Comfort Inn 2013 Annual Report Download - page 38

Table of Contents
benefit related to a change in estimate of the tax benefit from foreign operations. These items represented a net decline in diluted EPS of $0.12 per
share.
•Operating and net income in 2013 reflect an increased investment in the Company's SkyTouch division, a new division launched that develops
and markets cloud-based technology products, totaling approximately $8.4 million. Net income was further reduced by the issuance of
unsecured senior notes in the principal amount of $400 million as well as a $350 million senior secured credit facility to pay a special cash
dividend totaling approximately $600.7 million in the second and third quarters of 2012. The issuance of this debt resulted in interest expense
for the year ended December 31, 2013 increasing by approximately $15.3 million over the prior year. These items represented a net decline in
diluted EPS of $0.26 per share.
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The following Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader
understand Choice Hotels International, Inc. and its subsidiaries (together the "Company"). MD&A is provided as a supplement to—and should be read in
conjunction with—our consolidated financial statements and the accompanying notes.
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We are primarily a hotel franchisor with franchise agreements representing 6,340 hotels open and 503 hotels under construction, awaiting conversion or
approved for development as of December 31, 2013, with 506,058 rooms and 38,957 rooms, respectively, in 50 states, the District of Columbia and more
than 35 countries and territories outside the United States. Our brand names include Comfort Inn, Comfort Suites, Quality, Clarion, Ascend Hotel Collection,
Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Suburban Extended Stay Hotel and Cambria Suites (collectively, the "Choice brands").
The Company's domestic franchising operations are conducted through direct franchising relationships 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.
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 scale. 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, revenues from international franchising operations
comprised 8% of our total revenues in both 2013 and 2012 while representing approximately 18% and 19% of our franchise system hotels open at
December 31, 2013 and 2012, respectively. Therefore, our description of the franchise system is primarily focused on the domestic 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, 2013, 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 $2.5 million and a 1 basis point change in the Company’s effective royalty rate
would increase or decrease domestic royalties by
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