Comfort Inn 2011 Annual Report Download - page 36

Table of Contents
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 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. Therefore, our description of the franchise system is primarily focused on the domestic operations.
The Company previously had a 40% equity interest in Choice Hospitality (India) Ltd. (“CHN”) which it accounted for under the equity method of
accounting. On January 8, 2010, the Company purchased the remaining 60% of CHN at which time it became a wholly-owned subsidiary. The pro forma
results of operations as if CHN had been combined at the beginning of all periods presented, would not be materially different from the Company’s reported
results for those periods. This transaction enabled Choice to continue its strategy of more closely directing the growth of our international franchise operations
Our Company generates revenues, income and cash flows primarily from initial, relicensing and continuing royalty fees attributable to our franchise
agreements. Revenues are also generated from qualified vendor arrangements, hotel operations and other sources. 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.
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 and relicensing fee revenue; ongoing royalty fees and procurement services revenues. In addition, our
operating results can also be improved through our company wide efforts related to improving property level performance. At December 31, 2011 the Company
estimates, based on its current domestic portfolio of hotels under franchise, that a 1% change in revenue per available room (“RevPAR”) or rooms under
franchise would increase or decrease royalty revenues by approximately $2.3 million and a 1 basis point change in the Company’s effective royalty rate would
increase or decrease domestic royalties by approximately $0.5 million. In addition to these revenues, we also collect marketing and reservation system fees to
support centralized marketing and reservation activities for the franchise system. As a lodging franchisor, Choice 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 in the various hotel lodging price
categories; 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 at franchised hotels. The key
industry standard for measuring hotel-operating performance is 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 of our established brands 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 required by our franchise agreements to use the marketing and reservation system fees we collect for system-wide marketing and reservation
activities. These expenditures, which include advertising costs and costs to maintain our central reservations system, 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 our franchisees with
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