of Choice from February 2004 to September 2006. He was Director, Marketing and Reservations, Finance from October 2002 until February 2004. Prior to joining the Company, he was employed by American Express Tax & Business Services, Inc. from January 1994 to October 2002, last serving as Senior Manager from October 2000 to October 2002.
Choice Hotels International, Inc. and its subsidiaries are subject to various risks, which could have a negative effect on the Company and its financial condition. These risks could cause actual operating results to differ from those expressed in certain “forward looking statements” contained in this Form 10-K as well as in other Company communications. Before you invest in our securities you should carefully consider these risk factors together with all other information included in our publicly filed documents.
We are subject to the operating risks common in the lodging and franchising industries.
A significant portion of our revenue is derived from fees based on room revenues at hotels franchised under our brands. As such, our business is subject, directly or through our franchisees, to the following risks common in the lodging and franchising industry, among others:
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• | changes in the number of hotels operating under franchised brands; |
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• | changes in the relative mix of franchised hotels in the various lodging industry price categories; |
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• | changes in occupancy and room rates achieved by hotels; |
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• | desirability of hotel geographic location; |
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• | travelers’ fears of exposure to contagious diseases or insect infestations in hotel rooms; |
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• | changes in general and local economic and market conditions, which can adversely affect the level of business and leisure travel, and therefore the demand for lodging and related services; |
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• | level of consumer unemployment; |
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• | increases in operating costs that may not be able to be totally offset by increases in room rates; |
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• | periods of deflation, defined as a persistent decline in the general price level of goods and services, may require franchisees to lower their room rates which would result in lower revenues to the Company. In addition, there is no guarantee that the Company could reduce its costs at the same pace as revenue declines leading to a reduction in operating profits; |
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• | over-building in one or more sectors of the hotel industry and/or in one or more geographic regions, could lead to excess supply compared to demand, and to decreases in hotel occupancy and/or room rates; |
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• | the availability and cost of capital to allow hotel owners and developers to fund investments; |
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• | changes in travel patterns; |
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• | changes in governmental regulations that influence or determine wages, prices or increase operating, maintenance |
or construction costs of our franchisees;
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• | travel restrictions (whether security-related or otherwise) imposed by governmental authorities that have the effect of discouraging or limiting travel to and from certain jurisdictions; |
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• | the costs and administrative burdens associated with compliance with applicable laws and regulations, including, among others, franchising, lending, privacy, marketing and sales, licensing, labor, climate change, employment and regulations applicable under the Office of Foreign Asset Control and the Foreign Corrupt Practices Act; |
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• | other unpredictable external factors, such as acts of God, war, terrorist attacks, pandemics, epidemics, airline strikes, transportation and fuel price increases, natural disasters, and severe weather may reduce business and leisure travel or reduce the number of hotels open and operating within our system; |
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• | increases in the cost of human capital, energy, healthcare, insurance and other operating expenses resulting in lower operating margins; |
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• | the financial condition of franchisees and travel related companies; |
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• | franchisors’ ability to develop and maintain positive relations with current and potential franchisees; and |
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• | changes in exchange rates or sustained recessionary periods in the United States (affecting domestic travel) and internationally could also unfavorably impact future results. |
Acquisition and development of new brands and markets.
On an on-going basis, we consider acquisitions of new brands that complement our current portfolio of brands as well as expansion of our brands in international markets. In many cases, we will be competing for these opportunities with third parties who may have substantially greater financial resources or different or lower acceptable financial metrics than we do. There can be no assurance that we will be able to identify acquisition candidates, acceptable new markets or complete transactions on commercially reasonable terms or at all. If transactions are consummated or new markets entered, there can be no assurance that any anticipated benefits will actually be realized. Similarly, there can be no assurance that we will be able to obtain additional financing for acquisitions or investments, or that the ability to obtain such financing will not be restricted by the terms of our debt agreements.
We have recently developed and launched additional hotel brands, such as Cambria Suites and Ascend Collection, and may develop and launch additional brands in the future. In addition, we plan to expand the distribution of existing brands in certain international markets. There can be no assurance regarding the level of acceptance of these brands in the development and consumer marketplaces, that costs incurred to develop the brands or expand in international markets (including advances for system services we provide) will be recovered or that the anticipated benefits from these new brands or markets will be realized.
We are subject to risks relating to acts of God, terrorist activity, epidemics and war.
Our financial and operating performance may be adversely affected by acts of God, such as natural disasters and/or pandemics, epidemics, terrorist activities and acts of war affecting locations where we have a high concentration of franchisees and areas of the world from which our franchisees draw a large number of guests. Some types of losses, such as from terrorism and acts of war, may be either uninsurable or too expensive to justify insuring against. Should an uninsured loss or a loss in excess of insured limits occur, our results from operations and financial condition may be adversely affected.
We may not grow our franchise system or we may lose business by failing to compete effectively.
Our operational and growth prospects depend on the strength and desirability of our brands. We believe that hotel operators choose lodging franchisors based primarily on the value and quality of each franchisor’s brand and services, the extent to which affiliation with that franchisor may increase the hotel operator’s reservations and profits, and the franchise fees charged. Demographic, economic or other changes in markets may adversely affect the desirability of our brands and, correspondingly, the number of hotels franchised under the Choice brands.
We compete with other lodging companies for franchisees. As a result, the terms of new franchise agreements may not be as favorable as our current franchise agreements. For example, competition may require us to reduce or change fee structures, make greater use of financial incentives such as loans and guarantees to acquire franchisees and/or reduce the level of property improvements required before operating under their brand names. This could potentially impact our margins negatively. New competition may also emerge using different business models with a lesser reliance on franchise fees. In addition, an excess supply of hotel rooms or unfavorable borrowing conditions may discourage potential franchisees from expanding or constructing new hotels, thereby limiting a source of growth of the franchise fees received by us.
In addition, each of our hotel brands competes with major hotel chains in national and international markets and with
independent companies in regional markets. Our ability to remain competitive and to attract and retain business and leisure travelers depends on our success in distinguishing our products and services from those offered by our competitors. If we are unable to compete successfully in these areas, this could adversely affect our market share and our results of operations.
We may have disputes with the owners our franchised hotels or their representative franchisee associations.
Our responsibilities under our franchise agreements may be subject to interpretation and may give rise to disagreements in some instances. Such disagreements may be more likely when hotel returns are depressed as a result of economic conditions. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential hotel owners as well as their representative franchisee associations; however, failure to resolve such disagreements could result in litigation with outcomes that may be adverse to our economic interests.
We may not achieve our objectives for growth in the number of franchised hotels.
The number of properties and rooms franchised under our brands significantly affects our results. There can be no assurance that we will be successful in achieving our objectives with respect to growing the number of franchised hotels in our system or that we will be able to attract qualified franchisees. The growth in the number of franchised hotels is subject to numerous risks, many of which are beyond the control of our franchisees or us. Among other risks, the following factors affect our ability to achieve growth in the number of franchised hotels:
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• | the ability of our franchisees to open and operate additional hotels profitably. Factors affecting the opening of new hotels, or the conversion of existing hotels to a Choice brand, include, among others: |
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• | the availability of hotel management, staff and other personnel; |
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• | the cost and availability of suitable hotel locations; |
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• | the availability and cost of capital to allow hotel owners and developers to fund investments; |
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• | cost effective and timely construction of hotels (which construction can be delayed due to, among other reasons, availability of financing, labor and materials availability, labor disputes, local zoning and licensing matters, and weather conditions); and |
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• | securing required governmental permits. |
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• | our ability to continue to enhance our reservation, operational and service delivery systems to support additional franchisees in a timely, cost-effective manner; |
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• | our formal impact policy, which offers franchisees protection from the opening of a same-brand property within a specified distance; |
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• | the effectiveness and efficiency of our development organization; |
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• | our failure to introduce new brands that gain market acceptance; |
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• | our dependence on our independent franchisees’ skills and access to financial resources necessary to open the desired number of hotels; and |
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• | our ability to attract and retain qualified domestic and international franchisees. |
In addition, we are currently planning to expand our international operations in many of the markets where we currently operate and in selected new markets. This may require considerable management time as well as start-up expenses for market development before any significant revenues and earnings are generated. Operations in new foreign markets may achieve low margins or may be unprofitable, and expansion in existing markets may be affected by local economic and market conditions. Therefore, as we expand internationally, we may not experience the operating margins we expect, our results of operations may be negatively impacted and our stock price may decline.
Contract terms for new hotel franchises may be less favorable.
The terms of the franchise agreements for new or conversion hotels are influenced by contract terms offered by our competitors at the time these agreements are entered into. Accordingly, we cannot be certain that contracts for new hotel franchises entered into or renewed in the future will be on terms that are as favorable as those under our existing agreements.
Instability in the credit markets may impact the ability of our franchisees to expand or construct new locations.
Our growth strategy relies on the ability of our franchisees to expand or open new franchises and to operate those franchises on a profitable basis. Delays or failures in opening new locations could materially and adversely affect our planned growth. During periods of credit market instability or when real estate values decline, credit and liquidity concerns increase as well as loan default rates. As a result, lenders will reduce their willingness to make new loans and tighten their credit requirements. Many of our franchisees depend on the availability of financing to refinance existing indebtedness, to expand and
or renovate existing locations or construct and open new hotels. If our franchisees experience difficulty in obtaining adequate financing for these purposes, our growth strategy and franchise revenues may be adversely affected during these periods.
Development activities that involve our co-investment or financing and guaranty support for third parties may result in exposure to losses.
As a result of our program to make financial support available to developers in the form of loans, credit support, such as guarantees, and equity investments, we are subject to investment and credit risks that we would not otherwise be exposed to as a franchisor. In particular, when we make loans to franchisees, agree to provide loan guarantees for the benefit of franchisees, or make equity investments in franchisees, we are subject to all generally applicable credit and investment risks, such as (1) construction delays, cost overruns, or acts of God such as earthquakes, hurricanes, floods or fires that may increase overall project costs or result in project cancellations; (2) the possibility that the parties with which we have entered into a co-investment, financing or guaranty relations could become bankrupt or otherwise lack the financial resources to meet their obligations, or could have or develop business interests, policies or objectives that are inconsistent with ours; and (3) that the conditions within capital markets may limit the ability of franchisees to raise additional debt or equity that may be required for completion of projects. In addition to general credit and capital market risks, we face specific risks stemming from our ability to assess the existing and future financial strength of the franchisee and its principals, the development/construction abilities of the franchisee, the expected performance of the hotel in light of the forecasted general, regional and market-specific economic climate, and the ability to negotiate for, value, and if necessary collect security for our loans or obligations. Although we actively seek to minimize such risks before providing financial support, if we do not accurately assess these risks, our assumptions used to make these estimates prove inaccurate, or situations in the credit market or hospitality industry change in a manner we did not anticipate, our loans and investments may become impaired and/or we may be required to make payment
under guarantees we have issued. In such instances, there is no assurance that we will be able to recover any or all of such impaired or paid amounts, in which case we will experience losses which could be material.
Development activities that involve our investment in real estate to stimulate the development of new brands may result in exposure to losses
The Company has recently begun a program to identify real estate for potential developers to acquire and be utilized for Cambria Suites development. The Company’s intent is to identify potential development sites so that developers may acquire the site and commence construction of a Cambria Suites. However, in certain circumstances, the Company has acquired the real estate prior to identifying a potential developer for the project. As a result, we are subject to the investment risk that we would not otherwise be exposed to as a franchisor. In particular, we face specific risks stemming from (1) our ability to assess the fair market value of the real estate; (2) the location’s suitability for development as a Cambria Suites; (3) the availability of zoning or other local approvals needed for development; and (4) the availability and pricing of capital. Although we actively seek to minimize these risks prior to acquiring real estate, there is no assurance that we will be able to recover the costs of our investments in which case we will experience losses which could be material.
Investing through joint ventures decreases our ability to manage risk
We have from time to time invested, and expect to continue to invest in real estate and other hospitality related joint ventures. Joint venturers often have shared control over the operation of the joint venture assets and therefore these investments may involve risks such as the possibility that the co-venturer in an investment might become bankrupt or not have the financial resources to meet its obligations, or have economic or business interests or goals that are inconsistent with our business interests or goals. Consequently, actions by a co-venturer might subject us to additional risk or result in actions that are inconsistent with our business interests or goals.
Under certain circumstances our franchisees may terminate our franchise contracts.
We franchise hotels to third parties pursuant to franchise agreements. These agreements may be terminated, renegotiated or expire but typically have an initial term of either 10 or 20 years. These agreements also typically contain provisions permitting either party to terminate the franchise agreement after five, ten or fifteen years under certain circumstances and depending on the particular hotel brand that is licensed to the franchisee. While our franchise agreements provide for liquidated damages to be paid to us by franchisees whose agreements have been terminated as the result of a violation of the provisions of the agreement, these damage amounts are typically less than the fees we would have received if the terminated franchisee fulfilled its contractual obligations. In addition, there can be no assurance that we will be able to replace expired or terminated franchise agreements, or that the provisions of renegotiated or new agreements will be as favorable as the provisions that existed before such expiration, replacement or renegotiation. As a result, our revenues could be negatively impacted.
Deterioration in the general financial condition of our franchisees may adversely affect our results.
Our operating results are impacted by the ability of our franchisees to generate revenues at properties they franchise from us. An extended period of occupancy or room rate declines may adversely affect the operating results and financial condition of our franchisees. These negative operating conditions could result in the financial failure of our owners and result in a termination of the franchisee for non-payment of franchise fees or require the transfer of ownership of the franchise. In those instances where ownership is transferred, there can be no assurance that the new owners will choose to affiliate with our brands.
The hotel industry is highly competitive. Competition for hotel guests is based primarily on the level of service, quality of accommodations, convenience of locations and room rates. Our franchisees compete for guests with other hotel properties in their geographic markets. Some of their competitors may have substantially greater marketing and financial resources than our franchisees, and they may construct new facilities or improve their existing facilities, reduce their prices or expand and improve their marketing programs in ways that adversely affect our franchisees' operating results and financial condition. In addition, the ability of our franchisees to compete for guests directly impacts the desirability of our brands to current and prospective franchisees.
These factors, among others, could adversely affect the operating results and financial condition of our franchisees and result in declines in the number of franchised properties and/or franchise fees and other revenues derived from our franchising business. In addition, at times, the Company provides financial support to our franchisees via notes and guarantees. Factors that may adversely affect the operating results and financial condition of these franchisees may result in the Company incurring losses related to this financial support.
We may not be able to recover advances for system services that we provide to our franchisees.
The Company is obligated to use the system fees it collects from the current franchisees comprising its various hotel brands to provide system services, such as marketing and reservations services, appropriate to fulfill our obligations under the Company’s franchise agreements. In discharging our obligation to provide sufficient and appropriate system services, the Company has the right to expend funds in an amount reasonably necessary to ensure the provision of such services, regardless of whether or not such amount is currently available to the Company for reimbursement. As a result, expenditures for system services by the Company in excess of available system fees are recorded as receivables in the Company’s financial statements.
Under the terms of its franchise agreements, the Company has the legally enforceable right to assess and collect from its current franchisees, fees sufficient to pay for the system services the Company has provided or procured for the benefit of its franchisees, including fees to reimburse the Company for past services rendered. The Company’s current franchisees are legally obligated to pay any assessment the Company imposes on them to obtain reimbursement of any systems services advances regardless of whether the franchisees continue to generate gross room revenue and whether or not they joined the system following the deficit’s occurrence. However, our ability to recover these receivables may be adversely impacted by certain factors, including, among others, declines in the ability of our franchisees to generate revenues at properties they franchise from us, lower than expected franchise system growth of certain brands and/or lower than expected international franchise system growth. An extended period of occupancy or room rate declines or a decline in the number of hotel rooms in our franchise system could result in the generation of insufficient funds to recover system services advances as well as meet the ongoing system service needs of our franchisees.
Our franchisees may fail to make investments necessary to maintain or improve their properties, preference for our brands and our reputation could suffer and our franchise agreements with these franchisees could terminate.
Our franchised properties are governed by the terms of franchise agreements. Substantially all of these agreements require property owners to comply with standards that are essential to maintaining our brand integrity and reputation. We depend on our franchisees to comply with these requirements by maintaining and improving properties through investments, including investments in furniture, fixtures, amenities and personnel.
Franchisees may be unable to access capital or unwilling to spend available capital when necessary, even if required by the terms of our franchise agreements. If our franchisees fail to make investments necessary to maintain or improve the properties we franchise, our brand preference and reputation could suffer. In addition, if franchisees breach the terms of our agreements with them, we may elect to exercise our termination rights, which would eliminate our revenues from these properties and cause us to incur expenses related to terminating these relationships. These risks become more pronounced during economic downturns.
Increasing use of alternative internet reservation channels may decrease loyalty to our brands and our existing distribution channels or otherwise adversely affect us.
A significant percentage of hotel rooms are booked through internet travel intermediaries. If such bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from our franchisees or us. Moreover, some of these internet travel intermediaries are attempting to commoditize hotel rooms, by increasing the importance of price and general indicators of quality at the expense of brand identification. These intermediaries hope that consumers will eventually develop brand loyalties to their reservations systems rather than to our lodging brands and our existing distribution channels. If this happens, our business and profitability may be significantly harmed. We have established agreements with many key third party websites to limit transaction fees for hotels but we currently do not have agreements with several large internet travel intermediaries. We have also introduced a "Best Internet Rate Guarantee" to reduce the ability of intermediaries to undercut the published rates at our hotels. However, there can be no assurance that current margins or levels of utilization associated with either our online or contact center distribution channels will not decrease in the face of such competition. In addition, there can be no assurance that we will be able to renegotiate these agreements, upon their expiration, with terms as favorable as the provisions that existed before such expiration, replacement or renegotiation.
We are dependent upon our ability to attract and retain key officers and other highly qualified personnel.
Our future success and our ability to manage future growth depend in large part upon the efforts and skills of our senior management and our ability to attract and retain key officers and other highly qualified personnel. Competition for such personnel is intense. There can be no assurance that we will continue to be successful in attracting and retaining qualified personnel. Accordingly, there can be no assurance that our senior management will be able to successfully execute and implement our growth and operating strategies.
Our international operations are subject to political and monetary risks.
We have franchised properties open and operating in over 30 countries and territories outside of the United States. We also have investments in foreign hotel franchisors. International operations generally are subject to greater political and other risks than those affecting United States operations. In certain countries, these risks include the risk of war or civil unrest, expropriation and nationalization. In addition, the laws of some international jurisdictions do not adequately protect our intellectual property and restrict the repatriation of non-United States. earnings. Various international jurisdictions also have laws limiting the right and ability of non-United States entities to pay dividends and remit earnings to affiliated companies unless specified conditions have been met. In addition, revenues from international jurisdictions typically are earned in local currencies, which subjects us to risks associated with currency fluctuations. Currency devaluations and unfavorable changes in international monetary and tax policies could have a material adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions. We intend to continue to expand internationally, which would make the risks related to our international operations more significant over time.
We are subject to certain risks related to our indebtedness.
As a result of our debt obligations, we are subject to the following risks, among others:
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• | the risk that (to the extent we maintain floating rate indebtedness) interest rates increase; |
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• | our leverage may adversely affect our ability to obtain additional financing for acquisitions, working capital, capital expenditures or other purposes, if required; |
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• | the availability and cost of capital may limit our ability to refinance our existing revolving debt obligations; and |
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• | our existing debt agreements contain covenants that limit our ability to, among other things, borrow additional money, sell assets or engage in mergers. If we do not comply with these covenants, or do not repay our debt on time, we would be in default under our debt agreements. Unless any such default is waived by our lenders, the debt could become immediately payable and this would have a material adverse impact on us. |
Our ability to make payments of principal and interest on our indebtedness depends upon our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our consolidated operations, many of which are beyond our control. If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to, among other things:
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• | seek additional financing in the debt or equity markets; |
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• | refinance or restructure all or a portion of our indebtedness; |
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• | reduce or delay planned capital expenditures; |
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• | reduce or delay planned operating expenditures; or |
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• | reduce or eliminate quarterly dividends. |
While we currently maintain an investment grade credit rating by both of the major rating agencies, there can be no assurance we will be able to maintain this rating. In the event of a downgrade in our credit rating, we would likely incur higher borrowing costs.
Anti-takeover provisions may prevent a change in control.
Our restated certificate of incorporation, the staggered terms of our board of directors and the Delaware General Corporation Law each contain provisions that could have the effect of making it more difficult for a party to acquire, and may discourage a party from attempting to acquire, control of our Company without approval of our board of directors. These provisions together with the concentration of our share ownership could discourage tender offers or other bids for our common stock at a premium over market price.
The concentration of share ownership may influence the outcome of certain matters.
The concentration of share ownership by our directors and affiliates allows them to substantially influence the outcome of matters requiring shareholder approval. As a result, acting together, they may be able to control or substantially influence the outcome of matters requiring approval by our shareholders, including the elections of directors and approval of significant corporate transactions, such as mergers, acquisitions and equity compensation plans.
Government franchise and tax regulation could impact our business.
The Federal Trade Commission (the “FTC”), various states and certain foreign jurisdictions where we market franchises regulate the sale of franchises. The FTC requires franchisors to make extensive disclosure to prospective franchisees but does not require registration. A number of states in which our franchisees operate require registration or disclosure in connection with franchise offers and sales. In addition, several states in which our franchisees operate have “franchise relationship laws” or “business opportunity laws” that limit the ability of the franchisor to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. While our business has not been materially affected by such regulation, there can be no assurance that this will continue or that future regulation or legislation will not have such an effect.
The determination of our worldwide provision for income taxes and other tax liabilities requires estimation and significant judgment and there are many transactions and calculations where the ultimate tax determination is uncertain. Like many other multinational corporations, we are subject to tax in multiple United States and foreign tax jurisdictions and have structured our operations to reduce our effective tax rate. Our determination of our tax liability is always subject to audit and review by applicable domestic and foreign tax authorities. Any adverse outcome of any such audit or review could have a negative effect on our business, operating results and financial condition, and the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
In addition, recent economic downturns have reduced tax revenues for United States federal and state governments and as a result proposals to increase taxes from corporate entities are being considered at various levels of government. Among the options have been a range of proposals included in the tax and budget policies recommended to the United States Congress by the United States Department of the Treasury to modify the federal tax rules related to the imposition of United States federal corporate income taxes for companies operating in multiple United States and foreign tax jurisdictions. If such proposals are enacted into law, this could increase our effective tax rate.
Failure to comply with the Sarbanes-Oxley Act could impact our business.
There can be no assurance that the periodic evaluation of our internal controls required by the Sarbanes-Oxley Act will not result in the identification of significant deficiencies or material weaknesses in our internal controls or that our auditors will be able to attest to the effectiveness of our internal control over financial reporting. Failure to comply may have consequences on our business including, but not limited to, increased risks of financial statement misstatements, SEC sanctions and negative capital market reactions.
We are subject to certain risks related to litigation filed by or against us.
We cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of litigation filed by or against us, including, remedies or damage awards. This litigation may involve, but is not limited to, actions or negligence by franchisees outside of our control. Our franchise agreements provide that we are not liable for the actions of our franchisees; however, there is no guarantee that we would be insulated from liability in all cases.
We and our franchisees are reliant upon technology and the disruption or malfunction in our information systems could adversely affect our business.
The lodging industry depends upon the use of sophisticated technology and systems including those utilized for reservations, property management, procurement, operation of our customer loyalty programs and our administrative systems. The operation of many of these systems is dependent upon third party data communication networks and software upgrades, maintenance and support. These technologies can be expected to require refinements and there is the risk that advanced new technologies will be introduced. There can be no assurance that as various systems and technologies become outdated or new technology is required we will be able to replace or introduce them as quickly as our competitors or within budgeted costs for such technology.
There can be no assurance that we will achieve the benefits that may have been anticipated from any new technology or system. Further, there can be no assurance that disruptions of the operation of these systems will not occur as a result of failures related to our internal or third party systems and support.
Information technology systems that we rely upon are also vulnerable to damage or interruption from:
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• | earthquakes, fires, floods and other natural disasters; |
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• | power losses, computer systems failures, internet and telecommunications or data network failures, service provider negligence, improper operation by or supervision of employees, user error, physical and electronic losses of data and similar events; and |
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• | computer viruses, penetration by individuals seeking to disrupt operations or misappropriate information and other breaches of security. |
The hospitality industry is under increasing attack by cyber-criminals in the United States and other jurisdictions in which we operate. These attacks can be deliberate attacks or unintentional events that could cause interruptions or delays in our business, loss of data, or render us unable to process reservations. Accordingly, an extended interruption in the ability of any system to function could significantly curtail, directly and indirectly, our ability to conduct our business and generate revenue.
We seek to minimize the impact of these attacks through various technologies, processes and practices designed to protect our networks, systems, computers and data from attack, damage or unauthorized access. However, there are no guarantees that our cyber-security practices will be sufficient to thwart all attacks. While we carry property and business operation interruption insurance, we may not be sufficiently compensated for all losses we may incur. These losses include not only a loss of revenues but also potential reputational damage to our brands and litigation, fines or regulatory action against us. Furthermore, the Company may also incur substantial remediation costs to repair system damage as well as satisfy liabilities for stolen assets or information that may further reduce our profits.
The weakening of our trademarks and other intellectual property could impact our business.
We believe that our trademarks and other intellectual property are fundamental to our brands and our franchising business. We generate, maintain, license and enforce a substantial portfolio of trademarks and other intellectual property rights. We enforce our intellectual property rights to protect the value of our trademarks, our development activities, to protect our good name, to promote our brand name recognition, to enhance our competitiveness and to otherwise support our business goals and objectives. We rely on trademark laws to protect our proprietary rights. Monitoring the unauthorized use of our intellectual property is difficult. Litigation has been and may continue to be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources, may result in counterclaims or other claims against us and could significantly harm our results of operations. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. From time to time, we apply to have certain trademarks registered. There is no guarantee that such trademark registrations will be granted. We cannot assure you that all of the steps we have taken to protect our trademarks in the United States and foreign countries will be adequate to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brand and its market acceptance, competitive advantages or goodwill, which could adversely affect our business.
Failure to maintain the integrity of internal or customer data could result in faulty business decisions, damage of reputation and/or subject us to costs, fines or lawsuits.
Our business requires the collection and retention of large volumes of internal and customer data, including credit card numbers and other personally identifiable information of our employees and customers as such information is entered into, processed, summarized, and reported by the various information systems we use. The integrity and protection of that customer, employee, and company data is critical to us. Our customers have a high expectation that we will adequately protect their personal information, and the regulatory environment surrounding information security and privacy is increasingly demanding,
both in the United States and in the international jurisdictions in which we operate. If the Company fails to maintain compliance with the various United States. and international laws and regulations applicable to the protection of such data or with the Payment Card Industry (“PCI”) data security standards, the Company’s ability to process such data could be adversely impacted and expose the Company to fines, litigation or other expenses or sanctions.
Changes in privacy law could adversely affect our ability to market our products effectively.
We rely on a variety of direct marketing techniques, including telemarketing, email, marketing and postal mailings. Any future restrictions in laws such as Telemarketing Sales Rule, CANSPAM Act, and various United States state laws, or new federal laws regarding marketing and solicitation or international data protection laws that govern these activities could adversely affect the continuing effectiveness of telemarketing, email and postal mailing techniques and could force changes in our marketing strategies. If this occurs, we may not be able to develop adequate alternative marketing strategies, which could impact the amount and timing of our revenues. We also obtain access to potential customers from travel service providers and other companies with whom we have substantial relationships and market to some individuals on these lists directly or by including our marketing message in the other company’s marketing materials. If access to these lists was prohibited or otherwise restricted, our ability to develop new customers and introduce them to our products could be impaired.
We depend on the skill, ability and decisions of third party operators.
The Company utilizes third party operators to provide significant franchise services, such as providing general reservation call center services and inspecting its franchisees. The failure of any third-party operator to make decisions, perform their services, discharge their obligations, deal with regulatory agencies, and comply with laws, rules and regulations could result in material adverse consequences to our business.
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Item 1B. | Unresolved Staff Comments. |
None.
Our principal executive offices are located at 10750 Columbia Pike, Silver Spring, MD 20901. The offices are leased from a third party. We lease one office building and own a second office building in Phoenix, AZ, which houses our reservation and property systems’ information technology operations. The Company owns a reservation center in Grand Junction, CO. We also lease office space in Australia, England, Canada, Germany, Italy, France, India and Mexico and Chevy Chase, Maryland. During the year ended December 31, 2011, the Company entered into a new lease agreement to move its principal executive offices to Rockville, MD and expects to relocate its principal office to this new location during 2013. Management believes that the Company’s existing properties are sufficient to meet its present needs and does not anticipate any difficulty in securing additional or alternative space, as needed, on terms acceptable to the Company.
We own three MainStay Suites hotels located in Brentwood, TN, Pittsburgh, PA and Greenville, SC. In addition, the Company owns various parcels of real estate held for sale to third-party developers for the potential development of Cambria Suites hotels in El Segundo, CA, Rockland MA, Plano, TX and Orlando, FL. In addition, during 2011, the Company entered into an 80.5 year ground lease with the state of Arizona for 2.5 acres of land for potential development of a Cambria Suites hotel.
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Item 3. | Legal Proceedings. |
The Company is not a party to any litigation other than routine litigation incidental to its business. The Company’s management does not expect that the outcome of any of its currently ongoing legal proceedings, individually or collectively, will have a material adverse effect on the Company’s financial condition, results of operations or cash flow.
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Item 4. | Mine Safety Disclosures. |
None
PART II
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
The shares of the Company’s common stock are listed and traded on the New York Stock Exchange. The following table
sets forth information on the high and low prices of the Company’s common stock and cash dividends declared per share for each quarterly period for the two most recently completed years.
QUARTERLY MARKET PRICE RANGE OF COMMON STOCK AND CASH DIVIDENDS DECLARED
|
| | | | | | | | | | | |
| Market Price Per Share | | Cash Dividends Declared Per Share |
Quarters Ended | High | | Low | |
2010 | | | | | |
March 31, | $ | 35.62 |
| | $ | 30.61 |
| | $ | 0.185 |
|
June 30, | $ | 39.74 |
| | $ | 30.12 |
| | $ | 0.185 |
|
September 30, | $ | 37.00 |
| | $ | 29.25 |
| | $ | 0.185 |
|
December 31, | $ | 39.84 |
| | $ | |