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 Choice Hotels Reports 3rd Qtr 2004 Net Income
of $24.9 million vs $24.3 million a Year Eealier; 
Adds Nearly 15,000 rooms to System
During the Last Twelve Months 
Hotel Operating Statistics

.

SILVER SPRING, Md. - Oct. 28, 2004 -- Choice Hotels International, Inc. (NYSE:CHH) today reported the following highlights for the third quarter of 2004:
  • Diluted earnings per share for the third quarter was $0.73, an 11% increase compared to $0.66 in the third quarter of 2003;
  • Adjusted diluted EPS for the third quarter up 16% to $0.74, excluding the effects of third quarter 2004 debt extinguishment costs, compared to $0.64 for third quarter 2003, excluding interest earned in that quarter related to a note receivable from Sunburst, which was repaid in December 2003;
  • Domestic unit growth of 5.4%;
  • Year-to-date net domestic property additions were 160 hotels, up 34%;
  • Year-to-date new domestic hotel franchise contracts up 20% to 354;
  • The domestic hotel pipeline is up more than 17% to 397 hotels representing 30,776 rooms; the worldwide pipeline grew 15% to 492 hotels, representing 39,127 rooms;
  • Year-to-date royalty revenues up 10%;
  • Year-to-date total revenues up 11%;
  • Third quarter operating income up 7% to $42.5 million. 
"We added nearly 6,000 rooms to the domestic hotel system in the third quarter and close to 15,000 rooms during the last twelve months," said Charles A. Ledsinger, Jr., president and chief executive officer. "We are extremely pleased with this robust development, as unit growth is critical to our financial success. We now have almost 500 hotels under development worldwide. As evidenced by a 34% increase in net domestic hotel additions this year, our sharp focus on bringing properties on-line quickly has paid off."

He added, "We also are greatly encouraged by growth of almost 30% in new construction projects year-to-date, which enhances the overall quality of the system. As we continue to focus on enhancing consistency in our brands, we will be better positioned to build guest loyalty through improved guest satisfaction."

Third Quarter Performance

Choice reported third quarter 2004 net income of $24.9 million, or $0.73 diluted earnings per share (EPS), an 11% increase in diluted EPS over the same period of a year ago. At the end of third quarter 2003, the company reported net income of $24.3 million, or $0.66 diluted EPS.

The company also reported total revenues of $127.5 million for third quarter 2004, compared to $105.9 million for the same period in 2003, an increase of 20%. Franchising revenues, which include royalty revenues, initial and relicensing fees, partner services and other revenue, for the third quarter of 2004 were $61.1 million, an increase of 9% from the $56.3 million reported in the same period a year ago.

Royalty revenues for third quarter 2004 were $51.8 million, compared to $48.3 million for the same period in 2003, an increase of 7%.

System-wide domestic revenue per available room (RevPAR) was $44.35 in third quarter 2004, compared to $43.44 for the third quarter of 2003, an increase of 2%.

For the first nine months of 2004, Choice reported net income of $54.0 million or $1.55 diluted EPS, increases of 6% and 12% respectively over the $51.1 million and $1.38 diluted EPS reported for the first nine months of 2003. Operating income through September 30, 2004 increased 9% to $93.5 million, compared to $85.7 million for the same period a year ago. Franchising margins increased to 61.9% for the nine months ended September 30, 2004 compared to 61.4% for the same period in 2003.

Total revenues were $321.9 million for the nine months ended September 30, 2004, an increase of 11%, compared to $290.9 million for the same period in 2003. Franchising revenues for the first nine months of 2004 increased 8% to $150.0 million, compared to $138.7 million for the same period a year ago.

Royalty revenues for the first nine months of 2004 were $124.2 million, compared to $113.2 million for the same period a year ago, an increase of 10%. Domestic RevPAR was $35.95 for the first nine months of 2004, compared to $34.50 for the first nine months of 2003, a gain of 4%.

Net income and diluted EPS for the third quarter and nine months ended September 30, 2004 include a loss of approximately $0.7 million ($0.4 million, net of the related tax effect) related to the extinguishment of debt. This item represented diluted EPS of $0.01 for the three and nine months ended September 30, 2004.

Net income and diluted earnings per share for the quarter and nine months ended September 30, 2003 included approximately $1.2 million ($0.7 million, net of the related tax effect) and $3.5 million ($2.2 million, net of the related tax effect) respectively of interest income attributable to a note receivable from Sunburst Hospitality Corporation, which was repaid to the Company in December 2003. Revenues, operating income, net income and diluted earnings per share for the nine months ended September 30, 2003 also included approximately $1.7 million ($1.1 million, net of the related tax effect) of liquidated damages received from Sunburst for franchise terminations. Those items represented diluted EPS of $0.02 and $0.09 respectively for the three and nine months ended September 30, 2003.

2004 Unit Growth

The total number of domestic Choice hotels on-line grew by 5.4% to 3,796 (306,797 rooms on-line) as of September 30, 2004 from 3,601 (291,827 rooms on-line) as of the same period a year ago. Net domestic property additions in the third quarter of 2004 were 73 compared to 39 net domestic additions in the same period of 2003, an 87% increase. For the first nine months of this year, net domestic property additions were 160, an increase of 34% compared to 119 for the same period of a year ago.

Choice executed 122 new domestic hotel franchise contracts representing 10,162 rooms in third quarter 2004, compared to 108 new contracts representing 8,269 rooms for the same period a year ago, increases of approximately 13% and 23% respectively. For the year 2004 through September 30, Choice has executed 354 new domestic hotel franchise contracts, representing 30,149 rooms, compared to 294 contracts, representing 25,964 rooms, for the same period in 2003, increases of 20% and 16% respectively. These increases in executed contracts and an increase in the number of existing franchise relicensings have contributed to 22% and 20% increases in initial franchise and relicensing fees respectively for the three and nine months ended September 30, 2004, compared to the same periods in 2003.

In third quarter 2004, 40 contracts for new construction hotels, representing 2,732 rooms were executed, compared to 30 contracts, representing 2,052 rooms for the same period a year ago, each representing an increase of approximately 33%. For the nine months ended September 30, 2004, 100 contracts for new construction hotels representing 6,868 rooms were executed, both representing increases of better than 27%, compared to 78 contracts, representing 5,399 rooms, for new construction hotels for the same period a year ago.

As of September 30, 2004, the total number of Choice hotels worldwide grew 4% to 4,959 from 4,773 as of the same date a year ago. This growth represents an increase of 5% in the number of rooms open to 402,519 from 384,814. At the end of third quarter 2004, Choice had 492 hotels under development worldwide, representing 39,127 rooms, compared to 426 hotels and 35,417 rooms in 2003, increases of 15% and 10%, respectively.

Use of Free Cash Flow

The company has consistently used the free cash flow generated from its operations to return value to its shareholders. This is primarily achieved through share repurchases and, more recently, dividends.

During the third quarter of this year, the company purchased 0.4 million shares of common stock at a total cost of $21.6 million. For the nine months ended September 30, 2004, the company purchased 2.3 million shares of common stock at a total cost of $101.3 million. The company has remaining authorization to purchase up to 2.8 million shares. Since Choice announced its stock repurchase program on June 25, 1998, the company has purchased 31.6 million shares of common stock at an average price of $19.49 per share and a total cost of $616 million, as of October 28, 2004. Total shares outstanding as of September 30, 2004, are 33.0 million.

On September 15, 2004, Choice's Board of Directors declared a cash dividend of $0.225 on outstanding shares of common stock payable on October 22, 2004 to holders of record on October 8, 2004. This dividend represents a 12.5% increase over the previous quarterly rate of $0.20 and raises the indicated annual dividend rate on the company's common stock from $0.80 to $0.90 per share.

The company expects to continue to return value to its shareholders through a combination of share repurchases and dividends.

Fourth Quarter & Full-Year 2004

The company's fourth quarter 2004 diluted EPS is expected to be $0.53 to $0.55. Full year 2004 diluted EPS is expected to be $2.09 to $2.11, excluding the effect of the third quarter 2004 loss on extinguishment of debt. These estimates assume the existing share count and RevPAR growth in the fourth quarter of approximately 6% to 7%.

Non-GAAP Financial Measures

Franchising revenues, franchising margins and adjusted diluted EPS are non-GAAP financial measurements. These financial measurements are presented as supplemental disclosures because they are used by management in reviewing and analyzing the company's performance. This information should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted in the United States (GAAP), such as total revenues, operating income margins and diluted EPS. The company's calculation of these measurements may be different from the calculation used by other companies and therefore comparability may be limited. The company has included an exhibit accompanying this release which reconcile these measures to the comparable GAAP measurement.
 
 

 

Choice Hotels International, Inc.
Exhibit 1
Consolidated Statements of Income
(Unaudited)



(In thousands, except per      Three Months Ended   Nine Months Ended
 share amounts)                Sept. 30, Sept. 30, Sept. 30, Sept. 30,
                                  2004      2003     2004      2003
                                 ----------------- -------------------
REVENUES:

  Royalty fees                   $51,846  $48,346  $124,237  $113,196
  Initial franchise and
   relicensing fees                4,927    4,026    13,546    11,285
  Partner services                 3,027    2,953     9,282     9,630
  Marketing and reservation       65,380   48,639   169,109   149,549
  Hotel operations                 1,018      955     2,762     2,739
  Other                            1,312      974     2,984     4,547
                                 ----------------- -------------------
     Total revenues              127,510  105,893   321,920   290,946

OPERATING EXPENSES:

  Selling, general and
   administrative                 16,374   14,135    49,612    45,037
  Depreciation and amortization    2,489    2,583     7,525     8,472
  Marketing and reservation       65,380   48,639   169,109   149,549
  Hotel operations                   778      764     2,150     2,217
                                 ----------------- -------------------
     Total operating expenses     85,021   66,121   228,396   205,275

Operating income                  42,489   39,772    93,524    85,671

OTHER INCOME AND EXPENSES:
  Interest expense                 2,921    2,893     8,277     8,985
  Interest and other investment
   income                            (99)  (1,675)     (767)   (4,917)
  Loss on extinguishment of debt     696        -       696         -
                                 ----------------- -------------------
     Total other income and
      expenses                     3,518    1,218     8,206     4,068
                                 ----------------- -------------------

Income before income taxes        38,971   38,554    85,318    81,603
Income taxes                      14,055   14,209    31,305    30,460
                                 ----------------- -------------------
Net income                       $24,916  $24,345  $ 54,013  $ 51,143
                                 ================= ===================
 

Weighted average shares
 outstanding-basic                32,807   35,635    33,489    36,045
                                 ================= ===================

Weighted average shares
 outstanding-diluted              34,259   36,745    34,870    36,936
                                 ================= ===================

Basic earnings per share         $  0.76  $  0.68  $   1.61  $   1.42
                                 ================= ===================

Diluted earnings per share       $  0.73  $  0.66  $   1.55  $   1.38
                                 ================= ===================
 
 

Choice Hotels International, Inc.                           Exhibit 2
Consolidated Balance Sheets
 

(In thousands)                              September 30, December 31,
                                                2004         2003
                                            ------------- ------------
                                             (Unaudited)

ASSETS

Cash and cash equivalents                   $     30,548  $    20,031
Accounts receivable, net                          42,500       33,631
Deferred income taxes                              2,256        1,957
Other current assets                               3,377        3,613
                                            ------------- ------------
      Total current assets                        78,681       59,232

Fixed assets and intangibles, net                141,055      150,256
Receivable -- marketing and reservation
 fees                                             21,315       32,368
Other assets                                      29,566       25,416
                                            ------------- ------------

      Total assets                               270,617      267,272
                                            ------------- ------------
 

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current portion of long-term debt                  8,746       23,829
Other current liabilities                         86,005       78,382
                                            ------------- ------------
      Total current liabilities                   94,751      102,211

Long-term debt                                   299,379      222,823
Deferred income taxes                             13,195       21,562
Other liabilities                                 38,163       38,863
                                            ------------- ------------

      Total liabilities                          445,488      385,459
                                            ------------- ------------

      Total shareholders' deficit               (174,871)    (118,187)
                                            ------------- ------------

         Total liabilities and
          shareholders' deficit             $    270,617  $   267,272
                                            ------------- ------------
 
 

Choice Hotels International, Inc.                          Exhibit 3
Consolidated Statements of Cash Flow
(Unaudited)
 

(In thousands)                                  Nine Months Ended
                                           September 30, September 30,
                                               2004          2003
                                           ---------------------------

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income                                 $     54,013  $     51,143

Adjustments to reconcile net income to net
 cash provided by operating activities:
   Depreciation and amortization                  7,525         8,472
   Provision for bad debts                          215           213
   Non-cash stock compensation                    3,100         1,489
   Non-cash interest and other investment
    income                                         (215)       (1,032)
   Loss on extinguishment of debt                   695             -
   Equity in net income of affiliates              (451)         (335)

Changes in assets and liabilities, net of
 acquisitions:
   Receivables                                   (9,032)       (5,602)
   Receivable -- marketing and reservation
    fees, net                                    18,222        13,438
   Current liabilities                               22         2,362
   Income taxes payable and current other
    assets                                       10,356        10,628
   Deferred income taxes, other non
    current assets and liabilities               (9,227)          929
                                           ---------------------------

NET CASH PROVIDED BY OPERATING ACTIVITIES        75,223        81,705
                                           ---------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:

Investment in property and equipment             (4,266)       (7,076)
Proceeds from disposition of property                 -           498
Acquisition of flag                                   -        (1,211)
Issuance of notes receivable                     (1,781)       (3,244)
Purchases of investments, net                    (2,772)         (418)
Other items, net                                   (431)          344
                                           ---------------------------

NET CASH USED IN INVESTING ACTIVITIES            (9,250)      (11,107)
                                           ---------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from long-term debt                    383,425        66,800
Principal payments of long-term debt           (454,000)      (78,573)
Net borrowings (repayments) pursuant to
 revolving credit facility                      132,000       (16,000)
Debt issue costs                                 (1,010)            -
Purchase of treasury stock                     (101,336)      (43,725)
Dividends paid                                  (20,125)            -
Proceeds from exercise of stock options           5,590         4,370
                                           ---------------------------

NET CASH USED IN FINANCING ACTIVITIES           (55,456)      (67,128)
                                           ---------------------------

Net change in cash and cash equivalents          10,517         3,470
Cash and cash equivalents at beginning of
 period                                          20,031        12,227
                                           ---------------------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD $     30,548  $     15,697
                                           ===========================
 
 

CHOICE HOTELS INTERNATIONAL, INC.               Exhibit 4
        SUPPLEMENTAL OPERATING INFORMATION BY BRAND
                   DOMESTIC HOTEL SYSTEM
                        (UNAUDITED)
 

                   Three Months Ended           Nine Months Ended
               September 30, September 30, September 30, September 30,
                   2004          2003          2004          2003
               ------------- ------------- ------------- -------------

COMFORT INN
  Hotels              1,433         1,404         1,433         1,404
  Rooms             112,323       110,646       112,323       110,646
  Avg. Daily
   Rate              $70.21        $68.84        $65.47        $64.48
  Occupancy %          69.7%         69.3%         59.7%         58.1%
  RevPAR             $48.95        $47.74        $39.06        $37.44
 

COMFORT SUITES
  Hotels                383           367           383           367
  Rooms              30,210        29,057        30,210        29,057
  Avg. Daily
   Rate              $76.49        $75.21        $73.95        $73.23
  Occupancy %          71.7%         69.6%         64.2%         61.4%
  RevPAR             $54.87        $52.34        $47.45        $44.94
 

QUALITY
  Hotels                549           503           549           503
  Rooms              56,522        51,865        56,522        51,865
  Avg. Daily
   Rate              $68.88        $70.52        $64.24        $65.36
  Occupancy %          63.4%         61.7%         54.2%         51.6%
  RevPAR             $43.68        $43.52        $34.80        $33.71
 

CLARION
  Hotels                157           135           157           135
  Rooms              23,555        20,385        23,555        20,385
  Avg. Daily
   Rate              $74.98        $76.29        $72.33        $72.82
  Occupancy %          58.4%         57.5%         51.3%         49.3%
  RevPAR             $43.82        $43.84        $37.07        $35.92
 

SLEEP
  Hotels                311           305           311           305
  Rooms              23,807        23,387        23,807        23,387
  Avg. Daily
   Rate              $62.94        $61.02        $59.44        $58.27
  Occupancy %          67.4%         66.7%         59.3%         57.2%
  RevPAR             $42.45        $40.71        $35.23        $33.33
 

MAINSTAY
  Hotels                 27            24            27            24
  Rooms               2,150         1,903         2,150         1,903
  Avg. Daily
   Rate              $64.37        $64.46        $60.78        $62.08
  Occupancy %          67.9%         72.4%         61.1%         62.8%
  RevPAR             $43.71        $46.65        $37.14        $39.00
 

ECONO LODGE
  Hotels                770           728           770           728
  Rooms              47,468        45,504        47,468        45,504
  Avg. Daily
   Rate              $53.38        $52.59        $48.97        $48.17
  Occupancy %          56.7%         57.6%         48.3%         47.9%
  RevPAR             $30.26        $30.27        $23.64        $23.06
 

RODEWAY
  Hotels                166           135           166           135
  Rooms              10,762         9,080        10,762         9,080
  Avg. Daily
   Rate              $57.92        $56.65        $53.13        $50.65
  Occupancy %          58.6%         54.8%         48.5%         45.2%
  RevPAR             $33.93        $31.05        $25.78        $22.91
 

TOTAL CHOICE -
 DOMESTIC
  Hotels              3,796         3,601         3,796         3,601
  Rooms             306,797       291,827       306,797       291,827
  Avg. Daily
   Rate              $67.80        $67.08        $63.70        $63.06
  Occupancy %          65.4%         64.8%         56.4%         54.7%
  RevPAR             $44.35        $43.44        $35.95        $34.50
  Effective
   Royalty
   Rate                4.04%         4.03%         4.04%         4.00%
 
 

                                                            Exhibit 5
                   CHOICE HOTELS INTERNATIONAL, INC.
                       SUPPLEMENTAL INFORMATION
      CALCULATION OF FRANCHISING REVENUES AND FRANCHISING MARGINS
                              (UNAUDITED)
 

(dollar amounts in thousands)  Three Months Ended   Nine Months Ended
                               Sept. 30, Sept. 30, Sept. 30, Sept. 30,
                                 2004      2003      2004      2003
                               ------------------- -------------------

Franchising Revenues:

Total Revenues                 $127,510  $105,893  $321,920  $290,946
Adjustments:
     Marketing and Reservation
      Revenues                  (65,380)  (48,639) (169,109) (149,549)
     Hotel Operations            (1,018)     (955)   (2,762)   (2,739)
                               ------------------- -------------------
Franchising Revenues           $ 61,112  $ 56,299  $150,049  $138,658
                               ------------------- -------------------

Franchising Margins:

Operating Margin:

Total Revenues                 $127,510  $105,893  $321,920  $290,946
Operating Income               $ 42,489  $ 39,772  $ 93,524  $ 85,671
                               ------------------- -------------------
     Operating Margin              33.3%     37.6%     29.1%     29.4%
                               ------------------- -------------------

Franchising Margin:

Franchising Revenues           $ 61,112  $ 56,299  $150,049  $138,658

Operating Income               $ 42,489  $ 39,772  $ 93,524  $ 85,671
Less: Hotel Operations              240       191       612       522
                               ------------------- -------------------
                               $ 42,249  $ 39,581  $ 92,912  $ 85,149
                               ------------------- -------------------
                               ------------------- -------------------
     Franchising Margins           69.1%     70.3%     61.9%     61.4%
                               ------------------- -------------------
 
 

                                                            Exhibit 6

                   CHOICE HOTELS INTERNATIONAL, INC.
                       SUPPLEMENTAL INFORMATION
            CALCULATION OF ADJUSTED NET INCOME AND ADJUSTED
                   DILUTED EARNINGS PER SHARE (EPS)
                              (UNAUDITED)

(In thousands, except
 per share amounts)            Three Months Ended   Nine Months Ended
                               Sept. 30, Sept. 30, Sept. 30, Sept. 30,
                                  2004     2003      2004      2003
                               ------------------  ------------------
Adjusted Net Income

Net Income                     $ 24,916  $ 24,345  $ 54,013  $ 51,143
Adjustments:
     Debt Extinguishment
      Costs                         433                 433
     Interest Income
      Attributable to a Note
      Receivable from Sunburst
      Hospitality Corporation
      (Sunburst)                      -      (731)        -    (2,195)
     Liquidated Damages from
      Sunburst for Franchise
      Terminations                    -         -         -    (1,058)
                               ------------------  ------------------
Adjusted Net Income            $ 25,349  $ 23,614  $ 54,446  $ 47,890
                               ------------------  ------------------

Weighted average shares
 outstanding-diluted             34,259    36,745    34,870    36,936

Diluted Earnings Per Share       $ 0.73    $ 0.66    $ 1.55    $ 1.38
Adjustments:
     Debt Extinguishment Costs     0.01         -      0.01         -
     Interest Income
      Attributable to a Note
      Receivable from Sunburst
      Hospitality Corporation
      (Sunburst)                      -     (0.02)        -     (0.06)
     Liquidated Damages from
      Sunburst for Franchise
      Terminations                    -         -         -     (0.03)
                               ------------------  ------------------
Adjusted Diluted Earnings
 Per Share (EPS)                 $ 0.74    $ 0.64    $ 1.56    $ 1.29
                               ------------------  ------------------

 

Choice Hotels International franchises more than 4,900 hotels, representing approximately 400,000 rooms, in the United States and 40 other countries and territories. As of September 30, 2004, 397 hotels are under development in the United States, representing 30,776 rooms, and an additional 95 hotels, representing 8,351 rooms, are under development in 22 countries and territories. Its Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn and MainStay Suites brands serve guests worldwide.

Certain matters discussed in this press release may constitute forward-looking statements within the meaning of the federal securities law. Such statements are based on management's beliefs, assumptions and expectations, which in turn are based on information currently available to management. 


 
Contact:

Choice Hotels International, Inc.
John Hawkins
Vice President
Corporate Communications
Tel: (301) 592-5075
Fax: (301) 592-6177
     john_hawkins@choicehotels.com

Also See: Choice Hotels Adds 41,000 Franchise Rooms in 2003; Reports 342 Conversions and 128 New Construction Contracts / January 2004
Choice Hotels International Reports 2nd Qtr 2004 Net Income of $18.5 million Compared to Prior Year Net Income of $17.1 million; Gains 151 New Domestic Hotel Franchise Contracts in 2nd Qtr / Hotel Operating Statistics / July 2004
Choice Hotels, With 4,810 Franchised Hotels, Reports 2003 Net Income of $71.9 million, Compared to Prior Year Net Income of $ 60.8 million / Hotel Operating Statistics / February 2004


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