| CHOICE HOTELS INTERNATIONAL INC /DE Item 1A Risk Factors |
| Choice Hotels International, Inc |
| and subsidiaries is subject to various risks, which could have a negative effect on the Company and its financial condition |
| These risks could cause actual operating results to differ from those expressed in certain “forward looking statements” contained in this Form 10-K as well as in other Company communications |
| Before you invest in our securities you should carefully consider these risk factors together with all other information included in our publicly filed documents |
| We are subject to the operating risks common in the lodging and franchising industries |
| A significant portion of our revenue is derived from fees based on room revenues at hotels franchised under our brands |
| As such, our business is subject, directly or through our franchisees, to the following risks common in the lodging and franchising industry, among others: • changes in the number of hotels operating under franchised brands; • changes in the relative mix of franchised hotels in the various lodging industry price categories; • changes in occupancy and room rates achieved by hotels; • desirability of hotel geographic location; 17 ______________________________________________________________________ [45]Table of Contents • changes in general and local economic and market conditions, which can adversely affect the level of business and leisure travel, and therefore the demand for lodging and related services; • increases in costs due to inflation may not be able to be totally offset by increases in room rates; • over-building in one or more sectors of the hotel industry and/or in one or more geographic regions, could lead to excess supply compared to demand, and to decreases in hotel occupancy and/or room rates; • changes in travel patterns; • changes in governmental regulations that influence or determine wages, prices or construction costs; • other unpredictable external factors, such as acts of god, war, terrorist attacks, epidemics, airline strikes, transportation and fuel price increases and severe weather, may reduce business and leisure travel; • increases in the cost of human capital, energy, healthcare, insurance and other operating expenses resulting in lower operating margins; • the financial condition of franchisees and travel related companies; • franchisors’ ability to develop and maintain positive relations with current and potential franchisees; and, • changes in exchange rates or sustained recessionary periods in the US (affecting domestic travel) and internationally could also unfavorably impact future results |
| We are subject to risks relating to acts of God, terrorist activity, epidemics and war |
| Our financial and operating performance may be adversely affected by acts of God, such as natural disasters and/or epidemics in locations where we have a high concentration of franchisees and areas of the world from which our franchisees draw a large number of guests |
| Some types of losses, such as from terrorism and acts of war may be either uninsurable or too expensive to justify insuring against |
| Should an uninsured loss or a loss in excess of insured limits occur, our results of operations and financial condition may be adversely affected |
| We may not grow our franchise system or we may lose business by failing to compete effectively |
| Our operational and growth prospects depend on the strength and desirability of our brands |
| We believe that hotel operators choose lodging franchisors based primarily on the value and quality of each franchisor’s brand and services, the extent to which affiliation with that franchisor may increase the hotel operator’s reservations and profits, and the franchise fees charged |
| Demographic, economic or other changes in markets may adversely affect the desirability of our brands and, correspondingly, the number of hotels franchised under the Choice brands |
| We compete with other lodging companies for franchisees |
| As a result, the terms of new franchise agreements may not be as favorable as our current franchise agreements |
| Our competition may reduce fee structures, potentially causing us to charge lower fees, which may impact our margins |
| New competition may emerge using different business models with a lesser reliance on franchise fees |
| In addition, an excess supply of hotel rooms may discourage potential franchisees from constructing new hotels, thereby limiting a source of growth of the franchise fees received by us |
| We may not achieve our objectives for growth in the number of franchised hotels |
| The number of properties and rooms franchised under our brands significantly affects our results |
| There can be no assurance that we will be successful in achieving our objectives with respect to growing the number of franchised hotels in our system or that we will be able to attract qualified franchisees |
| The growth in the number 18 ______________________________________________________________________ [46]Table of Contents of franchised hotels is subject to numerous risks, many of which are beyond the control of our franchisees or us |
| • the ability of our franchisees to open and operate additional hotels profitably |
| Factors affecting the opening of new hotels, or the conversion of existing hotels to a Choice brand, include, among others: • the availability of hotel management, staff and other personnel; • the cost and availability of suitable hotel locations; • the availability and price of capital to allow hotel owners and developers to fund investments; • cost effective and timely construction of hotels (which construction can be delayed due to, among other reasons, labor disputes, local zoning and licensing matters, and weather conditions); and • securing required governmental permits |
| • our ability to continue to enhance our reservation, operational and service delivery systems to support additional franchisees in a timely, cost-effective manner; • the effectiveness and efficiency of our development organization; • our failure to introduce new brands that gain market acceptance, may adversely impact our unit growth potential; • our dependence on our independent franchisees’ skills and access to financial resources necessary to open the desired number of hotels; and, • our ability to attract and retain qualified domestic and international franchisees |
| Contract terms for new hotel franchises may be less favorable |
| The terms of the franchise agreements for new or conversion hotels are influenced by contract terms offered by our competitors at the time these agreements are entered into |
| Accordingly, we cannot assure you that contracts for new hotel franchises entered into or renewed in the future will be on terms that are as favorable to us as those under our existing agreements |
| Under certain circumstances our franchisees may terminate our franchise contracts |
| We franchise hotels to third parties pursuant to franchise contracts |
| These contracts may be terminated, renegotiated or expire |
| These franchise contracts typically have an initial term of twenty years with provisions permitting the franchisee to terminate the agreements after five, ten or fifteen years under certain circumstances |
| There can be no assurance that we will be able to replace terminated franchise contracts, or that the terms of renegotiated or new contracts will be as favorable as the terms that existed before such replacement or renegotiation |
| Deterioration in the general financial condition of our franchisees may adversely affect our results |
| Our operating results are impacted by the ability of our franchisees to generate revenues at properties they franchise from us |
| An extended period of occupancy or room rate declines may adversely affect the operating results and financial condition of our franchisees |
| The hotel industry is highly competitive |
| Competition is based primarily on the level of service, quality of accommodations, convenience of locations and room rates |
| Our franchisees compete for guests with other hotel properties in their geographic markets |
| Some of their competitors may have substantially greater marketing and financial resources than our franchisees, and they may construct new facilities or improve their existing facilities, reduce their prices or expand and improve their marketing programs in ways that adversely affect our franchisees operating results and financial condition |
| 19 ______________________________________________________________________ [47]Table of Contents These factors, among others, could adversely affect the operating results and financial condition of our franchisees and result in declines in the number of franchised properties and/or franchise fees and other revenues derived from our franchising business |
| Increasing use of internet reservation channels may decrease loyalty to our brands or otherwise adversely affect us |
| A growing percentage of our hotel rooms are booked through internet travel intermediaries |
| If such bookings continue to increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from our franchisees or us |
| Moreover, some of these internet travel intermediaries are attempting to commoditize hotel rooms, by increasing the importance of price and general indicators of quality at the expense of brand identification |
| These intermediaries hope that consumers will eventually develop brand loyalties to their reservations systems rather than to our lodging brands |
| If this happens our business and profitability may be significantly harmed |
| We have established preferred partner agreements with many key third party websites to limit transaction fees for hotels but we currently do not have agreements with several large internet travel intermediaries |
| We are dependent upon our employees’ ability to manage our growth |
| Our future success and our ability to manage future growth depend in large part upon the efforts and skills of our senior management and our ability to attract and retain key officers and other highly qualified personnel |
| Competition for such personnel is intense |
| Accordingly, there can be no assurance that our senior management will be able to successfully execute and implement our growth and operating strategies |
| We and our franchisees are reliant upon technology |
| The lodging industry depends upon the use of sophisticated technology and systems including technology utilized for reservation systems, property management, procurement, operation of our customer loyalty programs and administrative systems |
| The operation of many of these systems is dependent upon third party data communication networks and software upgrades, maintenance and support |
| These technologies can be expected to require refinements and there is the risk that advanced new technologies will be introduced |
| There can be no assurance that as various systems and technologies become outdated or new technology is required we will be able to replace or introduce them as quickly as our competitors or within budgeted costs for such technology |
| There can be no assurance that we will achieve the benefits that may have been anticipated from any new technology or system |
| Further, there can be no assurance that disruptions of the operation of these systems will not occur as a result of failures related to third party systems and support |
| Our international operations are subject to special political and monetary risks |
| We have franchised properties open and operating in more than 40 countries and territories outside of the United States |
| We also have investments in several foreign hotel franchisors |
| International operations generally are subject to political and other risks that are not present in US operations |
| These risks include the risk of war or civil unrest, expropriation and nationalization |
| In addition, some international jurisdictions restrict the repatriation of non-US earnings |
| Various international jurisdictions also have laws limiting the right and ability of non-US entities to pay dividends and remit earnings to affiliated companies unless specified conditions have been met |
| In addition, sales in international jurisdictions typically are made in local currencies, which subjects us to risks associated with currency fluctuations |
| Currency devaluations and unfavorable changes in international monetary and tax policies could have a material adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions |
| 20 ______________________________________________________________________ [48]Table of Contents We are subject to certain risks related to our indebtedness |
| As a result of our debt obligations, we are subject to the following risks, among others: • the risk that cash flows from operations or available lines of credit will be insufficient to meet required payments of principal and interest when due; • the risk that (to the extent we maintain floating rate indebtedness) interest rates increase; • our leverage may adversely affect our ability to obtain additional financing for acquisitions, working capital, capital expenditures or other purposes, if required; • our existing debt agreements contain covenants that limit our ability to, among other things, borrow additional money, sell assets or engage in mergers |
| If we do not comply with these covenants, or do not repay our debt on time, we would be in default under our debt agreements |
| Unless any such default is waived by our lenders, the debt could become immediately payable and this would have a material adverse impact on us; and, • the liquidity of the market for our publicly traded senior notes depends upon the number of holders of those securities, our performance, the market for similar securities, the interest of securities dealers in making a market in those securities and other factors |
| While our senior debt is currently rated investment grade by both of the major rating agencies, there can be no assurance we will be able to maintain this rating |
| In the event our senior debt is not investment grade, we would likely incur higher borrowing costs |
| Anti-takeover provisions may prevent a change in control |
| Our restated certificate of incorporation, the staggered terms of our board of directors and the Delaware General Corporation Law each contain provisions that could have the effect of making it more difficult for a party to acquire, and may discourage a party from attempting to acquire, control of our Company without approval of our board of directors |
| These provisions could discourage tender offers or other bids for our common stock at a premium over market price |
| The concentration of share ownership may influence the outcome of certain matters |
| The concentration of share ownership by our directors and affiliates allows them to substantially influence the outcome of matters requiring shareholder approval |
| As a result, acting together, they may be able to control or substantially influence the outcome of matters requiring approval by our shareholders, including the elections of directors and approval of significant corporate transactions, such as equity compensation plans |
| Forward-looking statements may prove inaccurate |
| We have made forward-looking statements in our reports on Form 10-Q, Form 10-K and other communications that are subject to risks and uncertainties |
| You should note that many factors, some of which are discussed in such reports, could affect future financial results and could cause those results to differ materially from those expressed in our forward-looking statements contained in such reports |
| Government regulation could impact our business |
| The Federal Trade Commission (the “FTC”), various states and certain foreign jurisdictions where we market franchises regulate the sale of franchises |
| The FTC requires franchisors to make extensive disclosure to prospective franchisees but does not require registration |
| A number of states in which our franchisees operate require registration or disclosure in connection with franchise offers and sales |
| In addition, several states in which our franchisees operate have “franchise relationship laws” or “business opportunity laws” that limit the ability of the franchisor to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements |
| While our business has not been materially affected by such regulation, there can be no assurance that this will continue or that future regulation or legislation will not have such an effect |
| 21 ______________________________________________________________________ [49]Table of Contents Failure to comply with Sarbanes-Oxley Act could impact our business |
| There can be no assurance that the periodic evaluation of our internal controls required by the Sarbanes-Oxley Act will not result in the identification of significant control deficiencies or that our auditors will be able to attest to the effectiveness of our internal control over financial reporting |
| Failure to comply may have consequences on our business including, but not limited to, increased risks of financial statement misstatements, SEC sanctions and negative capital market reactions |
| We are subject to certain risks related to litigation filed by or against us |
| We cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of litigation filed by or against us, including, remedies or damage awards |
| This litigation may include, but is not limited to, actions or negligence by franchisees outside of our control |
| We are not liable for the actions of our franchisees; however, there is no guarantee that we would be insulated from liability in all cases |
| Disruption or malfunction in our information systems could adversely affect our business |
| Our information technology system is vulnerable to damage or interruption from: • earthquakes, fires, floods and other natural disasters; • power losses, computer systems failures, internet and telecommunications or data network failures, operator negligence, improper operation by or supervision of employees, physical and electronic losses of data and similar events; and • computer viruses, penetration by individuals seeking to disrupt operations or misappropriate information and other breaches of security |
| We rely on this system to perform functions critical to our ability to operate, including our central reservation systems |
| Accordingly, an extended interruption in the systems’ function could significantly curtail, directly and indirectly, our ability to conduct our business and generate revenue |
| The weakening of our intellectual property could impact our business |
| Our intellectual property is fundamental to our brands and our franchising business |
| We generate, maintain, utilize and enforce a substantial portfolio of trademarks and other intellectual property rights |
| We use our intellectual property rights to protect development activities, to protect our good name, to promote our brand name recognition, to enhance our competitiveness and to otherwise support our business goals and objectives |
| Our intellectual property rights, however, may be challenged, cancelled, invalidated or circumvented, or may fail to provide us with significant competitive advantages |