Comfort Inn 2007 Annual Report Download - page 30

Management’s Discussion and Analysis of Financial Condition and Results of Operation.
The following Management’ s Discussion and Analysis (“MD&A”) is intended to help the reader understand Choice
Hotels International, Inc. and subsidiaries. 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 a hotel franchisor with franchise agreements representing 5,570 hotels open and 1,093 hotels under
development as of December 31, 2007, with 452,027 rooms and 87,982 rooms, respectively, in 49 states, the District of
Columbia and 39 countries and territories outside the United States. Our brand names include Comfort Inn, Comfort
Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Suburban Extended Stay Hotel,
Cambria Suites and Flag Hotels.
The Company conducts its international franchise operations through a combination of direct franchising and master
franchising relationships which allow the use of our brands by third parties in foreign countries. The Company has made
equity investments in certain non-domestic lodging franchise companies that conduct franchise operations for the
Company’ s brands under master franchising relationships. As a result of our use of master franchising relationships and
international market conditions, total revenues from international franchising operations comprised only 7% and 6% of
our total revenues in 2007 and 2006, respectively while representing approximately 20% and 22% of our franchise system
hotels open at December 31, 2007 and 2006, respectively.
During 2006, the Company acquired 100% of the stock of Choice Hotels Franchise GmbH (“CHG”). CHG was a
wholly owned subsidiary of one of the Company’ s master franchisees, The Real Hotel Company PLC (“RHC”), formerly
known as CHE Hotel Group PLC. Under the master franchise agreement with RHC, CHG franchised hotels under the
Company’ s brands in Austria, Germany, Italy, Czech Republic and portions of Switzerland. As a result of this acquisition,
the master franchise agreement between the Company and RHC covering these countries terminated. The results of CHG
have been consolidated with the Company since October 30, 2006.
During 2006, the Company acquired RHC’ s assets, including franchise contracts, related to its franchising of hotels
under the Company’ s brands in France, Belgium, Portugal, Spain and portions of Switzerland. As a result of this
acquisition, the master franchise agreement between the Company and RHC covering these countries terminated and the
Company commenced direct franchising operations in these countries on November 30, 2006.
These transactions enable Choice to continue its strategy of more closely directing the growth of our franchise
operations throughout continental Europe.
During 2005, the Company acquired 100% of the stock of Suburban Franchise Holding Company, Inc. (“Suburban”)
and its wholly owned subsidiary, Suburban Franchise Systems, Inc. Suburban is the franchisor of Suburban Extended Stay
Hotels operating in the economy extended stay segment primarily in the southeastern United States. The acquisition
allowed the Company to enter, on an accelerated basis, the economy extended stay segment, a market in which it did not
previously compete. The results of Suburban have been consolidated with the Company since September 28, 2005.
On September 14, 2005, the Company’ s board of directors declared a two-for one stock split effected in the form of
a stock dividend. The stock dividend was distributed on October 21, 2005 to shareholders of record on October 7, 2005.
Share data and earnings per share data included in MD&A reflect the stock split, applied retroactively, to all periods
presented.
Our Company generates revenues, income and cash flows primarily from initial and continuing royalty fees
attributable to our franchise agreements. Revenues are also generated from brand solutions endorsed 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
28