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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________
FORM 10-Q
_____________________________________________
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 001-13393
_____________________________________________
CHOICE HOTELS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________
| | | | | | | | | | | |
Delaware | | 52-1209792 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
| | | |
1 Choice Hotels Circle | | 20850 |
Suite 400 | |
Rockville, | Maryland | |
(Address of Principal Executive Offices) | | (Zip Code) |
(Registrant’s telephone number, including area code): (301) 592-5000
(Former name, former address and former fiscal year, if changed since last report): N/A
________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
Common Stock, Par Value $0.01 per share | | CHH | | New York Stock Exchange |
_____________________________________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of common stock outstanding on October 31, 2022 was 53,299,203.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
REVENUES | | | | | | | |
Royalty, licensing and management fees | $ | 144,020 | | | $ | 127,317 | | | $ | 356,208 | | | $ | 299,606 | |
Initial franchise fees | 7,011 | | | 6,149 | | | 21,635 | | | 18,904 | |
Procurement services | 14,401 | | | 13,010 | | | 47,887 | | | 36,293 | |
Owned hotels | 19,992 | | | 11,377 | | | 49,220 | | | 24,724 | |
Other | 31,432 | | | 8,645 | | | 51,588 | | | 20,753 | |
Other revenues from franchised and managed properties | 197,410 | | | 156,871 | | | 513,429 | | | 384,380 | |
Total revenues | 414,266 | | | 323,369 | | | 1,039,967 | | | 784,660 | |
OPERATING EXPENSES | | | | | | | |
Selling, general and administrative | 70,202 | | | 35,110 | | | 144,414 | | | 99,847 | |
Depreciation and amortization | 8,726 | | | 5,883 | | | 20,436 | | | 18,477 | |
Owned hotels | 13,158 | | | 7,054 | | | 32,004 | | | 16,534 | |
Other expenses from franchised and managed properties | 190,541 | | | 116,216 | | | 458,037 | | | 327,674 | |
Total operating expenses | 282,627 | | | 164,263 | | | 654,891 | | | 462,532 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Gain on sale of business and assets, net | 13,379 | | | — | | | 16,688 | | | — | |
Operating income | 145,018 | | | 159,106 | | | 401,764 | | | 322,128 | |
OTHER INCOME AND EXPENSES, NET | | | | | | | |
Interest expense | 9,362 | | | 11,638 | | | 32,084 | | | 35,106 | |
Interest income | (2,348) | | | (1,202) | | | (5,256) | | | (3,717) | |
| | | | | | | |
Other loss (gain) | 2,303 | | | 407 | | | 9,578 | | | (2,906) | |
Equity in net loss (gain) of affiliates | (1,075) | | | (3,326) | | | (1,279) | | | 1,492 | |
Total other income and expenses, net | 8,242 | | | 7,517 | | | 35,127 | | | 29,975 | |
Income before income taxes | 136,776 | | | 151,589 | | | 366,637 | | | 292,153 | |
Income tax expense | 33,696 | | | 34,934 | | | 89,998 | | | 67,279 | |
Net income | $ | 103,080 | | | $ | 116,655 | | | $ | 276,639 | | | $ | 224,874 | |
| | | | | | | |
Basic earnings per share | $ | 1.87 | | | $ | 2.10 | | | $ | 4.98 | | | $ | 4.05 | |
Diluted earnings per share | $ | 1.85 | | | $ | 2.08 | | | $ | 4.93 | | | $ | 4.01 | |
| | | | | | | |
Cash dividends declared per share | $ | 0.2375 | | | $ | 0.225 | | | $ | 0.7125 | | | $ | 0.450 | |
The accompanying notes are an integral part of these consolidated financial statements.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Net income | $ | 103,080 | | | $ | 116,655 | | | $ | 276,639 | | | $ | 224,874 | |
Other comprehensive income (loss), net of tax: | | | | | | | |
| | | | | | | |
Foreign currency translation adjustment | (902) | | | (57) | | | (1,139) | | | 66 | |
Other comprehensive income (loss), net of tax | (902) | | | (57) | | | (1,139) | | | 66 | |
Comprehensive income | $ | 102,178 | | | $ | 116,598 | | | $ | 275,500 | | | $ | 224,940 | |
The accompanying notes are an integral part of these consolidated financial statements.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
ASSETS | | | |
Current assets | | | |
Cash and cash equivalents | $ | 52,541 | | | $ | 511,605 | |
Accounts receivable (net of allowance for credit losses of $21,595 and $34,149, respectively) | 297,628 | | | 153,147 | |
Income taxes receivable | 508 | | | 12,511 | |
Notes receivable (net of allowance for credit losses of $4,291 and $4,318, respectively) | 52,381 | | | 54,453 | |
Prepaid expenses and other current assets | 56,091 | | | 29,945 | |
Total current assets | 459,149 | | | 761,661 | |
Property and equipment, at cost (net of accumulated depreciation and amortization of $248,137 and $232,492, respectively) | 417,431 | | | 377,367 | |
Operating lease right-of-use assets | 70,533 | | | 34,183 | |
Goodwill | 227,703 | | | 159,196 | |
Intangible assets (net of accumulated amortization of $188,689 and $195,909, respectively) | 723,617 | | | 312,389 | |
Notes receivable (net of allowance for credit losses of $7,122 and $12,461, respectively) | 54,492 | | | 66,451 | |
Investments, employee benefit plans, at fair value | 29,010 | | | 33,946 | |
Investments in affiliates | 29,694 | | | 27,967 | |
Deferred income taxes | 90,847 | | | 68,643 | |
Other assets | 86,507 | | | 90,021 | |
Total assets | $ | 2,188,983 | | | $ | 1,931,824 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities | | | |
Accounts payable | $ | 129,856 | | | $ | 81,169 | |
Accrued expenses and other current liabilities | 125,227 | | | 104,472 | |
Deferred revenue | 85,863 | | | 81,538 | |
Current portion of long-term debt | 2,976 | | | 216,351 | |
Liability for guest loyalty programs | 82,461 | | | 86,765 | |
Total current liabilities | 426,383 | | | 570,295 | |
Long-term debt | 1,155,142 | | | 844,123 | |
Long-term deferred revenue | 134,171 | | | 105,785 | |
Deferred compensation and retirement plan obligations | 43,053 | | | 38,690 | |
Income taxes payable | 15,482 | | | 20,642 | |
| | | |
Operating lease liabilities | 70,564 | | | 35,492 | |
Liability for guest loyalty programs | 49,113 | | | 41,785 | |
Other liabilities | 10,564 | | | 9,130 | |
Total liabilities | 1,904,472 | | | 1,665,942 | |
Commitments and Contingencies | | | |
Common stock, $0.01 par value; 160,000,000 shares authorized; 95,065,638 shares issued at September 30, 2022 and December 31, 2021; 53,773,667 and 55,609,226 shares outstanding at September 30, 2022 and December 31, 2021, respectively | 951 | | | 951 | |
Additional paid-in-capital | 284,092 | | | 259,317 | |
Accumulated other comprehensive loss | (5,713) | | | (4,574) | |
Treasury stock, at cost; 41,291,971 and 39,456,412 shares at September 30, 2022 and December 31, 2021, respectively | (1,507,423) | | | (1,265,032) | |
Retained earnings | 1,512,604 | | | 1,275,220 | |
Total shareholders’ equity | 284,511 | | | 265,882 | |
Total liabilities and shareholders’ equity | $ | 2,188,983 | | | $ | 1,931,824 | |
The accompanying notes are an integral part of these consolidated financial statements.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, |
| 2022 | | 2021 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net income | $ | 276,639 | | | $ | 224,874 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 20,436 | | | 18,477 | |
Depreciation and amortization – marketing, reservation, and system | 23,237 | | | 18,364 | |
Gain on sale and disposal of business and assets, net | (16,688) | | | — | |
Amortization - franchise agreement acquisition cost | 11,558 | | | 9,734 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Stock compensation and other charges | 28,621 | | | 24,277 | |
Interest and investment loss (income) | 9,135 | | | (11,039) | |
Deferred income taxes | (22,402) | | | (34,285) | |
Equity in net loss of affiliates, less distributions received | 2,451 | | | 8,421 | |
| | | |
| | | |
| | | |
Franchise agreement acquisition costs, net of reimbursements | (32,947) | | | (28,466) | |
| | | |
Change in working capital and other | (34,838) | | | 14,887 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Net cash provided by operating activities | 265,202 | | | 245,244 | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Investment in property and equipment | (66,084) | | | (46,098) | |
Investment in intangible assets | (3,247) | | | (3,113) | |
Asset acquisitions, net of cash paid | (856) | | | — | |
| | | |
Proceeds from sale of business and assets | 140,554 | | | — | |
Proceeds from termination of intangibles | 5,698 | | | — | |
Business acquisition, net of cash acquired | (550,431) | | | — | |
| | | |
Contributions to investments in affiliates | (4,264) | | | (2,150) | |
| | | |
Proceeds from sale of equity method investments | — | | | 15,554 | |
Purchases of investments, employee benefit plans | (3,719) | | | (1,279) | |
Proceeds from sales of investments, employee benefit plans | 1,896 | | | 2,487 | |
Issuance of notes receivable | (5,617) | | | (17,918) | |
Collections of notes receivable | 701 | | | 63 | |
| | | |
Other items, net | 1,708 | | | (115) | |
Net cash used in investing activities | (483,661) | | | (52,569) | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | |
| | | |
Payments to extinguish acquired debt | (55,975) | | | — | |
Proceeds from acquired derivative | 1,943 | | | — | |
Net borrowings pursuant to revolving credit facilities | 315,000 | | | — | |
| | | |
Principal payments on 2012 senior notes | (216,571) | | | — | |
| | | |
Debt issuance costs | (24) | | | (365) | |
Purchases of treasury stock | (246,530) | | | (10,039) | |
Dividends paid | (39,697) | | | (12,528) | |
| | | |
Proceeds from exercise of stock options | 2,361 | | | 10,817 | |
Net cash used in financing activities | (239,493) | | | (12,115) | |
Net change in cash and cash equivalents | (457,952) | | | 180,560 | |
Effect of foreign exchange rate changes on cash and cash equivalents | (1,112) | | | (223) | |
Cash and cash equivalents at beginning of period | 511,605 | | | 234,779 | |
Cash and cash equivalents at end of period | $ | 52,541 | | | $ | 415,116 | |
| | | |
Supplemental disclosure of cash flow information: | | | |
Cash payments during the period for | | | |
Income taxes, net of refunds | $ | 81,479 | | | $ | 58,229 | |
Interest, net of capitalized interest | $ | 36,691 | | | $ | 36,519 | |
Non-cash investing and financing activities | | | |
Dividends declared but not paid | $ | 12,776 | | | $ | 12,517 | |
Investment in property, equipment and intangibles acquired in accounts payable and accrued liabilities | $ | 5,352 | | | $ | 6,920 | |
Asset acquisition from extinguishment of note receivable | $ | 20,446 | | | $ | — | |
The accompanying notes are an integral part of these consolidated financial statements.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock - Shares Outstanding | | Common Stock - Par Value | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Retained Earnings | | Total |
Balance as of December 31, 2020 | 55,535,554 | | | $ | 951 | | | $ | 233,921 | | | $ | (4,646) | | | $ | (1,260,478) | | | $ | 1,024,500 | | | $ | (5,752) | |
Net income | — | | | — | | | — | | | — | | | — | | | 22,337 | | | 22,337 | |
Other comprehensive income (loss), net of tax | — | | | — | | | — | | | 52 | | | — | | | — | | | 52 | |
Share-based payment activity(1) | 48,781 | | | — | | | 3,617 | | | — | | | 4,030 | | | (3) | | | 7,644 | |
Dividends declared(1) | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Treasury purchases | (46,499) | | | — | | | — | | | — | | | (5,046) | | | — | | | (5,046) | |
Balance as of March 31, 2021 | 55,537,836 | | | $ | 951 | | | $ | 237,538 | | | $ | (4,594) | | | $ | (1,261,494) | | | $ | 1,046,834 | | | $ | 19,235 | |
Net income | — | | | — | | | — | | | — | | | — | | | 85,882 | | | 85,882 | |
Other comprehensive income (loss) | — | | | — | | | — | | | 71 | | | — | | | — | | | 71 | |
Share based payment activity(1) | 111,895 | | | — | | | 9,066 | | | — | | | 3,516 | | | 1 | | | 12,583 | |
Dividends declared ($0.225 per share)(1) | — | | | — | | | — | | | — | | | — | | | (12,521) | | | (12,521) | |
Treasury purchases | (2,738) | | | — | | | — | | | — | | | (317) | | | — | | | (317) | |
Balance as of June 30, 2021 | 55,646,993 | | | $ | 951 | | | $ | 246,604 | | | $ | (4,523) | | | $ | (1,258,295) | | | $ | 1,120,196 | | | $ | 104,933 | |
Net income | — | | | — | | | — | | | — | | | — | | | 116,655 | | | 116,655 | |
Other comprehensive income (loss) | — | | | — | | | — | | | (57) | | | — | | | — | | | (57) | |
Share based payment activity (1) | 23,757 | | | — | | | 6,757 | | | — | | | 1,045 | | | 6 | | | 7,808 | |
Dividends declared ($0.225 per share) (1) | — | | | — | | | — | | | — | | | — | | | (12,517) | | | (12,517) | |
Treasury purchases | (40,046) | | | — | | | — | | | — | | | (4,676) | | | — | | | (4,676) | |
Balance as of September 30, 2021 | 55,630,704 | | | $ | 951 | | | $ | 253,361 | | | $ | (4,580) | | | $ | (1,261,926) | | | $ | 1,224,340 | | | $ | 212,146 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock - Shares Outstanding | | Common Stock - Par Value | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Retained Earnings | | Total |
Balance as of December 31, 2021 | 55,609,226 | | | $ | 951 | | | $ | 259,317 | | | $ | (4,574) | | | $ | (1,265,032) | | | $ | 1,275,220 | | | $ | 265,882 | |
Net income | — | | | — | | | — | | | — | | | — | | | 67,391 | | | 67,391 | |
Other comprehensive income (loss), net of tax | — | | | — | | | — | | | (134) | | | — | | | — | | | (134) | |
Share-based payment activity(1) | 262,008 | | | — | | | 6,068 | | | — | | | 3,486 | | | 4 | | | 9,558 | |
Dividends declared ($0.2375 per share)(1) | — | | | — | | | — | | | — | | | — | | | (13,250) | | | (13,250) | |
Treasury purchases | (100,912) | | | — | | | — | | | — | | | (14,802) | | | — | | | (14,802) | |
Balance as of March 31, 2022 | 55,770,322 | | | $ | 951 | | | $ | 265,385 | | | $ | (4,708) | | | $ | (1,276,348) | | | $ | 1,329,365 | | | $ | 314,645 | |
Net income | — | | | — | | | — | | | — | | | — | | | 106,168 | | | 106,168 | |
Other comprehensive income (loss), net of tax | — | | | — | | | — | | | (103) | | | — | | | — | | | (103) | |
Share based payment activity(1) | 12,422 | | | — | | | 8,999 | | | — | | | 596 | | | — | | | 9,595 | |
Dividends declared ($0.2375 per share)(1) | — | | | — | | | — | | | — | | | — | | | (13,242) | | | (13,242) | |
Treasury purchases | (2,422) | | | — | | | — | | | — | | | (338) | | | — | | | (338) | |
Balance as of June 30, 2022 | 55,780,322 | | | $ | 951 | | | $ | 274,384 | | | $ | (4,811) | | | $ | (1,276,090) | | | $ | 1,422,291 | | | $ | 416,725 | |
Net income | — | | | — | | | — | | | — | | | — | | | 103,080 | | | 103,080 | |
Other comprehensive income (loss), net of tax | — | | | — | | | — | | | (902) | | | — | | | — | | | (902) | |
Share based payment activity(1) | (1,655) | | | — | | | 9,708 | | | — | | | 55 | | | — | | | 9,763 | |
Dividends declared ($0.2375 per share)(1) | — | | | — | | | — | | | — | | | — | | | (12,767) | | | (12,767) | |
Treasury purchases | (2,005,000) | | | — | | | — | | | — | | | (231,388) | | | — | | | (231,388) | |
Balance as of September 30, 2022 | 53,773,667 | | | $ | 951 | | | $ | 284,092 | | | $ | (5,713) | | | $ | (1,507,423) | | | $ | 1,512,604 | | | $ | 284,511 | |
(1) In April 2020, in light of uncertainty resulting from the COVID-19 pandemic, the Company suspended future, undeclared dividends. In May 2021, the Company resumed the payment of quarterly dividends, subject to future declarations by the Company's board of directors, and declared a quarterly cash dividend of $0.225 per share of common stock. On December 6, 2021, the Company's board of directors approved a 6% increase in the quarterly cash dividend and declared a quarterly cash dividend of $0.2375 per share of common stock. During certain periods presented, accumulated dividends were paid to certain shareholders upon vesting of performance vested restricted stock units ("PVRSU") which are captured in Share-based payment activity.
The accompanying notes are an integral part of these consolidated financial statements.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of Choice Hotels International, Inc. and its subsidiaries (together "Choice" or the "Company") have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America ("GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments that are necessary to fairly present the Company's financial position and results of operations. Except as otherwise disclosed, all adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP have been omitted. Although we believe the disclosures made are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2021 and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the SEC on February 24, 2022. Interim results are not necessarily indicative of the entire year results.
Acquisition of Radisson Hotels Americas
On August 11, 2022, the Company completed the acquisition (the "Transaction") of (1) all of the issued and outstanding shares of Radisson Hospitality, Inc. and (2) certain trademarks held by Radisson Hospitality Belgium BV/SRL (collectively referred to as "Radisson Hotels Americas"). With the close of this Transaction, Choice Hotels International has added approximately 67,000 rooms across the United States, Canada, Caribbean and Latin America. The Transaction expands the Company's footprint in international markets and the upper-upscale and upscale full-service segments and enhances guest offerings in the core upper-midscale segment. It also accelerates our asset-light strategy of growth in higher revenue travel segments and locations.
The Company has determined it is the accounting acquirer of Radisson Hotels Americas and has accounted for the Transaction as a business combination using the acquisition method of accounting. Accordingly, assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date.
Other revenues and expenses from franchised and managed properties
In conjunction with the third quarter acquisition of Radisson Hotels Americas, Inc., which resulted in the Company acquiring certain management contracts, the Company has revised its historical presentation of marketing, reservation and system fees and expenses to include fees and expenses related to the acquired management contracts.
The presentation of Other revenues from franchised and managed properties represents amounts contractually reimbursable by, or amounts billed and collected in advance from, owners of franchised and managed properties, relating to certain costs and expenses paid by us in support of the operations of these properties. Indirect and direct reimbursements are as follows:
•Direct reimbursements include payroll and related costs and certain other operating costs of the managed and franchised properties' operations, which are contractually reimbursed to us by the property owners as expenses are incurred. Revenue is recognized based on the amount of expenses incurred by Choice, which are presented as other expenses from managed and franchised properties in our consolidated statements of operations, that are then reimbursed to us by the property owner typically on a monthly basis, which results in no net effect on operating income or net income.
•Indirect reimbursements include marketing, reservation, system and other expenses associated with our brand programs and shared services, which are paid from royalties and program fees collected by Choice from the managed and franchised properties. Indirect reimbursements are typically billed and collected monthly, based on the underlying hotel's sales or usage (such as gross room revenue or number of reservations processed), and revenue is generally recognized as services are provided. The expenses incurred by Choice to operate the marketing and brand programs
and shared services are recognized as incurred and presented as Other expenses from managed and franchised properties in our consolidated statements of income and are expected to equal the revenues earned from indirect reimbursements over time.
Royalty, licensing and management fees
In conjunction with the Transaction, the Company has revised its historical presentation of Royalty fees to Royalty, licensing and management fees to reflect current and future period activity, which includes revenue associated with the acquired management contracts.
Initial franchise fees
The Company has revised its historical presentation of Initial franchise and relicensing fees to Initial franchise fees.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are detailed in the “Summary of Significant Accounting Policies” section of Note 1 in the Annual Report on Form 10-K for the year ended December 31, 2021.
Recently Adopted Accounting Standards
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"). ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with Revenue from Contracts with Customers (Topic 606), as if the acquirer had originated the contracts at the date of the business combination. ASU 2021-08 is effective for annual reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted.
The Company elected to early adopt ASU 2021-08 in the second quarter of 2022. There was no retrospective impact to our consolidated financial statement as a result of the adoption. ASU 2021-08 was applied in the accounting for the acquisition of Radisson Hotels Americas, and accordingly, the Company determined that the carrying value of the contract assets and contract liabilities of Radisson Hotels Americas reflects fair value (see Note 15).
Recently Issued Accounting Standards
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses ("ASU 2022-02"). ASU 2022-02 eliminates the recognition and measurement guidance on troubled debt restructuring for creditors that have adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) ("Topic 326"), requires enhanced disclosures about loan modifications for borrowers experiencing financial difficulty, and includes new guidance on current-period gross write-offs presentation. ASU 2022-02 is effective for annual reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the potential impact that ASU 2022-02 will have on the consolidated financial statements and disclosures.
2. Revenue
Contract Liabilities
Contract liabilities relate to (i) advance consideration received, such as initial franchise fees paid when a franchise agreement is executed and system implementation fees paid at time of installation, for services considered to be part of the brand intellectual property performance obligation and (ii) amounts received when loyalty points are issued, but for which revenue is not yet recognized since the related loyalties points have not been redeemed.
Deferred revenues from initial fees and system implementation fees are typically recognized over a five- to ten-year period, unless the franchise agreement is terminated and the hotel exits the franchise system whereby remaining deferred amounts are recognized to revenue in the period of termination. Loyalty points are typically redeemed within three years of issuance.
Significant changes in the contract liabilities balances during the period December 31, 2021 to September 30, 2022 are as follows:
| | | | | |
(in thousands) | |
Balance as of December 31, 2021 | $ | 175,425 | |
Assumption of contract liabilities from Radisson Hotels Americas acquisition | 30,031 | |
Increases to the contract liability balance due to cash received | 84,356 | |
Revenue recognized in the period | (86,473) | |
Balance as of September 30, 2022 | $ | 203,339 | |
Remaining Performance Obligations
The aggregate amount of transaction price allocated to unsatisfied or partially unsatisfied performance obligations is $203.3 million as of September 30, 2022. This amount represents fixed transaction price that will be recognized as revenue in future periods, which is captured in the consolidated balance sheet as current and non-current deferred revenue.
Based on practical expedient elections permitted by ASU 2014-09, Revenue From Contracts with Customers (Topic 606) and subsequent amendments ("Topic 606"), the Company does not disclose the value of unsatisfied performance obligations for (i) variable consideration subject to the sales or usage-based royalty constraint or comprising a component of a series (including franchise, partnership, qualified vendor, and software as a service ("SaaS") agreements), (ii) variable consideration for which we recognize revenue at the amount to which we have the right to invoice for services performed, or (iii) contracts with an expected original duration of one year or less.
Disaggregation of Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| September 30, 2022 | | September 30, 2021 |
(in thousands) | Over time | | Point in time | | Total | | Over time | | Point in time | | Total |
Royalty, licensing and management fees | $ | 143,987 | | | $ | 33 | | | $ | 144,020 | | | $ | 127,317 | | | $ | — | | | $ | 127,317 | |
Initial franchise fees | 7,011 | | | — | | | 7,011 | | | 6,149 | | | — | | | 6,149 | |
Procurement services | 13,628 | | | 773 | | | 14,401 | | | 12,285 | | | 725 | | | 13,010 | |
Owned hotels | 14,854 | | | 5,115 | | | 19,969 | | | 9,614 | | | 1,652 | | | 11,266 | |
Other | 31,432 | | | — | | | 31,432 | | | 8,645 | | | — | | | 8,645 | |
Other revenues from franchised and managed properties | 178,349 | | | 19,061 | | | 197,410 | | | 145,216 | | | 11,655 | | | 156,871 | |
Total Topic 606 revenues | $ | 389,261 | | | $ | 24,982 | | | 414,243 | | | $ | 309,226 | | | $ | 14,032 | | | 323,258 | |
Non-Topic 606 revenues | | | | | 23 | | | | | | | 111 | |
Total revenues | | | | | $ | 414,266 | | | | | | | $ | 323,369 | |
| | | | | | | | | | | |
| Nine Months Ended | | Nine Months Ended |
| September 30, 2022 | | September 30, 2021 |
(in thousands) | Over time | | Point in time | | Total | | Over time | | Point in time | | Total |
Royalty, licensing and management fees | $ | 356,175 | | | $ | 33 | | | $ | 356,208 | | | $ | 299,606 | | | $ | — | | | $ | 299,606 | |
Initial franchise fees | 21,635 | | | — | | | 21,635 | | | 18,904 | | | — | | | 18,904 | |
Procurement services | 45,503 | | | 2,384 | | | 47,887 | | | 34,526 | | | 1,767 | | | 36,293 | |
Owned hotels | 39,490 | | | 9,500 | | | 48,990 | | | 20,683 | | | 3,709 | | | 24,392 | |
Other | 51,588 | | | — | | | 51,588 | | | 20,753 | | | — | | | 20,753 | |
Other revenues from franchised and managed properties | 438,734 | | | 74,695 | | | 513,429 | | | 346,211 | | | 38,169 | | | 384,380 | |
Total Topic 606 revenues | $ | |