# CHOICE HOTELS INTERNATIONAL INC /DE (CHH) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CHOICE HOTELS INTERNATIONAL INC /DE's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1046311/000104631124000010/chh-20231231.htm
Accession: 0001046311-24-000010
Filing date: 2024-02-20
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/CHH/
All MD&A years: /company/CHH/mda/
Previous year: /company/CHH/mda/fy2022/ (FY 2022)
Next year: /company/CHH/mda/fy2024/ (FY 2024)

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

We are primarily a hotel franchisor operating in 50 states, the District of Columbia, and 46 countries and territories. At December 31, 2023, we had 7,527 hotels with 632,986 rooms open and operating, and 1,032 hotels with 105,062 rooms under construction, awaiting conversion or approved for development, or committed to future franchise development on outstanding master development agreements (collectively, "pipeline") in our global system. Our brand names include Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Clarion Pointe™, Ascend Hotel Collection®, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay Suites®, Suburban Studios™, WoodSpring Suites®, Everhome Suites®, and Cambria® Hotels (collectively, the "legacy Choice brands"). Additionally, through the Radisson Hotels Americas acquisition completed on August 11, 2022, our brands expanded to include Radisson Blu®, Radisson RED®, Radisson®, Park Plaza®, Country Inn & Suites® by Radisson, Radisson Inn & SuitesSM, Park Inn by Radisson®, Radisson Individuals®, and Radisson Collection® (collectively, the "legacy Radisson brands"), which are located across the United States, Canada, the Caribbean and Latin America.

The hotel franchising business represents the Company's primary operations. The Company's domestic operations are conducted through direct franchising relationships, the ownership of seven Cambria and three legacy Radisson Hotels Americas open and operating hotels, and the management of 14 hotels (inclusive of four owned hotels), while its international franchise operations are conducted through a combination of direct franchising and master franchising relationships. Master franchising relationships are governed by master franchising agreements which generally provide the master franchisee with the right to use our brands and sub-license the use of our brands in a specific geographic region, usually for a fee. As a result of our master franchise relationships and international market conditions, our revenues are primarily concentrated in the United States. Therefore, our description of our business is primarily focused on the domestic operations, which encompasses the United States.

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

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

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

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franchises. Accordingly, over the long-term, the continued growth of our franchise business should enable us to realize the benefits from the operating leverage in place and improve our operating results.

We are required by our franchise agreements to use the marketing and reservation system fees we collect for system-wide marketing and reservation system activities. These expenditures, which include advertising costs and costs to maintain our central reservations systems, enhance awareness and consumer preference for our brands and deliver guests to our franchisees. Greater awareness and preference promote long-term growth in business delivery to our franchisees and increases the desirability of our brands to hotel owners and developers, which ultimately increases the franchise fees earned by the Company. Additionally, the legacy Radisson Hotels Americas management agreements include cost reimbursements, primarily related to payroll costs at managed hotels where the Company is the employer.

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

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

Profitable Growth - Our success is dependent on improving the performance of our hotels, increasing the size of our system by selling additional hotel franchises with a focus on revenue-intense chain scales and markets, improving our effective royalty rate, expanding our qualified vendor and partnership platform programs and maintaining a disciplined cost structure. We attempt to improve our revenues and overall profitability by providing a variety of products and services designed to increase business delivery and/or reduce operating and development costs. These products and services include national marketing campaigns, a guest loyalty program, a central reservation system, property and yield management programs and systems, revenue management services, quality assurance standards, and qualified vendor relationships and partnerships with companies that provide products and services to our franchisees and guests. We believe that healthy brands, which deliver a compelling return on investment, will enable us to sell additional hotel franchises and raise royalty rates. We have multiple brands that meet the needs of many different types of guests, and can be developed at various price points and applied to both new and existing hotels. This ensures that we have brands suitable for creating growth in a variety of market conditions. Improving the performance of the hotels in our system, strategically growing the system through additional franchise sales, and improving franchise agreement pricing while maintaining a disciplined cost structure are the keys to profitable growth. The addition of the legacy Radisson brands in the Americas increased Choice's footprint in the upper midscale and upscale chain scales and established Choice's presence in the upper upscale chain scale. We believe the Radisson Hotels Americas acquisition has enabled us to strengthen our presence in the upper midscale chain scale, expand our market presence in certain geographies in the United States, and further build on our momentum in the upscale chain scale which will facilitate the continued growth of our Cambria Hotels and Ascend Hotel Collection brands and the further expansion of the Radisson portfolio.

Maximizing Financial Returns and Creating Value for Shareholders - 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. Since our business has not historically required significant reinvestment of capital, we typically utilize cash in ways that management believes provides the greatest returns to our shareholders, which include acquisitions, share repurchases and dividends. Refer to the Liquidity and Capital Resources section in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for more information regarding our capital returns to shareholders.

In addition to our hotel franchising business, we have also developed or acquired seven Cambria and three legacy Radisson Hotels Americas open and operating hotels. We intend to continue to strategically develop hotels to increase the presence of our newly introduced brands in the United States, drive greater guest satisfaction and brand preference, and ultimately increase the number of franchise agreements awarded. When developing hotels, we seek key markets with strong growth potential that will deliver strong operating performance and improve the recognition of our brands. Our hotel development and ownership efforts currently focus on the Cambria Hotels and Everhome Suites brands. We believe our owned hotels provide us the opportunity to support and accelerate the growth of these brands. We do not anticipate owning hotels on a permanent basis and we expect to target dispositions to a franchisee encumbered with a long-term Choice franchise agreement in the future.

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

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

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

Results of Operations - Royalty, licensing and management fees, operating income, net income, and diluted earnings per share ("EPS") represent the key measures of our financial performance. These measures are primarily driven by the operations of our hotel franchise system and, therefore, our analysis of the Company's operations is primarily focused on the size, performance, and the potential growth of the hotel franchise system as well as our variable overhead costs.

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

Due to the seasonal nature of the Company’s hotel franchising and management business and the multi-year investments required to support franchise operations, quarterly and/or annual deficits may be generated. During the years ended December 31, 2023, 2022, and 2021, other revenues from franchised and managed properties exceeded other expenses from franchised and managed properties by $1.8 million, $49.7 million, and $83.9 million, respectively.

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

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

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

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

Wyndham Proposal

On December 12, 2023, the Company disclosed that it had commenced an exchange offer to acquire all of the outstanding shares of Wyndham Hotels & Resorts, Inc. ("Wyndham") at an exchange ratio of $49.50 in cash and 0.324 shares of Choice common stock per Wyndham share. There can be no assurance that the exchange offer will be successful. In the event we enter into and consummate an acquisition of Wyndham, the acquisition would have a significant impact on our future financial condition, results of operations, and cash flows.

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Operations Review

The summarized financial results for the years ended December 31, 2023 and 2022 are as follows:

[[GREPCENT_TABLE]]
[["","December 31,"],["(in thousands)","2023","","2022"],["REVENUES"],["Royalty, licensing and management fees","$","513,412","","","$","471,759"],["Initial franchise fees","27,787","","","28,074"],["Platform and procurement services fees","75,114","","","63,800"],["Owned hotels","97,641","","","70,826"],["Other","46,051","","","64,740"],["Other revenues from franchised and managed properties","784,160","","","702,750"],["Total revenues","1,544,165","","","1,401,949"],["OPERATING EXPENSES"],["Selling, general and administrative","216,081","","","167,697"],["Business combination, diligence and transition costs","55,778","","","39,578"],["Depreciation and amortization","39,659","","","30,425"],["Owned hotels","71,474","","","48,837"],["Other expenses from franchised and managed properties","782,409","","","653,060"],["Total operating expenses","1,165,401","","","939,597"],["Impairment of long-lived assets","(3,736)","","","\u2014"],["Gain on sale of business and assets, net","\u2014","","","16,249"],["Operating income","375,028","","","478,601"],["OTHER EXPENSES AND INCOME, NET"],["Interest expense","63,780","","","43,797"],["Interest income","(7,764)","","","(7,288)"],["Gain on extinguishment of debt","(4,416)","","","\u2014"],["Other (gain) loss","(10,649)","","","7,018"],["Equity in net (gain) loss of affiliates","(2,879)","","","(1,732)"],["Total other expenses and income, net","38,072","","","41,795"],["Income before income taxes","336,956","","","436,806"],["Income tax expense","78,449","","","104,654"],["Net income","$","258,507","","","$","332,152"]]
[[/GREPCENT_TABLE]]

Results of Operations

For the year ended December 31, 2023, the Company recognized income before income taxes of $337.0 million, which is a $99.8 million decrease from the year ended December 31, 2022. The decrease in income before income taxes is primarily due to a decrease in operating income.

Operating income decreased $103.4 million primarily due to a $47.9 million decrease in the net surplus generated from other revenues and other expenses from franchised and managed properties, a $22.7 million decrease in termination fees in other revenues from the exit of 110 WoodSpring units in September 2022, and a $16.2 million decrease in net gains on the sale of business and assets that were recognized during 2022. Selling, general and administrative expenses increased $48.4 million primarily due to the inclusion of the full year's cost of operations of the acquired Radisson Hotels Americas business, an increase in the Company's deferred compensation liabilities based on increases in the fair value of the underlying investments, and an increase in employee salary and benefit continuation payments due to certain restructurings. Business combination, diligence and transition costs increased $16.2 million related to the integration of the Radisson Hotels Americas business and costs associated with acquisition pursuits. Depreciation and amortization expense also increased $9.3 million due to the acquisition of three hotel properties and identifiable intangible assets in the Radisson Hotels Americas transaction. The decreases to operating income were partially offset by the growth of the legacy Choice franchising business and the inclusion of the full year's revenues from operations of the acquired Radisson Hotels Americas business.

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

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Royalty, Licensing and Management Fees

Domestic royalty fees increased $14.8 million to $458.1 million for the year ended December 31, 2023 from $443.3 million for the year ended December 31, 2022. The increase in domestic royalty fees is attributable to higher royalty fees in the comparative period for the legacy Radisson brands and a system-wide 6 basis point increase in the effective royalty rate from 4.93% for the year ended December 31, 2022 to 4.99% for the year ended December 31, 2023, and a 0.1% domestic system-wide RevPAR increase due to a 1.9% increase in average daily rates, partially offset by a 100 basis point decrease in occupancy.

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

[[GREPCENT_TABLE]]
[["","2023","","2022","","Change"],["","Average Daily Rate","","Occupancy","","RevPAR","","Average Daily Rate","","Occupancy","","RevPAR","","Average Daily Rate","","Occupancy","","RevPAR"],["Upscale & Above (1)","$","151.14","","","56.7","%","","$","85.73","","","$","146.24","","","55.8","%","","$","81.65","","","3.4","%","","90","","bps","","5.0","%"],["Midscale & Upper Midscale (2)","101.14","","","56.8","%","","57.46","","","100.42","","","57.4","%","","57.64","","","0.7","%","","(60)","","bps","","(0.3)","%"],["Extended Stay (3)","63.50","","","72.2","%","","45.88","","","61.91","","","75.6","%","","46.81","","","2.6","%","","(340)","","bps","","(2.0)","%"],["Economy (4)","71.71","","","47.9","%","","34.37","","","71.75","","","50.1","%","","35.94","","","(0.1)","%","","(220)","","bps","","(4.4)","%"],["Total (5)","$","96.93","","","57.0","%","","$","55.21","","","$","95.13","","","58.0","%","","$","55.16","","","1.9","%","","(100)","","bps","","0.1","%"]]
[[/GREPCENT_TABLE]]

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

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

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

(4) Includes Econo Lodge and Rodeway brands.

(5) Radisson Hotels Americas was acquired on August 11, 2022. To enhance comparability for the year ended December 31, 2022, ADR, Occupancy, and RevPAR reflect the operating performance as if the legacy Radisson brands were acquired on January 1, 2022.

A summary of the domestic hotels and rooms by brand in our franchise system as of December 31, 2023 and 2022 was as follows:

[[GREPCENT_TABLE]]
[["","December 31, 2023","","December 31, 2022","","Variance"],["","Hotels","","Rooms","","Hotels","","Rooms","","Hotels","","%","","Rooms","","%"],["Comfort (1)","1,705","","133,675","","1,685","","","132,523","","","20","","1.2","%","","1,152","","0.9","%"],["Quality Inn","1,617","","","118,960","","","1,633","","","121,275","","","(16)","","(1.0)","%","","(2,315)","","(1.9)","%"],["Econo Lodge","675","","","39,805","","","702","","","42,112","","","(27)","","(3.8)","%","","(2,307)","","(5.5)","%"],["Rodeway","470","","","26,309","","","503","","","28,364","","","(33)","","(6.6)","%","","(2,055)","","(7.2)","%"],["Country (2)","426","","","33,976","","","434","","","34,657","","","(8)","","(1.8)","%","","(681)","","(2.0)","%"],["Sleep Inn","427","","","30,104","","","423","","","29,775","","","4","","0.9","%","","329","","1.1","%"],["Ascend Hotel Collection","199","","","22,818","","","196","","","20,091","","","3","","1.5","%","","2,727","","13.6","%"],["WoodSpring Suites","235","","","28,350","","","212","","","25,592","","","23","","10.8","%","","2,758","","10.8","%"],["Clarion (3)","178","","","19,185","","","178","","","19,630","","","\u2014","","\u2014","%","","(445)","","(2.3)","%"],["MainStay Suites","126","","","8,831","","","115","","","7,891","","","11","","9.6","%","","940","","11.9","%"],["Suburban Studios","104","","","9,046","","","75","","","6,719","","","29","","38.7","%","","2,327","","34.6","%"],["Cambria Hotels","74","","","10,239","","","65","","","8,865","","","9","","13.8","%","","1,374","","15.5","%"],["Radisson (4)","64","","","15,206","","","70","","","16,453","","","(6)","","(8.6)","%","","(1,247)","","(7.6)","%"],["Park Inn","4","","","363","","","4","","","363","","","\u2014","","\u2014","%","","\u2014","","\u2014","%"],["Everhome Suites","1","","","98","","","1","","","99","","","\u2014","","\u2014","%","","(1)","","(1.0)","%"],["Total Domestic Franchises","6,305","","496,965","","6,296","","494,409","","9","","0.1","%","","2,556","","0.5","%"]]
[[/GREPCENT_TABLE]]

(1)Includes the Comfort family of brand extensions, including Comfort Inn and Comfort Suites.

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

(3)Includes the Clarion family of brand extensions, including Clarion and Clarion Pointe.

(4)Includes the Radisson, Radisson Blu, Radisson Individuals, and Radisson Red brands.

International royalty fees increased to $28.9 million for the year ended December 31, 2023 from $20.0 million for the year ended December 31, 2022. The increase in international royalty fees is attributable to higher royalty fees for the legacy Radisson brands, improvements in RevPAR performance, and an increase in the international franchise system size by 31 hotels (from 1,191 hotels as of December 31, 2022 to 1,222 hotels as of December 31, 2023), and an increase of 2,626 rooms (from 133,395 rooms as of December 31, 2022 to 136,021 rooms as of December 31, 2023).

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Initial Franchise Fees

Initial franchise fees are generally paid to the Company when a franchisee executes a franchise agreement for a new property entering the franchise system, or an existing franchised property at the time of an ownership change (referred to as a relicensing), or a franchise agreement renewal; however, the recognition of revenue is deferred until the hotel associated with the franchise agreement is open or the franchise agreement is terminated. Upon hotel opening, revenue is recognized ratably as the services are provided over the enforceable period of the franchise agreement. Upon the termination of a franchise agreement, the previously deferred initial franchise fees are recognized as revenue immediately in the period the franchise agreement is terminated.

Initial franchise fees revenue decreased $0.3 million from $28.1 million to $27.8 million for the years ended December 31, 2022 and 2023, respectively. The decrease is primarily attributable to the lower number of domestic franchise agreement terminations in the current year as compared to the prior year.

At December 31, 2023, the Company had 1,032 hotels with 105,062 rooms in its global pipeline. Approximately 88% of our pipeline is located in the United States and approximately 72% of the domestic pipeline is new construction. After the execution of a franchise agreement, new construction hotels typically average 18 to 36 months to open, while conversion hotels typically average three to six months to open.

Fluctuations in the Company’s pipeline are primarily due to the timing of hotel openings and the timing of awarding new franchise agreements. While the Company’s pipeline provides a strong platform for growth, a hotel in the pipeline does not always result in an open and operating hotel due to various macroeconomic factors, including access to liquidity, availability of construction labor, and local governmental approvals and entitlements.

Platform and Procurement Services Fees

Platform and procurement services fees revenue increased $11.3 million from $63.8 million for the year ended December 31, 2022 to $75.1 million for the year ended December 31, 2023. The increase is primarily attributable to an increase in the fees generated from travel-related partnerships and qualified vendors, and an increase in the fees generated from the Company's annual convention, which includes activity from the newly acquired Radisson hotel brands.

Owned Hotels

The Company's revenues, net of operating expenses, from the owned hotels increased $4.1 million from $22.0 million for the year ended December 31, 2022 to $26.1 million for the year ended December 31, 2023. The increase reflects improved operating performance at our owned hotels and the net addition of one owned hotel during the year ended December 31, 2023 relative to the comparative period.

Other Revenues

Other revenues decreased $18.6 million from $64.7 million for the year ended December 31, 2022 to $46.1 million for the year ended December 31, 2023, which was primarily due to a decrease in termination fees of $22.7 million resulting from the exit of 110 WoodSpring units in the third quarter of 2022.

Selling, General and Administrative

Selling, general and administrative expenses, which includes the cost to operate the business, increased $48.4 million from $167.7 million for the year ended December 31, 2022 to $216.1 million for the year ended December 31, 2023.

Selling, general and administrative expenses increased $48.4 million primarily due to the acquisition of the Radisson Hotels Americas business in August 2022, with the year ended December 31, 2023 reflecting a full year of combined operations. In addition, the increase includes a $12.3 million increase in the Company's deferred compensation liabilities based on increases in the fair value of the underlying investments, and a $5.5 million increase in employee salary and benefit continuation payments

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related to restructuring certain areas of the business. The remaining increase relates to general corporate purposes, including compensation, benefits, travel, and professional fees, and the provision of credit losses on accounts receivable balances.

Business Combination, Diligence and Transition Costs

Business combination, diligence and transition costs increased $16.2 million due to the integration of the Radisson Hotels Americas business, which was acquired on August 11, 2022 and substantially completed integration in the fourth quarter of 2023, and costs associated with acquisition pursuits.

Depreciation and Amortization

Depreciation and amortization expense was $39.7 million and $30.4 million for the years ended December 31, 2023 and 2022, respectively. Depreciation and amortization expense increased primarily due to the acquisition of Radisson Hotels Americas and the associated depreciation and amortization from the portion of the purchase price allocated to three hotel properties and contract asset acquisition costs.

Impairment of Long-Lived Assets

Impairment of long-lived assets of $3.7 million for the year ended December 31, 2023 was primarily related to a sublease agreement that was signed for the legacy Radisson corporate office space in Minneapolis, Minnesota. The long-lived asset group associated with the office space was determined to be impaired due to the carrying value exceeding its fair value, which resulted in the recognition of a $3.4 million impairment loss.

Gain on Sale of Business and Assets, Net

Gain on sale of business and assets, net, was $16.2 million for the year ended December 31, 2022. The gain primarily related to the sale of two owned hotels in the second and third quarters of 2022. The gains were partially offset by a reduction in the carrying value of an asset held for sale in the third quarter of 2022 and the sale and conversion of an international direct franchising market to a master franchising market in the second quarter of 2022.

Interest Expense

The Company recognized $63.8 million of interest expense for the year ended December 31, 2023, which was an increase of $20.0 million from the comparable period in 2022. The increase in interest expense was due to an increase in borrowings and higher interest rates on the Company's revolving credit facility. Refer to the discussion in the Liquidity and Capital Resources section of MD&A.

Gain on Extinguishment of Debt

Gain on extinguishment of debt was $4.4 million for the year ended December 31, 2023. The Company derecognized certain economic development loans from the consolidated balance sheets due to satisfying the relevant performance conditions in the loan agreements.

Other (Gain) Loss

The Company recognized other net gains of $10.6 million and other net losses of $7.0 million for the years ended December 31, 2023 and 2022, respectively. For the year ended December 31, 2023, the net gain was primarily due to a $6.6 million increase in the Company's deferred compensation assets based on increases in the fair value of the underlying investments and a $4.0 million unrealized gain on investments in equity securities. For the year ended December 31, 2022, the net loss was primarily due to a decrease in the Company's deferred compensation assets based on decreases in the fair value of the underlying investments.

Income Tax Expense

The Company's effective income tax rates were 23.3% and 24.0% for the years ended December 31, 2023 and 2022, respectively. The effective income tax rates for the years ended December 31, 2023 and 2022 were higher than the U.S. federal income tax rate of 21.0% primarily due to state income taxes and tax expense related to compensation, partially offset by federal income tax credits.

Refer to Choice Hotels International, Inc.'s 2022 10-K Annual Report, specifically the section "Comparison of 2022 and 2021 Operating Results" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for the details regarding the changes between 2022 and 2021.

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Liquidity and Capital Resources

Our Company historically generates strong and predictable operating cash flows primarily from our hotel franchising operations. Our capital allocation decisions, including capital structure and our uses of capital, are intended to maximize our return on invested capital and create value for our shareholders, while maintaining a strong balance sheet and financial flexibility. The Company's short-term and long-term liquidity requirements primarily arise from working capital needs, debt obligations, income tax payments, dividend payments, share repurchases, capital expenditures, and investments in growth opportunities.

As of December 31, 2023, the Company's primary sources of liquidity consisted of $648.3 million in cash and cash equivalents and available borrowing capacity under the senior unsecured revolving credit facility. As of December 31, 2023, the Company was in compliance with all of its financial covenants under its credit agreements and the Company expects to remain in such compliance. The Company believes that its cash on hand, available borrowing capacity under the senior unsecured revolving credit facility, cash flows from operations, and access to additional capital in the debt markets will provide sufficient liquidity to meet the expected future operating, investing, and financing needs of the business.

Our board of directors authorized a program which permits us to offer financing, investment, and guaranty support to qualified franchisees, and allows us to acquire or develop and resell hotels to incentivize franchise development of our brands in strategic markets. We are currently engaged in these financial support activities to encourage acceleration of the growth of our Cambria Hotels and Everhome Suites brands. With respect to these activities, the Company had approximately $467.8 million in financial support of the Cambria Hotels and Everhome Suites brands reflected in the consolidated balance sheet as of December 31, 2023. The Company is generally targeting to recycle these investments within a five year period, and expects our outstanding investments to not exceed $1.2 billion at any point in time based on the current board of directors' authorization. The deployment and annual pace of future financial support activities will depend upon market and other conditions, including among others, our franchise sales results, the environment for new construction hotel development, and the hotel lending environment.

The Company also strategically deploys capital in the form of franchise agreement acquisition costs across our brands to incentivize franchise development. The timing and the amount of the franchise agreement acquisition cost payments are dependent on various factors, including the implementation of various development and brand incentive programs, the level of franchise sales, and the ability of our franchisees to complete construction or convert their hotels to one of the Company’s brands.

The Company has historically generated cash flows from operating activities that are in excess of the capital needed to invest in growth opportunities and to service debt obligations. As a result, the Company maintains a share repurchase program and typically pays a quarterly dividend. As of December 31, 2023, the Company had 1.8 million shares remaining under the current share repurchase authorization. The 2023 annual dividend rate was $1.15 per share or approximately $56.5 million in aggregate dividend payments.

Cash Flows from Operating Activities

During the years ended December 31, 2023, 2022, and 2021, the net cash provided by operating activities was $296.6 million, $367.1 million, and $383.7 million, respectively. Our operating cash flows decreased $70.5 million primarily due to a decrease in the net surplus generated from our other franchised and managed properties activities, an increase in franchise agreement acquisition cost payments, an increase in business combination, diligence and transition costs associated with the integration of the Radisson Hotels Americas business and acquisition pursuits, an increase in selling, general and administrative expenses, and an increase in borrowing costs, all of which were partially offset by the timing of working capital items.

In conjunction with brand and development programs, we strategically make certain franchise agreement acquisition cost payments to franchisees as an incentive to enter into new franchise agreements or perform-designated improvements to properties under existing franchise agreements. If the franchisee remains in the franchise system in good standing over the term specified in the incentive agreement, the Company forgives the incentive ratably. If the franchisee exits our franchise system or is not operating their franchise in accordance with our quality or credit standards and is terminated, then the franchisee must repay the unamortized franchise agreement acquisition cost payment plus interest to the Company. During the years ended December 31, 2023, 2022, and 2021, the Company's net franchise agreement acquisition costs were $98.3 million, $54.5 million, and $38.2 million, respectively.

The Company's franchise agreements require the payment of marketing and reservation system fees to be used by the Company for the expenses associated with providing franchise services such as national marketing, media advertising, and central reservation systems. Additionally, the legacy Radisson Hotels Americas management agreements include cost reimbursements, primarily related to payroll costs at managed hotels where the Company is the employer. These activities are reflected in other revenues from franchised and managed properties and other expenses from franchised and managed properties. During the years ended December 31, 2023, 2022, and 2021, the activity from other revenues from franchised and managed properties

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exceeded the activity of other expenses from franchised and managed properties by $1.8 million, $49.7 million, and $83.9 million, respectively.

Cash Flows from Investing Activities

The net cash used in investing activities was $265.6 million, $442.4 million, and 78.9 million for the years ended December 31, 2023, 2022, and 2021, respectively.

During the years ended December 31, 2023, 2022, and 2021, capital expenditures for property and equipment totaled $116.3 million, $90.0 million, and $74.3 million, respectively. These capital expenditures primarily reflect the costs incurred to support the continued growth of the Cambria Hotels and Everhome Suites brands and the ongoing hotel development efforts, as well as leasehold improvements in the Company's new corporate headquarters office in North Bethesda, Maryland.

The Company has equity method investments in affiliates related to the Company's program to offer equity support to qualified franchisees to develop and operate Cambria Hotels and Everhome Suites branded-hotels in strategic markets. During the years ended December 31, 2023, 2022, and 2021, the Company invested $38.9 million, $3.1 million, and $2.8 million, respectively, to support these efforts. In addition, during the years ended December 31, 2023 and 2021, the Company received proceeds from the sale of certain affiliates totaling $0.9 million and $15.6 million, respectively. The Company received no distributions from affiliates during the year ended December 31, 2022.

During the year ended December 31, 2023, the Company purchased $112.4 million of equity securities in Wyndham in conjunction with its proposed acquisition, and made no dispositions. There were no purchases or dispositions of equity securities during the years ended December 31, 2022 and 2021.

The Company provides financing to franchisees for hotel development efforts and other purposes in the form of notes receivable loans. The loans bear interest and are expected to be repaid in accordance with the terms of the loan agreements. During the years ended December 31, 2023, 2022, and 2021, the Company issued a total of $4.3 million, $5.6 million, and $20.1 million of notes receivable loans, respectively, and received repayments totaling $10.9 million, $1.0 million, and $0.2 million on the notes receivable loans, respectively.

During the year ended December 31, 2022, the Company recognized net proceeds of $166.6 million from the sale of three Cambria hotels, one parcel of land, and a sale and conversion of an international direct franchising market to a master franchising market. During the year ended December 31, 2021, the Company recognized proceeds of $6.1 million from the sale of a commercial office building that was previously awarded to the Company pursuant to a court settlement. The Company did not sell any businesses or assets during the year ended December 31, 2023.

On August 11, 2022, the Company acquired 100% of the issued and outstanding equity interest of Radisson Hotels Americas for an accounting purchase price of approximately $673.9 million. The purchase price, net of the cash acquired, was $550.4 million. To fund the transaction, the Company drew down $175.0 million on its senior unsecured credit facility, and then funded the remainder with cash on hand. Refer to Note 24 to our consolidated financial statements for further discussion.

During the year ended December 31, 2022, the Company recognized contract termination fee revenue of $22.7 million resulting from the exit of 110 WoodSpring units in September 2022. The contract termination fee revenue consisted of $67.4 million in consideration received, less the $44.7 million in carrying basis of intangible assets that were initially recognized on the date of the WoodSpring acquisition.

Cash Flows from Financing Activities

Cash flows from financing activities primarily relate to the proceeds or payments on the Company’s borrowings, treasury stock repurchases, acquisition of shares in connection with the exercise or vesting of equity awards, the payment of dividends, and the payment of debt issuance costs.

Debt

Restated Senior Unsecured Credit Facility

On August 20, 2018, the Company entered into the Restated Senior Unsecured Credit Agreement (the "Restated Credit Agreement"), which amended and restated the Company’s existing senior unsecured revolving credit agreement dated July 21, 2015. The Restated Credit Agreement provided for a $600 million unsecured credit facility with an original maturity date of August 20, 2023, subject to one-year extension options that could be requested by the Company prior to each of the first, second and third anniversaries of the closing date of the Restated Credit Agreement in exchange for the payment fees. The Company has exercised the one year extension option on multiple occasions, which has resulted in a new maturity date of August 20, 2026. The Restated Credit Agreement allows for up to $35 million of borrowings that may be used for alternative

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currency loans and up to $25 million of borrowings that may be used for swingline loans. From time to time, the Company may designate one or more wholly-owned subsidiaries of the Company as additional borrowers under the Restated Credit Agreement, subject to the consent of the lenders and certain customary conditions. There are no subsidiary guarantors under the Restated Credit Agreement.

On February 18, 2020, the Company entered into the First Amendment to the Amended and Restated Senior Unsecured Credit Agreement which, among other things, removed a springing guarantee (requiring subsidiaries to guarantee the Company's obligations under the Restated Credit Agreement if the subsidiary incurs certain recourse debt) and other provisions and references in the Restated Credit Agreement related to the potential existence of subsidiary guarantors.

On February 14, 2023, the Company entered into a Third Amendment to the Amended and Restated Senior Unsecured Credit Agreement. This amendment provides, among other things, for (i) an increase in the aggregate amount of commitments under the Company's existing $600 million unsecured credit facility (the "Revolver") by $250 million (the “Increased Commitments”) to an aggregate amount of $850 million, and (ii) the replacement of the interest reference rate for U.S. dollar-denominated borrowings under the Revolver from the London Interbank Offered Rate to an adjusted Secured Overnight Financing Rate.

The Restated Credit Agreement requires the Company to pay a fee on the total commitments, calculated on the basis of the actual daily amount of the commitments (regardless of usage) times a percentage per annum ranging from 0.075% to 0.25%, which is dependent on the Company’s senior unsecured long-term debt rating or other circumstances as set forth in the Restated Credit Agreement if the Company’s total leverage ratio is less than 2.5 to 1.0.

The Restated Credit Agreement requires that the Company and its restricted subsidiaries comply with various covenants, including restrictions on liens, incurring indebtedness, making investments, and effecting mergers and/or asset sales. With respect to the payment of dividends, the Company may not declare or make any dividend payments if there is an existing event of default or if the dividend payment would create an event of default.

The Restated Credit Agreement imposes financial covenants that require the Company to maintain a consolidated fixed charge coverage ratio of at least 2.5 to 1.0 and a total leverage ratio of not more than 4.5 to 1.0. In addition, on up to two nonconsecutive occasions, the Company will be required to maintain a total leverage ratio of not more than 5.5 to 1.0 for up to three consecutive quarters following a material acquisition commencing with the fiscal quarter in which the material acquisition occurred. The Company maintains an Investment Grade Rating, as defined in the Restated Credit Agreement, and therefore is not currently required to comply with the consolidated fixed charge coverage ratio covenant.

The Restated Credit Agreement includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations under the Restated Credit Agreement to be immediately due and payable. As of December 31, 2023, the Company maintained a total leverage ratio of 2.57x, including outstanding debt of approximately $227 million on the senior unsecured revolving credit facility. The Company was in compliance with all financial covenants under the Restated Credit Agreement.

Debt issuance costs incurred in connection with the Restated Credit Agreement are amortized on a straight-line basis, which is not materially different from the effective interest method, and through the loan's maturity date. The amortization of the debt issuance costs is included in interest expense in the consolidated statements of income.

The proceeds of the Restated Credit Agreement are generally expected to be used for general corporate purposes, including working capital, debt repayment, stock repurchases, dividends, investments, and other permitted uses as set forth in the Restated Credit Agreement.

Term Loan Due 2024

On December 18, 2023, the Company entered into a $500 million unsecured term loan with a maturity date of December 16, 2024 (the "2023 Term Loan"), which has an optional one-year extension that can be requested by the Company prior to the initial maturity date. The extension option is subject to the consent of the lenders and certain customary conditions.

The 2023 Term Loan and all accrued but unpaid interest must be repaid in full on the maturity date. Upon the occurrence of certain debt issuances and equity issuances, as defined in the term loan agreement, the Company is required to make certain principal prepayments of the 2023 Term Loan in an amount equal to 100% of the net cash proceeds from those debt and equity issuances.

The Company may elect to have the 2023 Term Loan bear interest at a rate equal to (i) SOFR (subject to a credit spread adjustment of 0.10% and a 0.00% floor) plus a margin ranging from 125 to 175 basis points, or (ii) a base rate plus a margin ranging from 25 to 75 basis points. In each case, the margin is determined according to the Company’s senior unsecured long-term debt rating.

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The term loan agreement requires that the Company comply with various covenants, including restrictions on liens, incurring indebtedness, making dividends, stock repurchases, investments, and completing mergers and/or asset sales. The term loan agreement has financial covenants which require the Company to maintain a consolidated fixed charge coverage ratio of at least 2.5 to 1.0, and a total leverage ratio of not more than 4.5 to 1.0 which may be increased to 5.5 to 1.0 for up to three consecutive fiscal quarters commencing with the fiscal quarter in which certain material acquisitions are consummated. As long as the Company maintains an Investment Grade Rating, as defined in the term loan agreement, then the Company will not need to comply with the consolidated fixed charge coverage ratio covenant.

The term loan agreement includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest, and other obligations of the Company under the term loan agreement to be immediately due and payable.

Senior Unsecured Notes Due 2031

On July 23, 2020, the Company issued unsecured senior notes with a principal amount of $450 million (the "2020 Senior Notes") bearing a coupon of 3.70%. The 2020 Senior Notes will mature on January 15, 2031, with interest to be paid semi-annually on January 15th and July 15th. The Company used the net proceeds of the 2020 Senior Notes, after deducting underwriting discounts, commissions and offering expenses, to repay in full the $250 million term loan entered in April 2020 and to fund the purchase price of the 2012 Senior Notes tendered and accepted by the Company for the purchase pursuant to the tender offer (discussed further below under "Senior Unsecured Notes Due 2022").

The interest rate payable on the 2020 Senior Notes is subject to adjustment based on certain rating events. The Company may redeem the 2020 Senior Notes, in whole or in part, at its option at the applicable redemption price before the maturity date. If the Company redeems the 2020 Senior Notes prior to October 15, 2030 (three months prior to the maturity date) (the “2020 Notes Par Call Date”), the redemption price will be equal to the greater of (a) 100% of the principal amount of the notes to be redeemed, or (b) the sum of the present values of the remaining scheduled principal and interest payments that would have been payable had the 2020 Senior Notes matured on the 2020 Notes Par Call Date, discounted to the redemption date on a semi-annual basis at the applicable Treasury Rate plus 50 basis points, plus accrued and unpaid interest. If the Company redeems the 2020 Senior Notes on or after the 2020 Notes Par Call Date, the redemption price will equal 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest. Additionally, at the option of the holders of the 2020 Senior Notes, the Company may be required to repurchase all or a portion of the 2020 Senior Notes upon the occurrence of a change of control event at a price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest, to the date of repurchase.

Senior Unsecured Notes Due 2029

On November 27, 2019, the Company issued unsecured senior notes with a principal amount of $400 million (the "2019 Senior Notes") at a discount of $2.4 million, bearing a coupon of 3.70% with an effective rate of 3.88%. The 2019 Senior Notes will mature on December 1, 2029, with interest to be paid semi-annually on December 1st and June 1st. The Company used the net proceeds of this offering, after deducting underwriting discounts, commissions, and offering expenses, to repay the previously outstanding senior notes with a principal amount of $250 million due August 28, 2020, and for working capital and other general corporate purposes.

The Company may redeem the 2019 Senior Notes, in whole or in part, at its option at the applicable redemption price before maturity. If the Company redeems the 2019 Senior Notes prior to September 1, 2029 (three months prior to the maturity date) (the “2019 Notes Par Call Date”), the redemption price will be equal to the greater of (a) 100% of the principal amount of the notes to be redeemed, or (b) the sum of the present values of the remaining scheduled principal and interest payments that would have been payable had the 2019 Senior Notes matured on the 2019 Notes Par Call Date, discounted to the redemption date on a semi-annual basis at the applicable Treasury Rate plus 30 basis points, plus accrued and unpaid interest. If the Company redeems the 2019 Senior Notes on or after the 2019 Notes Par Call Date, the redemption price will equal 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest. Additionally, at the option of the holders of the 2019 Senior Notes, the Company may be required to repurchase all or a portion of the 2019 Senior Notes upon the occurrence of a change of control event at a price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest, to the date of repurchase.

Senior Unsecured Notes Due 2022

On June 27, 2012, the Company issued unsecured senior notes with a principal amount of $400 million (the "2012 Senior Notes") at par, bearing a coupon of 5.75% with an effective rate of 6.00%. The Company utilized the net proceeds from this offering, after deducting underwriting discounts, commissions and other offering expenses, together with borrowings under the Company's senior unsecured senior credit facility, to pay a special cash dividend to shareholders that totaled approximately $600.7 million on August 23, 2012.

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On July 9, 2020, the Company commenced a tender offer (the "Tender Offer") to purchase an aggregate principal amount of up to $160.0 million of the 2012 Senior Notes, subject to increase or decrease. The Tender Offer was subsequently upsized to an aggregate principal amount of up to $180.0 million of the 2012 Senior Notes. On July 23, 2020, the Company amended the Tender Offer by increasing the aggregate principal amount from $180.0 million to $183.4 million. The Tender Offer settled on July 24, 2020 for $197.8 million, which included an early tender premium, settlement fees, and accrued interest paid.

The 2012 Senior Notes matured on July 1, 2022. The outstanding principal amount of $216.6 million was re-paid on the maturity date.

Economic Development Loans

The Company entered into economic development agreements with various governmental entities in conjunction with the relocation of its corporate headquarters in April 2013. In accordance with these agreements, the governmental entities agreed to advance approximately $4.4 million to the Company to offset a portion of the corporate headquarters relocation and tenant improvement costs in consideration of the employment of permanent, full-time employees within the jurisdictions. These advances bear interest at a rate of 3% per annum.

Repayment of the advances is contingent upon the Company achieving certain performance conditions. The performance conditions are measured annually on December 31st and primarily relate to maintaining certain levels of employment within the various jurisdictions. If the Company fails to meet an annual performance condition, then the Company may be required to repay a portion, or all, of the advances including accrued interest by April 30th following the measurement date. Any outstanding advances upon expiration of the Company's ten-year corporate headquarters lease agreement in 2023 will be forgiven in full. The $4.4 million of advances have been included in debt in the consolidated balance sheets.

Upon the expiration of the Company's previous ten-year corporate headquarters lease agreement in 2023, the Company concluded that it had achieved the performance conditions over the entire term of the agreement and therefore, the Company is not required to repay the advances. As a result, during the year ended December 31, 2023, the Company derecognized the $4.4 million economic development loans debt from the consolidated balance sheets and recognized a gain on extinguishment of debt in the consolidated statements of income.

Acquired Debt and Swap Derivative Asset

On August 11, 2022, in connection with the Radisson Hotels Americas acquisition, the Company acquired three owned hotel properties, one of which had an encumbered mortgage loan with a mortgage principal in the amount of $53.5 million with an original maturity date of August 7, 2024. In addition, the mortgage loan had an associated interest rate cap agreement with an effective date of July 30, 2021 through August 6, 2024. On August 12, 2022, the Company paid off the outstanding mortgage loan principal, outstanding interest, and certain prepayment, exit and related fees in the amount of $56.0 million. At the same time, several of the loan-related escrows were released in the amount of $10.4 million. On August 16, 2022, the interest rate cap agreement was terminated, which resulted in a $1.9 million payment to the Company.

Dividends

During the year ended December 31, 2022, the Company declared cash dividends at a quarterly rate of $0.2375 per share of common stock.

In March 2023, the Company's board of directors approved a 21% increase in the quarterly cash dividend to $0.2875 per share, which is the current per share dividend amount that was utilized in each of the dividends that were declared in 2023. During the year ended December 31, 2023, the Company declared aggregate annual cash dividends of $1.15 per share or approximately $56.5 million in aggregate dividend payments.

We expect that cash dividends will continue to be paid in the future, subject to the declaration by our board of directors, future business performance, economic conditions, changes in tax regulations, and other matters. In accordance with the Restated Credit Agreement and the 2023 Term Loan, the Company may not declare or make any dividend payments if there is an existing event of default or if the dividend payment would create an event of default.

Share Repurchases & Redemptions

In 1998, we instituted a share repurchase program. Treasury stock activity is recorded at cost in the consolidated balance sheets.

During the year ended December 31, 2023, the Company repurchased 2.9 million shares of its common stock under the share repurchase program at a total cost, including accrued excise tax, of $351.7 million. In total through December 31, 2023, the Company repurchased 58.3 million shares of its common stock (including 33.0 million prior to the two-for-one stock split effected in October 2005) under the program at a total cost of $2.3 billion. Considering the effect of the two-for-one stock split,

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the Company has repurchased 91.3 million shares at an average price of $24.88 per share. As of December 31, 2023, the Company had 1.8 million shares remaining under the current share repurchase authorization.

During the year ended December 31, 2023, the Company redeemed 114.2 thousand shares of common stock at a total cost of $14.2 million from employees to satisfy the option exercise price and statutory minimum tax-withholding requirements related to the exercising of stock options and the vesting of PVRSUs and restricted stock grants. These redemptions were outside the share repurchase program. During the year ended December 31, 2023, the Company received proceeds of $6.3 million from stock options exercised by employees.

The following table summarizes the material contractual obligations (excluding the previously addressed debt obligations, the financing, investment, guaranty, and franchise agreement acquisition cost commitments to franchisees, and the deferred compensation plan liabilities) as of December 31, 2023:

[[GREPCENT_TABLE]]
[["","Payment due by period"],["(in thousands)","Total","","Less than 1 year","","Greater than 1 year"],["Purchase obligations","$","76,497","","","$","31,423","","","$","45,074"],["Total contractual obligations","$","76,497","","","$","31,423","","","$","45,074"]]
[[/GREPCENT_TABLE]]

The total amount of unrecognized tax positions and the interest and penalties thereon was $13.5 million as of December 31, 2023. Due to the uncertainty with respect to the timing and amounts of the payments in connection with these positions, the Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Refer to Note 15 to our consolidated financial statements for more information.

Critical Accounting Estimates

The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods, and the related disclosures in the consolidated financial statements and the accompanying footnotes. On an ongoing basis, we evaluate these estimates and judgments based on historical experiences and various other factors that we believe reflect the current circumstances. While we believe our estimates, assumptions, and judgments are reasonable, they are based on information that was available when the estimate or assumption was made. Actual results may differ significantly from these estimates due to changes in assumptions, judgments, and conditions as a result of unforeseen events or otherwise, which could have a material effect on our financial condition or results of operations.

We believe that the following estimates, which are used in conjunction with our significant accounting policies, are critical because they involve a higher degree of judgment and are based on information that is inherently uncertain. Refer to Note 1 to our consolidated financial statements for information on our significant accounting policies.

Guest Loyalty Programs

Choice Privileges is the Company’s guest loyalty program, which enable members to earn points based on their spending levels with the Company’s franchisees. The points, which the Company accumulates and tracks on the members’ behalf, may be redeemed for free accommodations or other benefits (e.g., gift cards to participating retailers). The Company collects from franchisees a percentage of the loyalty program members’ gross room revenue from completed hotel stays to operate the guest loyalty program. At the time the points are redeemed for free accommodations or other benefits, the Company reimburses the franchisees or third parties based on a rate derived in accordance with the franchise or vendor agreement.

Loyalty program points represent a performance obligation attributable to the usage of the points, and thus the revenues are recognized at a point in time when the loyalty program points are redeemed by the members for benefits. The transaction price is variable and determined in the period when the loyalty program points are earned and the underlying gross room revenues are known. No loyalty program revenues are recognized at the time the loyalty program points are issued.

The Company is an agent in coordinating the delivery of the services between the loyalty program member and the franchisee or third party, and as a result, the revenues are recognized net of the cost of redemptions. The estimated value of the future redemptions is reflected in the current and non-current liability for guest loyalty program in the consolidated balance sheets. The liability for the guest loyalty program is developed based on an estimate of the eventual redemption rates and point values using various actuarial methods. These significant judgments determine the required point liability attributable to the outstanding points, which is relieved as the redemption costs are processed. The amount of the loyalty program fees in excess of the guest loyalty program point liability represents current and non-current deferred revenue, which is recognized to revenue as the points are redeemed including an estimate of the future forfeitures (“breakage”). The anticipated redemption pattern of the

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points is the basis for the current and non-current designation of each liability. The loyalty program point redemption revenues are recognized within other revenues from franchised and managed properties in the consolidated statements of income. Any changes in the estimates used in developing the breakage rate or other future guest loyalty program operations could result in a material change to the liability for the guest loyalty program and the deferred revenues.

The Company maintains various agreements with third-party partners, including the co-branding of the Choice Privileges credit card. The agreements typically provide for use of the Company’s marks, limited access to the Company’s distribution channels, and the sale of Choice Privileges points, in exchange for the payment of fees which primarily comprises variable consideration each month. Choice Privileges members can earn points through participation in the third-party partner’s program. The partner agreements include multiple performance obligations. The primary performance obligations are brand intellectual property and material rights for free or discounted goods or services to the hotel guests. The allocation of fixed and variable consideration to the performance obligations is based on the standalone selling price, which is estimated based on the market and income methods which contain significant judgments. The amounts allocated to the brand intellectual property are recognized on a gross basis over time using the output measure of time elapsed, and are presented within royalty, licensing and management fees and platform and procurement services fees in the consolidated statements of income. The amounts allocated to material rights for free or discounted goods or services to hotel guests are recognized to revenue as the points are redeemed including an estimate of breakage, primarily within other revenues from franchised and managed properties.

Long-Lived Assets, Intangible Assets, and Goodwill

The Company groups its long-lived assets, including property and equipment and definite-lived intangible assets (e.g., franchise rights and franchise agreement acquisition costs), at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The Company evaluates the potential impairment of its long-lived asset groups annually as of December 31 or earlier when other circumstances indicate that the Company may not be able to recover the carrying value of the asset group. When indicators of impairment are present, then the recoverability is assessed based on undiscounted expected cash flows. If the undiscounted expected cash flows are less than the carrying amount of the asset group, then an impairment charge is measured and recognized, as applicable, for the excess of the carrying value over the fair value of the asset group. The fair value of the long-lived asset groups are estimated primarily using discounted cash flow analyses representing the highest and best use by an independent market participant. Significant management judgment is involved in evaluating any indicators of impairment and developing any required projections to test for the recoverability or the estimated fair value. Furthermore, if management uses different projections or if different conditions occur in future periods, then future operating results could be materially impacted.

The Company did not identify any indicators of impairment of long-lived assets in the Hotel Franchising reporting unit during the years ended December 31, 2023, 2022, and 2021, other than impairments on franchise sales commission assets and franchise agreement acquisition cost intangible assets primarily resulting from the termination of franchise agreements from the Choice system or significant delinquencies in construction or invoice payments.

The Company evaluates the impairment of goodwill and intangible assets with indefinite lives annually as of December 31 or earlier upon the occurrence of substantive unfavorable changes in economic conditions, industry trends, costs, cash flows, or ongoing declines in market capitalization that indicate that the Company may not be able to recover the carrying amount of the asset. In evaluating these assets for impairment, the Company may elect to first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit or the indefinite lived intangible asset is less than its carrying amount. If the conclusion is that it is not more likely than not that the fair value of the asset is less than its carrying value, then no further testing is required. If the conclusion is that it is more likely than not that the fair value of the asset is less than its carrying value, then a quantitative impairment test is performed whereby the carrying value is compared to the fair value of the asset and an impairment charge is recognized, as applicable, for the excess of the carrying value over the fair value. The Company may elect to forgo the qualitative assessment and move directly to the quantitative impairment tests for goodwill and indefinite-lived intangible assets. The Company determines the fair value of its reporting units and indefinite-lived intangible assets using the income and market methods.

Goodwill is allocated to the Company's reporting units. The Company's reporting units are determined primarily by the availability of discrete financial information relied upon by the chief operating decision maker ("CODM") to assess performance and make operating segment resource allocation decisions. As of December 31, 2023, the Company's goodwill is allocated to the Hotel Franchising reporting unit. The Company performed a qualitative impairment analysis for the Hotel Franchising reporting unit and concluded that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount. As such, no impairment was recognized and a quantitative test was not required.

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Income Taxes

Income taxes are recorded using the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not that such assets will be unrealized. Historically, deferred United States income taxes have not been recorded for temporary differences related to investments in certain foreign subsidiaries and corporate affiliates. The temporary differences consisted primarily of undistributed earnings that are considered permanently reinvested in operations outside the United States. Due to the changes resulting from the 2017 Tax Cuts and Jobs Act, the Company implemented a new foreign dividend policy effective during the quarter ended September 30, 2018. As a result of the new policy, the Company intends to limit any future foreign distributions to income which has been previously subject to US taxation, for which relevant taxes have been recorded. Nonetheless, the Company will continue to assert that any other outside basis difference of the foreign subsidiaries will be permanently (or indefinitely) reinvested outside of the U.S. Consequently, the Company did not record any additional deferred taxes for this item in 2023.

With respect to uncertain income tax positions, a tax liability is recorded in full when management determines that the position does not meet the more likely than not threshold of being sustained on examination. A tax liability may also be recognized for a position that meets the more likely than not threshold, based upon management’s assessment of the position’s probable settlement value. The Company records interest and penalties on unrecognized tax benefits in the provision for income taxes in the consolidated statements of income. Additional information regarding the Company’s unrecognized tax benefits is provided in Note 15 to the consolidated financial Statements.

New Accounting Standards

Refer to the "Recently Adopted & Issued Accounting Standards" section of Note 1 to the consolidated financial statements for information related to our adoption and assessment of new accounting standards.