WEEK 2 HOMEWORK EXAMPLES CHAPTER 3 EP3-1. Calculating Ratios Below are the financial statements for Mowing and Maintenance, Inc. Assets Current assets: Cash and marketable securities Accounts receivable Inventory Total Current Assets Fixed assets: Gross plant and equipment Less: Depreciation Net plant and equipment Other long-term assets Total Fixed Assets Total assets Mowing & Maintenance, Inc. Balance Sheet as of December 31, 2017 and 2016 (in millions of dollars) 2017 2016 Liabilities & Equity 2017 2016 $ 75 $ 65 115 110 200 190 $ 390 $ 365 Current liabilities: Accrued wages and taxes Accounts payable Notes payable Total Current Liabilities Long-term debt: $ 580 $ 471 110 100 $ 470 $ 371 50 49 $ 520 $ 420 Stockholders’ equity: Preferred stock (5 million shares) Common stock and paid-in surplus (65 million shares) Retained earnings Total Equity $ 910 $ 785 Total liabilities and equity $ 40 90 80 $ 210 $ $ 300 $ 280 $ $ 5 65 43 80 70 $ 193 5 65 330 242 $ 400 $ 312 $ 910 $ 785 Mowing & Maintenance, Inc. Income Statement for Years Ending December 31, 2017 and 2016 (in millions of dollars) 2017 2016 Net sales (all credit) $ 515 $ 432 Less: Cost of goods sold 230 175 Gross profits $285 $257 Less: Depreciation 22 20 Other operating expenses 30 25 Earnings before interest and taxes (EBIT) $233 $212 Less: Interest 33 30 Earnings before taxes (EBT) $200 $182 Less: Taxes 57 55 Net income $ 143 $ 127 Less: Preferred stock dividends Net income available to common stockholders Less: Common stock dividends Addition to retained earnings $ 5 $ 138 65 $ 73 $ 5 $ 122 65 $ 57 Per (common) share data: Earnings per share (EPS) Dividends per share (DPS) Book value per share (BVPS) Market value (price) per share (MVPS) $2.123 $1.000 $6.077 $14.750 $1.877 $1.000 $4.723 $12.550 Calculate the following ratios for Mowing & Maintenance, Inc. for 2016 and 2017. Mowing & Maintenance, Inc. Industry a. Current ratio 2017: $390/$210 = 1.86 times 2016: $365/$193 = 1.89 times 2.00 times 2.00 times b. Quick ratio 2017: ($390 - $200)/$210 = 0.904 times 2016: ($365 - $190)/$193 = 0.906 times 1.20 times 1.20 times c. Inventory turnover 2017: $230/$200 = 1.15 times 2016: $175/$190 = 0.92 times d. Days’ sales outstanding 2017: $115/($515/360) = 80.4 days 2016: $110/($432/360) = 91.7 days 3.60 times 3.60 times 101 days 101 days e. Fixed asset turnover 2017: $515 / $520 = 0.99 times 2016: $432 / $420 = 1.03 times 1.25 times 1.25 times f. Total asset turnover 2017: $515 / $910 = 0.57 times 2016: $432 / $785 = 0.55 times 0.85 times 0.85 times g. Debt ratio 2017: ($210 + $300) / $910 = 56.04% 62.50% 2016: ($193 + $280) / $785 = 60.25% 62.50% h. Times interest earned 2017: $233 / $33 = 7.06 times 2016: $212 / $30 = 7.07 times i. Profit margin 2017: $138 / $515 = 26.80% 2016: $122 / $432 = 28.24% 8.50 times 8.50 times 28.75% 28.75% j. ROA 2017: $138 / $910 = 15.16% 2016: $122 / $785 = 15.54% k. ROE 2017: 2016: 2017: 2016: l. Market-to-book ratio m. PE ratio 19.75% 19.75% $138 / ($400-5) = 34.94% $122 / ($312-5) = 39.74% $14.750 / $6.077 = 2.43 times $12.550 / $4.723 = 2.66 times 36.88% 36.88% 2.55 times 2.55 times 2017: $14.750 / $2.123 = 6.95 times 2016: $12.550 / $1.877 = 6.69 times 15.60 times 15.60 times If you have any questions about where the numbers above come from, contact me by email! EP3-2. Ratio Analysis Using the ratios from P3-1 for M & M, Inc. and the industry, what can you conclude M & M’s financial performance for 2017. Discuss each ratio in terms of how they compare to the industry and which direction they are headed. Conclude with a summary. a. Current ratio M&M’s ratio is below the industry average and decreased slightly from last year. They may want to look into whether or not they have enough liquidity. b. Quick ratio Again, M&M’s ratio is below the industry average and decreased slightly from last year. They may want to look into whether or not they have enough liquidity. c. Inventory turnover ratio M&M’s ratio is below the industry average, though increased slightly from last year. They may want to look into whether they are holding too much inventory or not earning enough sales. At least it seems they are moving in the right direction. d. Days’ sales in outstanding M&M’s ratio is below the industry average and decreased from last year. This indicates they are collecting sales sooner than the industry, perhaps a good sign. Though they may be losing customers if their collection policy is too stringent. e. Fixed asset turnover ratio M&M’s ratio is below the industry average and decreased slightly from last year. This indicates that they are not generating as much sales for their fixed assets as the rest of the industry, perhaps needing improvement. f. Total asset turnover ratio Again, M&M’s ratio is below the industry average and decreased slightly from last year. This indicates that they are not generating as much sales for their fixed assets as the rest of the industry, perhaps needing improvement. g. Debt ratio M&M’s ratio is slightly below the industry average and decreased slightly from last year. This indicates that they do not have as much relative debt, which is a less risky position, but perhaps less profitable. Late in the course we will dwell into this more. h. Times interest earned M&M’s ratio is slightly below the industry average and decreased slightly from last year. This indicates that they are not generating as much income relative to interest as the rest of the industry. This may be more troubling, given they carry less debt. i. Profit margin M&M’s ratio is slightly below the industry average and decreased slightly from last year. This indicates that they are not generating as much profit relative to sales as the rest of the industry, needing improvement. j. ROA M&M’s ratio is below the industry average and decreased slightly from last year. This indicates that they are not generating as much profit relative to assets as the rest of the industry, needing improvement. k. ROE M&M’s ratio is below the industry average and decreased slightly from last year. This indicates that they are not generating as much profit relative to equity as the rest of the industry, needing improvement. l. Market-to-book ratio M&M’s ratio was slightly higher and is now slightly below the industry average. This indicates that perhaps investors expect their future earnings to be less compared to the rest of the industry, needing improvement. m. PE ratio M&M’s ratio is below the industry average, though did increase slightly from last year. Again, this indicates that perhaps investors expect their future earnings to be less compared to the rest of the industry, or at least more risky. SUMMARY Liquidity: They are slightly less liquid than the industry. If they were more profitable than the industry, this may be OK, but they are not. Activity: They seem to be less efficient at generating sales from their assets, though they do collect receivables quicker. The latter may or may not be good. Debt: They do have less debt, which is a safer position, but can also lower profits. Profitability: They are a little less profitable than the industry, and this may be a result of the above factors. Market: They tend to be lower valued by the market, perhaps due to the lower performance compared to the industry. CHAPTER 4 – No homework CHAPTER 5 Note that the Time Value of Money App and web page are the easiest way to perform the calculations! It may seem like a lot of problems, but they can be answered quickly. To show your work, state what you use as inputs and what you used to calculate the answer (App, Excel, formulas, etc.). EP5-1 Compounding with Different Interest Rates A deposit of $350 earns the following interest rates:  8 percent in the first year,  6 percent in the second year, and  5.5 percent in the third year. What would be the third year future value (assume annual compounding)? The time line for this problem is: Cash Flow Period 0 -350 X 8% 1 6% 2 5.5% 3 years FV = PV × (1 + i) (1 + j) (1 + k) FV = 350 × (1 + 0.08) (1 + 0.06) (1 + 0.055) = 350 × 1.08 × 1.06 × 1.055 = 422.72 EP5-2 Present Value with Different Discount Rates Compute the present value of $1,000 paid in three years using the following discount rates; 6 percent in the first year, 7 percent in the second year, and 8 percent in the third year (assume annual compounding). PV = FV/[(1 + i) (1 + j) (1 + k)] PV = 1000/[(1 + 0.06) (1 +0.07) (1 + 0.08)] = 1000/[1.06 × 1.07 × 1.08] = 1000/1.22494 = 816.37 EP5-3 Future Value At age 30 you invest $1,000 that earns 8 percent each year. At age 40 you invest $1,000 that earns 12 percent per year. In which case would you have more money at age 60 (assume annual compounding)? FVAge 60 = PVAge 30 × (1 + i)Years until age 60 FVAge 60 = 1000 × (1.08)30 = 1,000 × 10.06266 = 10,062.66 FVAge 60 = PVAge 40 × (1 + i)Years until age 60 FVAge 60 = 1000 × (1.12)20 = 1,000 × 9.64629 = 9,646.29 EP5-4 Solving for Rates You invested $2,000 in the stock market one year ago. Today, the investment is valued at $1,500. What return did you earn? What return would you need to get next year to break even overall (assume annual compounding)? FVN = PV × (1 + i)N 1,500 = 2,000 × (1 + i)1 (1 + i) = 1,500/2,000 i = (0.75) -1 = −0.25, or −25% (first year return is negative) FVN = PV × (1 + i)N 2,000 = 1,500 × (1 + i)1 (1 + i) = 2,000/1,500 i = (2/1.5) -1 = 0.3333 or 33.33% (second year return needs to be higher to compensate for the loss) EP5-5 Future Value Compute the future value in year 9 of a $2,000 deposit in year 1 and another $1,500 deposit at the end of year 3 using a 10% interest rate (assume annual compounding). Use equation: FV = $2,000 × (1 + 0.10)8 + $1,500 × (1 + 0.10)6 = $4,287.18 + $2,657.34 = $6,944.52 EP5-6 Future Value of an Annuity What is the future value of a $900 annuity payment over 5 years if interest rates are 8 percent (assume annual compounding)? Use equation: FVA 5 5  1  0.08  1  $900   $900  5.8666  $5,279.94 0.08 EP5-7 Present Value Compute the present value of a $2,000 deposit in year 1 and another $1,500 deposit at the end of year 3 if interest rates are 10 percent (assume annual compounding). Use equation: PV = $2,000 ÷ (1 + 0.10)1 + $1,500 ÷ (1 + 0.10)3 = $1,818.18 + $1,126.97 = $2,945.15 EP5-8 Present Value of an Annuity What’s the present value of a $900 annuity payment over 5 years if interest rates are 8 percent (assume annual compounding)? Use equation: 1  1  1  0.08 5 PVA 5  $900   0.08       $900  3.99271  $3,593 .44   EP5-9 Present Value of an Annuity Due If the present value of an ordinary, 7-year annuity is $6,500 and interest rates are 7.5 percent, what’s the present value of the same annuity due (assume annual compounding)? Use equation: PVA7 due = 6,500 × (1 +0.075) = $6,987.50 EP5-10 Effective Annual Rate A loan is offered with monthly payments and a 10 percent APR. What’s the loan’s effective annual rate (EAR) (monthly compounding)? Use equation: 12  0.10  EAR  1    1  0.1047  10.47% 12   EP5-11 Present Value Given a 6 percent interest rate, compute the present value of payments made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,200, and $1,500 (assume annual compounding). Use equation: PV = $1,000 ÷ (1+0.06)1 + $1,200 ÷ (1+0.06)2 + $1,200 ÷ (1+0.06)3 + $1,500 ÷ (1 + 0.06)4 PV = $943.40 + $1,068 + $1,007.54 + $1,188.14 = $4,207.08 EP5-12 Loan Payments You wish to buy a $25,000 car. The dealer offers you a 4-year loan with a 9 percent APR. What are the monthly payments (monthly compounding)? How would the payment differ if you paid interest only? What would the consequences of such a decision be? Use equation:     .09 / 12   $25,000  0.024885  $622 .13 PMT 48  $25,000   1 1    1  .09 / 12 48  If you only paid interest over the length of the loan and your principal balance was repaid at the end of the 48 months, your payment would be $187.50 per month (= $25,000×0.09÷12) for interest only and you would still owe $25,000 at the end of the 48 months, too. Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 _____________________________________________________ FORM 10-K _____________________________________________________ (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ☐ For the transition period from to Commission file number 001-13393 __________________________________________________________________ CHOICE HOTELS INTERNATIONAL, INC. (Exact Name of Registrant as Specified in Its Charter) __________________________________________________________ Delaware (State or other jurisdiction of incorporation) 52-1209792 (IRS Employer Identification Number) 1 Choice Hotels Circle, Suite 400 Rockville, Maryland (Address of principal executive offices) Registrant’s telephone number, including area code (301) 592-5000 ___________________________________________________________ Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, Par Value $0.01 per share Trading Symbol(s) CHH 20850 (Zip Code) Name of Each Exchange on Which Registered New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ___________________________________________________________ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ 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 during the preceding 12 months (or 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 or a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer", "accelerated filer", "smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one): 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 Act) Yes ☐ No ☐ ☒ The aggregate market value of common stock of Choice Hotels International, Inc. held by non-affiliates was $3,003,149,667 as of June 30, 2019 based upon a closing price of $87.01 per share. The number of shares outstanding of Choice Hotels International, Inc.’s common stock at February 14, 2020 was 55,708,652. Table of Contents DOCUMENTS INCORPORATED BY REFERENCE. Certain portions of our definitive proxy statement, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the Annual Meeting of Shareholders to be held on May 1, 2020, are incorporated by reference under Part III of this Form 10-K. Table of Contents CHOICE HOTELS INTERNATIONAL, INC. Form 10-K Table of Contents Page No. Part I Item 1. Business 4 Item 1A. Risk Factors 23 Item 1B. Unresolved Staff Comments 33 Item 2. Properties 33 Item 3. Legal Proceedings 33 Item 4. Mine Safety Disclosures 33 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 34 Item 6. Selected Financial Data 36 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 56 Item 8. Financial Statements and Supplementary Data 57 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 107 Item 9A. Controls and Procedures 107 Item 9B. Other Information 110 Item 10. Directors, Executive Officers and Corporate Governance 110 Item 11. Executive Compensation 110 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 110 Item 13. Certain Relationships and Related Transactions and Director Independence 110 Item 14. Principal Accounting Fees and Services 110 Item 15. Exhibits, Financial Statement Schedules 111 Item 16. Form 10-K Summary 115 SIGNATURE 116 Part II Part III Part IV Table of Contents PART I Throughout this report, we refer to Choice Hotels International, Inc., together with its subsidiaries as "Choice," "we," "us" or the "Company." Forward-Looking Statements Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, our use of words such as "expect," "estimate," "believe," "anticipate," "should," "will," "forecast," "plan," "project," "assume" or similar words of futurity identify such forward-looking statements. These forward-looking statements are based on management's current beliefs, assumptions and expectations regarding future events, which in turn are based on information currently available to management. Such statements may relate to projections of the Company’s revenue, expenses, earnings and other financial and operational measures, Company debt levels, ability to repay outstanding indebtedness, payment of dividends, and future operations, among other matters. We caution you not to place undue reliance on any such forward-looking statements. Forward-looking statements do not guarantee future performance and involve known and unknown risks, uncertainties and other factors. Several factors could cause actual results, performance or achievements of the Company to differ materially from those expressed in or contemplated by the forward-looking statements. Such risks include, but are not limited to, changes to general, domestic and foreign economic conditions; changes in law and regulation applicable to the lodging and franchising industries; foreign currency fluctuations; operating risks common in the lodging and franchising industries; changes to the desirability of our brands as viewed by hotel operators and customers; changes to the terms or termination of our contracts with franchisees and our relationships with our franchisees; our ability to keep pace with improvements in technology utilized for marketing and reservations systems and other operating systems; the commercial acceptance of our software as a service ("SaaS") technology solutions division's products and services; our ability to grow our franchise system; exposure to risks related to our hotel development, financing and ownership activities; impairments or losses relating to acquired businesses; fluctuations in the supply and demand for hotel rooms; our ability to realize anticipated benefits from acquired businesses; the level of acceptance of alternative growth strategies we may implement; cyber security and data breach risks; operating risks associated with our international operations; the outcome of litigation; and our ability to effectively manage our indebtedness. These and other risk factors are discussed in detail in Item 1A. Risk Factors of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). Our SEC filings are available to the public over the internet at the SEC’s web site at http://www.sec.gov. Our SEC filings are also available free of charge at the "Investor Relations–Financial Performance and Presentations" section of our website at http://www.choicehotels.com as soon as reasonably practicable following the time that they are filed with or furnished to the SEC. Information on or connected to our website is neither part of nor incorporated by reference into this Annual Report on Form 10-K or any other SEC filings. Item 1. Business. Overview We are one of the largest hotel franchisors in the world with 7,153 open hotels comprising 590,897 rooms and 1,135 hotels under construction, awaiting conversion or approved for development comprising 100,868 rooms as of December 31, 2019, located in 50 states, the District of Columbia and over 40 countries and territories outside the United States. Choice franchises lodging properties under the following proprietary brand names: Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Clarion Pointe ™, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay Suites®, Suburban Extended Stay Hotel®, WoodSpring Suites®, Everhome™ Suites, Cambria® Hotels, and Ascend Hotel Collection® (collectively, the "Choice brands"). On January 27, 2020, we announced the launch of Everhome Suites, a new-construction midscale extended-stay brand offering. We expect to open the first Everhome Suites hotel in 2021. The Company's primary segment is the hotel franchising business, which represents approximately 97% of the Company's total revenues. The Company's domestic franchise operations are conducted through direct franchising relationships, while its international franchise operations are conducted through a combination of direct franchising and master franchising relationships. With a primary focus on hotel franchising, 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 4 Table of Contents 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 to these revenues, we also collect marketing and reservation system fees to support centralized marketing and reservation activities for the franchise system. Our hotel franchise operating results can also be improved through our company-wide efforts related to improving property-level performance. The principal factors that affect the Company’s franchise operations results are: the number and mix of hotel rooms in the various hotel lodging price categories; growth in the number of hotel rooms owned and under franchise; occupancy and room rates achieved by the hotels in our system; the effective royalty rate achieved on our franchise agreements; the level of franchise sales and relicensing activity; and our ability to manage costs. The number of rooms, occupancy and room rates at the Company's properties significantly affect the Company’s results because our fees are based upon room revenues or the number of rooms at owned and franchised hotels. The key industry standard for measuring hotel-operating performance is revenue per available room ("RevPAR"), which is calculated by multiplying the percentage of occupied rooms by the average daily room rate realized. Our variable overhead costs associated with franchise system growth of our established brands have historically been less than incremental royalty fees generated from new franchises. Accordingly, continued growth of our franchise business should enable us to realize benefits from the operating leverage in place and improve operating results. We are required by our franchise agreements to use the marketing and reservation system fees we collect for system-wide support marketing and reservation activities. These expenditures, which include advertising costs and costs to maintain our central reservations and property management systems, help to enhance awareness and increase consumer preference for our brands and deliver guests to our franchisees. Greater awareness and brand preference promotes long-term growth in business delivery to our franchisees and increases the desirability of our brands to hotel owners and developers, which ultimately increases franchise fees earned by the Company. Our Company articulates its mission as a commitment to our franchisees’ profitability by providing our franchisees with hotel franchises that strive to generate the highest return on investment of any hotel franchise. We have developed an operating system dedicated to our franchisees’ success that focuses on delivering guests to hotels and reducing hotel operating costs. In addition to our hotel franchising business, we have also developed or purchased five Cambria hotels. We intend to continue to strategically develop or purchase Cambria hotels to increase the presence of our Cambria Hotel brand in the United States, drive greater guest satisfaction and brand preference, and ultimately increase the number of franchise agreements awarded. When developing or purchasing hotels, we seek key markets, including major business centers and leisure destinations, with strong growth potential that will improve the recognition of the Cambria Hotel brand. We believe our owned Cambria hotels provide us the opportunity to support and accelerate growth of the brand. We do not anticipate owning these hotels on a permanent basis and expect to target dispositions to a franchisee in the future. A key component of our strategy for owned hotels is to maximize revenues and manage costs. We strive to optimize revenues by focusing on revenue management, increasing guest loyalty, expanding Cambria Hotel's brand awareness with targeted customer segments and providing superior guest service. We manage costs by setting performance goals for our hotel management companies and optimizing distribution channels. We currently do not manage our owned hotels but utilize the services of third-party management companies who provide their own employees. Our capital allocation decisions, including capital structure and uses of capital, are intended to maximize our return on invested capital and create value for our shareholders. We believe our strong and predictable cash flows create a strong financial position. We strive to maintain a capital structure that generates high financial returns and use our excess cash flow to return value to our shareholders primarily through share repurchases, dividends or investing in growth opportunities. Historically, we have returned value to our shareholders in two primary ways: share repurchases and dividends. In 1998, we instituted a share repurchase program which has generated substantial value for our shareholders. Since the program's inception through December 31, 2019, we repurchased 51.1 million shares (including 33.0 million prior to the two-for-one stock split effected in October 2005) of common stock at a total cost of $1.4 billion. Considering the effect of the two-for-one stock split, the Company repurchased 84.1 million shares at an average price of $17.15 per share. During the third quarter of 2019, the Company's board of directors approved an increase to the number of shares authorized under the share repurchase program by approximately 2.3 million shares to a total of 4.0 million shares. As of December 31, 2019, the Company had 3.9 million shares remaining under the current share repurchase authorization. We currently believe that our cash flows from operations will support our ability to complete the current board of directors repurchase authorization and upon completion of the current authorization, our board of directors will evaluate the advisability of additional share repurchases. The Company commenced paying quarterly dividends in 2004 and in 2012 the Company elected to pay a special cash dividend totaling approximately $600 million. The Company currently maintains the payment of a quarterly dividend on its common shares outstanding; however the declaration of future dividends is subject to the discretion of the board of directors. During the 5 Table of Contents fourth quarter of 2019, the Company's board of directors announced a 5% increase to the quarterly dividend rate to $0.225 per share from $0.215 per share. We expect to continue to pay dividends in the future, subject to quarterly declaration by our board of directors as well as future business performance, economic conditions, changes in income tax regulations and other factors. The Company also allocates capital to financing, investment and guaranty support to incent franchise development for certain brands in strategic markets; hotel ownership; and exploring growth opportunities in business areas that are adjacent or complementary to our core hotel franchising business, which leverage our core competencies and are additive to our franchising business model. The timing and amount of these investments are subject to market and other conditions. Our direct real estate exposure is currently limited to activity in the United States, including our owned Cambria hotel assets and an office building owned by the Company. In addition, our development activities that involve financing, equity investments and guaranty support to hotel developers create limited additional exposure to the real estate markets. For additional information, see the "Investing Activities" caption under the "Liquidity and Capital Resources" section in Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company was incorporated in 1980 under the laws of the State of Delaware. The Lodging Industry Companies participating in the lodging industry primarily do so through a combination of one or more of the three primary lodging industry activities: ownership, franchising and management. A company’s relative reliance on each of these activities determines which drivers most influence its profitability. • Ownership requires a substantial capital commitment and involves the most risk but offers high returns due to the owner’s ability to influence margins by driving RevPAR, managing operating expenses and providing financial leverage. The ownership model has a high fixed-cost structure that results in a high degree of operating leverage relative to RevPAR performance. As a result, profits escalate rapidly in a lodging up-cycle but erode quickly in a downturn as costs rarely decline as fast as revenue. Profits from an ownership model increase at a greater rate from RevPAR growth attributable to average daily rate ("ADR") growth, than from occupancy gains since there are more incremental costs associated with higher guest volumes compared to higher pricing. • Franchisors license their brands to a hotel owner, giving the hotel owner the right to use the brand name, logo, operating practices, and reservations systems in exchange for a fee and an agreement to operate the hotel in accordance with the franchisor’s brand standards. Under a typical franchise agreement, the hotel owner pays the franchisor an initial fee, a percentage-of-revenue royalty fee and a marketing/reservation fee. A franchisor’s revenues are dependent on the number of rooms in its system and the top-line performance of those hotels. Earnings drivers include RevPAR increases, unit growth and effective royalty rate improvement. Franchisors enjoy significant operating leverage in their business model since it typically costs little to add a new hotel franchise to an existing system. Franchisors normally benefit from higher industry supply growth, because unit growth usually outpaces lower RevPAR resulting from excess supply. As a result, franchisors benefit from both RevPAR growth and supply increases which aids in reducing the impact of lodging industry economic cycles. • Management companies operate hotels for owners that do not have the expertise and/or the desire to self-manage. These companies collect management fees predominately based on revenues earned and/or profits generated. Similar to franchising activities, the key drivers of revenue based management fees are RevPAR and unit growth and similar to ownership activities, profit based fees are driven by improved hotel margins and RevPAR growth. Similar to other industries, lodging experiences both positive and negative operating cycles. Positive cycles are characterized as periods of sustained occupancy growth, increasing room rates and hotel development. These cycles usually continue until either the economy sustains a prolonged downturn, excess supply conditions exist or some external factor occurs such as war, terrorism, pandemic or natural resource shortages. Negative cycles are characterized by hoteliers reducing room rates to stimulate occupancy and a reduction of hotel development. Industry recovery usually begins with an increase in occupancy followed by hoteliers increasing room rates. As demand begins to exceed room supply, occupancies and rates continue to improve. These factors result in increased hotel development. Hotel room supply growth is cyclical as hotel construction responds to interest rates, construction and material supply conditions, capital availability and industry fundamentals. Historically, the industry has added hotel rooms to its inventory through new construction due largely to favorable lending environments that encouraged hotel development. Typically, hotel development continues during favorable lending environments until the increase in room supply outpaces demand. The excess supply eventually results in lower occupancies, which results in hoteliers reducing room rates to stimulate demand, and reduced hotel development. Over time, the slow growth in hotel supply results in increased occupancy rates and allows hotels to again raise room rates. The increase in occupancy and room rates serves as a catalyst for increased hotel development. 6 Table of Contents The following chart demonstrates these trends over the last fifteen years: US Lodging Industry Trends: 2005 - 2019 Year Occupancy Rates Average Daily Room Rates (ADR) Change in ADR Versus Prior Year Change in CPI Versus Prior Year Revenue Per Available Room (RevPAR) New Rooms Added (Gross) 2005 63.1% $90.84 5.1 % 3.4 % $57.34 65,900 2006 63.4% $97.31 7.1 % 3.2 % $61.69 73,308 2007 63.1% $104.04 6.9 % 2.8 % $65.61 94,541 2008 60.3% $106.96 2.8 % 3.8 % $64.49 146,312 2009 54.5% $98.17 (8.2)% (0.4)% $53.50 142,287 2010 57.5% $98.06 (0.1)% 1.6 % $56.43 73,976 2011 59.9% $101.85 3.9 % 3.2 % $61.02 38,409 2012 61.3% $106.25 4.3 % 2.1 % $65.15 43,879 2013 62.2% $110.30 3.8 % 1.5 % $68.58 54,020 2014 64.4% $114.92 4.2 % 0.8 % $74.04 63,346 2015 65.4% $120.30 4.7 % 0.7 % $78.68 85,596 2016 65.4% $124.13 3.2 % 2.1 % $81.15 100,757 2017 65.9% $126.77 2.1 % 2.1 % $83.53 118,947 2018 66.1% $129.97 2.5 % 1.9 % $85.96 115,306 2019 66.1% $131.21 1.0 % 2.3 % $86.76 122,725 Source: Smith Travel Research and US Department of Labor As a franchisor with 7,153 opened hotels, including ownership of five hotels, we believe we are well positioned in any stage of the lodging cycle as our feefor-service business model has historically delivered predictable, profitable, long-term growth in a variety of lodging and economic environments. We have historically benefited from both the RevPAR gains typically experienced in the early stages of recovery, as our revenues are based on our franchisees’ gross room revenues, and the supply growth normally occurring in the later stages as we increase our portfolio size. The Company’s portfolio of brands offers both new construction and conversion opportunities. Our new construction brands typically benefit from periods of supply growth and favorable capital availability and pricing. Our conversion brands also benefit from periods of supply growth as the construction of hotels increases the need for existing hotels to seek new brand affiliations. Furthermore, the Company's conversion brands benefit from lodging cycle downturns as our unit growth has been historically driven from the conversion of independent and other hotel chain affiliates into our system as these hotels endeavor to improve their performance. The lodging industry can be divided into chain scale categories or groupings of generally competitive brands as follows: Chain Scale Brand Examples Room Count Luxury Four Seasons, Ritz Carlton, W Hotel, JW Marriott 123,876 Upper Upscale Marriott, Hilton, Hyatt, Sheraton Upscale Cambria Hotels, Courtyard, Hyatt Place, Hilton Garden Inn Upper Midscale Comfort Inn, Holiday Inn Express, Hampton Inn, Fairfield Inn Midscale Quality Inn, Sleep Inn, Best Western, Baymont Economy Econo Lodge, Super 8, Days Inn, Motel 6 % of Total Avg. No. of Rooms Per Hotel 2.3% 326.0 635,891 11.8% 326.9 818,252 15.1% 147.0 1,117,389 20.7% 98.6 421,983 7.8% 80.2 760,419 14.1% 75.2 3,877,810 71.8% 112.1 Independents 1,522,117 28.2% 67.8 Total All Hotels 5,399,927 100% 94.7 Sub-Total Brand Affiliated 7 Table of Contents According to Smith Travel Research, the lodging industry consisted of approximately 57,000 hotels representing approximately 5.4 million rooms open and operating in the United States at December 31, 2019. During the year ended December 31, 2019, the industry added approximately 123,000 gross rooms to the industry supply and net room growth was approximately 2.1%. Approximately, 82% of the new rooms opened during the year were positioned in the Upscale, Upper Midscale, Midscale and Economy chain scale categories in which we primarily operate. The lodging industry consists of independent operators of hotels and those that have joined national hotel franchise chains. Independent operators of hotels not owned or managed by major lodging companies have increasingly joined national hotel franchise chains as a means of remaining competitive with hotels owned by or affiliated with national lodging companies. Over the years, the industry has seen a significant movement of hotels from independent to chain affiliation, with affiliated hotels increasing from 46% of the rooms in the market in 1990 to 72% of the market in 2019. However, the pace of this increase has moderated over the last several years and in 2019 the percentage of rooms in the market affiliated with a chain increased by approximately 30 basis points from 71.5% to 71.8%. Due to the fact that a significant portion of the costs of owning and operating a hotel are generally fixed, increases in revenues generated by affiliation with a franchise lodging chain can improve a hotel’s financial performance. The large franchise lodging chains, including us, generally provide a number of support services to hotel operators designed to improve the financial performance of their properties including central reservation and property management systems, marketing and advertising programs, training and education programs, revenue enhancement services and relationships with qualified vendors to streamline purchasing processes and make lower cost products available. We believe that national franchise chains with a large number of hotels enjoy greater brand awareness among potential guests and greater bargaining power with suppliers than those with fewer hotels, and that greater brand awareness and bargaining power can increase the desirability of a hotel to its potential guests and reduce operating costs of a hotel. Furthermore, we believe that hotel operators choose lodging franchisors based primarily on the perceived value and quality of each franchisor’s brand and its services, and the extent to which affiliation with that franchisor may increase the hotel operator profitability. Choice’s Franchising Business Choice operates primarily as a hotel franchisor offering 14 brands. This family of well-known and diversified new construction and conversion brands competes at various hotel consumer and developer price points. Economics of Franchising Business. The fee and cost structure of our business provides opportunities for us to improve operating results by increasing the number of franchised hotel rooms, improving RevPAR performance and increasing the effective royalty rates of our franchise contracts. As a hotel franchisor, we derive our revenue primarily from various franchise fees. Our franchise fees consist primarily of an initial fee and ongoing royalty, marketing and reservation system fees that are typically based on a percentage of the franchised hotel’s gross room revenues. The initial fee and ongoing royalty portion of the franchise fees are intended to cover our operating expenses, such as expenses incurred in business development, quality assurance, administrative support, certain franchise services and to provide us with operating profits. The marketing and reservation system fees are used for the expenses associated with marketing, media, advertising, providing a central reservation system, property management systems, e-commerce initiatives and certain franchise services. Our fees depend on the number of rooms in our system, the gross room revenues generated by our franchisees and effective royalty rates under our franchise contracts. We enjoy significant operating leverage since the variable operating costs associated with the franchise system growth of our established brands have historically been less than incremental royalty fees generated from new franchises. We believe that our business is well positioned in the lodging industry since we benefit from both increases in RevPAR and unit growth from new hotel construction or conversion of existing hotel assets into our system. In addition, improving business delivery to our franchisees should allow us to improve the effective royalty rate of our franchise contracts. Our family of well-known and diversified brand offerings positions us well within the lodging industry. Our new build brands such as Cambria Hotels, Comfort, Sleep Inn, WoodSpring, and our newly launched Everhome Suites brand offer hotel developers an array of choices at various price points for transient and extended stay business during periods of supply growth in the various hotel chain scale categories. Our brands such as Quality, Clarion Pointe, Ascend Hotel Collection and Econo Lodge offer conversion opportunities during both industry contraction and growth cycles to independent operators and non-Choice affiliated hotels who desire to affiliate with our brands and take advantage of the services we have to offer. Strategy. Our mission is a commitment to franchisee profitability by providing our franchisees with hotel franchises that strive to generate the highest return on investment of any hotel franchise. Our business strategy is to create franchise system growth by leveraging Choice’s large and well-known hotel brands, franchise sales capabilities, effective marketing and reservation delivery efforts, training and education programs, RevPAR enhancing services and technologies and financial strength created by our significant free cash flow. We believe our brands’ growth will be driven by our ability to create a compelling return on 8 Table of Contents investment for franchisees. Our strategic objective is to improve profitability of our franchisees by providing services which increase business delivery, enhance RevPAR, reduce hotel operating and development costs, and/or improve guest satisfaction. Specific elements of our strategy include: building strong brands, delivering exceptional services, reaching more consumers and leveraging our size, scale and distribution to reduce costs for hotel owners. We believe that by focusing on these elements we can increase the gross room revenues generated by our franchisees by increasing the business delivered to existing franchisees and expanding our market share of franchised hotels in the chain scale categories in which we operate or seek to operate. Improving the desirability of our brands should also allow us to continue to improve the effective royalty rate of our contracts. Building Strong Brands. Each of our brands has particular attributes and strengths, including awareness with both consumers and developers. Our strategy is to utilize the strengths of each brand for room growth, RevPAR gains and royalty rate improvement that create revenue growth. We believe brand consistency, brand quality and guest satisfaction are critical in improving brand performance and building strong brands. We have multiple brands that are positioned to meet the needs of many types of guests. These brands can be developed at various price points and are suitable for both new construction properties and conversion of existing hotels. This flexibility ensures that we have brands suitable for creating room growth in various types of markets, with various types of customers, and during both industry contraction and growth cycles. During times of lower industry supply growth and tighter capital markets, we can target conversions of existing non-Choice affiliated hotels seeking the awareness and proven performance provided by our brands. During periods of strong industry supply growth, we expect a greater portion of our room growth to come from our new construction brands. We believe that a large number of markets can still support our hotel brands and that the growth potential for our brands remains strong. We strive to maintain the strength of our brands by enhancing product consistency and quality. We attempt to achieve consistency and quality for new entrants into the franchise system by placing prospective hotels in the appropriate brand based on the physical characteristics, performance and amenities of the hotel and by requiring property improvement plans, when necessary, to ensure the new hotel meets the quality standards of the brand. Furthermore, we may require hotels currently in our franchise system to execute property improvement plans at specified contractual windows to ensure that they continue to maintain the product consistency and quality standards of the brand. We believe each of our brands appeals to targeted hotel owners and guests because of unique brand standards, marketing campaigns, loyalty programs, reservation delivery, revenue enhancing programs, service levels and pricing. Delivering Exceptional Services. We provide a combination of services and technology based offerings to help our franchisees improve performance. We have field services staff members located nationwide that help franchisees improve RevPAR performance, efficiency of their hotel operations and guest satisfaction. In addition, we provide our franchisees with education and training programs as well as revenue management technology and services designed to improve property level performance. These services and products promote revenue gains for franchisees and improve guest satisfaction which translate into both higher royalties for the Company and improved returns for owners, leading to further room growth by making our brands even more attractive to prospective franchisees. We develop our services based on customer needs and focus on activities that generate high return on investment for our franchisees. Reaching More Consumers. We believe hotel owners value and benefit from the large volume of guests we deliver through a mix of activities including brand marketing, reservation systems, account sales (corporate, government, social, military, educational and fraternal organizations), and the Company’s loyalty program, Choice Privileges®. Our strategy is to maximize the effectiveness of these activities in delivering both leisure and business travelers to Choicebranded hotels. The Company intends to continue to increase awareness of its brands through its national marketing campaigns and its Choice Privileges loyalty program promotions. These campaigns are intended to generate a compelling message to consumers to create even greater awareness for our brands with the ultimate goal of driving business through our central reservation system. Local and regional co-op marketing campaigns will continue to be utilized to leverage the national marketing programs to drive business to our franchised properties at a local level. We expect our efforts at marketing directly to individual guests and corporate customers will continue to be enhanced through the use of our customer relationship management technology and programs, as well as our field based sales agents that are focused on increasing our share of business travelers. Our continued focus on overall brand quality coupled with our marketing initiatives is designed to stimulate room demand for our franchised hotels through improved guest awareness and satisfaction. Our central reservations system is a critical technology used to deliver guests to our franchisees through multiple channels, including our call centers, proprietary web and mobile sites, global distribution systems (e.g., SABRE, Amadeus), on-line travel agents ("OTAs") (e.g., Expedia, Booking.com) and internet referral or booking services (e.g., Kayak, Trip Advisor). We believe 9 Table of Contents our well-known brands, combined with our relationships with many internet distribution web sites, benefits our franchisees by facilitating increased rate and reservations delivery, and reducing costs and operational complexity. Leveraging Size, Scale and Distribution. We continually focus on identifying methods for utilizing our significant platform of hotels in our system, our relationships with hospitality related vendors and partnerships with travel related providers to reduce costs and increase returns for our franchisees. We are focused on expanding our platform business, which is reflected in our procurement services revenues, through key partnerships, new technology and other key franchisee resources. The expansion of these relationships has enabled us to further drive our top-line revenue and deliver tangible value-added solutions to our hotel owners and customers. For example, we create relationships with qualified vendors to: (i) make low-cost products available to our franchisees; (ii) streamline the purchasing process; and (iii) maintain brand standards and consistency. We also create relationships with key partners to market their services directly to our guests. These relationships provide value-added travel related services to our guests and generate revenues for the Company. We continue to expand these relationships and identify new methods for decreasing hotel-operating costs by increasing penetration within our existing franchise system and enhancing our existing vendor relationships and/or creating new vendor relationships. We believe our efforts to leverage the Company’s size, scale and distribution benefit the Company by enhancing brand quality and consistency, improving our franchisees returns and satisfaction, and creating procurement services revenues. Domestic Franchise System Our standard domestic franchise agreements grant franchisees the non-exclusive right to use certain of our trademarks and receive other benefits of our franchise system to facilitate the operation of their franchised hotel at a specified location. The majority of our standard domestic franchise agreements are 10 to 30 years in duration with certain rights for each of the franchisor and franchisee to terminate the agreement, such as upon designated anniversaries of hotel opening, before the stated duration. Our franchisees operate domestically under one of 14 Choice brand names: Comfort Inn, Comfort Suites, Quality, Clarion, Clarion Pointe, Sleep Inn, Econo Lodge, Rodeway Inn, Mainstay Suites, Suburban Extended Stay Hotel, WoodSpring Suites, Everhome Suites, Cambria Hotels and Ascend Hotel Collection. The following table presents key statistics related to our domestic franchise system over the five years ended December 31, 2019: As of and For the Year Ended December 31, 2015 Number of properties, end of period 5,276 Number of rooms, end of period Royalty fees ($000)(1) Average occupancy percentage(2) Revenue per available room (RevPAR)(2) (1) (2) (3) 281,100 2017 5,362 400,372 $ Average royalty rate(2) Average daily room rate (ADR)(2) 2016 404,498 $ 300,383 2018 5,501 413,015 $ 323,674 2019(3) 5,863 5,955 450,028 $ 359,502 462,973 $ 371,396 4.30% 4.41% 4.60% 4.75% 4.86% 61.1% 61.7% 62.2% 63.3% 62.9% $ 79.86 $ 82.64 $ 84.02 $ 81.64 $ 81.42 $ 48.78 $ 51.00 $ 52.25 $ 51.65 $ 51.19 Royalty fees exclude the impact of franchise agreement acquisition cost amortization. 2015 amounts exclude operating statistics from Cambria Hotel properties open during these periods as the operating statistics are not representative of a stabilized brand which the Company defines as having at least 25 units open and operating for a twelve month period. Additionally, the periods prior to 2018 exclude operating statistics from WoodSpring Suites properties, while 2018 includes full year operating statistics. 2019 amounts include operating statistics of the Company's owned hotels, including intersegment royalties of $0.9 million. Currently, no individual franchisee accounts for more than 3% of the Company's total domestic royalty fees. Industry Positioning Our brands offer consumers and developers a wide range of options for transient and extended stay customers, including economy, mid-scale, upper mid-scale and upscale hotels. Our brands are as follows: Cambria Hotels: Cambria Hotels is a select service hotel chain that operates in the upscale lodging category, targeting top primary market locations. Designed for the modern business traveler, Cambria offers guests a distinct experience with simple, guilt-free indulgences allowing them to treat themselves while on the road. The brand is designed to provide guests with the freedom to be their best self. The environment matches guests' casual lifestyle but tailored to their business travel needs. Properties feature compelling design inspired by the location, spacious and comfortable rooms, spa inspired bathrooms, flexible meeting space, and locally sourced prepared food and craft beer. Principal competitor brands include Courtyard by Marriott, Aloft, Hyatt Place, Hotel Indigo and Hilton Garden Inn. 10 Table of Contents Ascend Hotel Collection: Ascend Hotel Collection is an innovative membership program that enables individual hotels (resort, boutique and historic) to retain their individuality and identity yet have access to Choice Hotels' global distribution, technology, services, training and loyalty benefits. Ascend Hotel Collection offers the best of both worlds: independence backed up by a powerful global distribution network. Principal competitors include Tapestry, Autograph Collection, BW Premier Collection, BW Signature Collection and Small Luxury Hotels. Comfort Inn & Comfort Suites: The Comfort brands are primarily upper mid-scale limited service hotels that offer a warm and welcoming guest experience designed to help travelers feel refreshed and ready to take on the day. The brand family includes Comfort Inn, Comfort Inn & Suites, and Comfort Suites. One of the original brands in the limited service category, Comfort has built a reputation for consistent high-value accommodations for both business and leisure travelers. Comfort hotels offer complimentary hot breakfast with hearty and healthy options, a swimming pool and/or fitness center, free high-speed internet access and a 100% smoke-free environment. Comfort Suites properties are tailored to meet the demands of today's business traveler, with each oversized suite featuring separate areas for working and relaxing, along with a sleeper sofa, refrigerator and microwave. Comfort Suites hotels also offer a business center and marketplace. Principal competitor brands include Hampton, Holiday Inn Express and Fairfield Inn & Suites. Sleep Inn: Sleep Inn is a midscale new construction brand offering developers a lower cost to build with competitive mid-scale average daily rates. Sleep Inn delivers a reliable, simply stylish guest experience, providing both business and leisure travelers with free high-speed internet access, a complimentary Morning Medley hot breakfast, and an exercise room and/or pool. Sleep Inn’s competitors include AmericInn, Baymont and Country Inn & Suites. Clarion & Clarion Pointe: Clarion helps owners of existing midscale assets with food and beverage capabilities achieve strong returns with reasonable investment. Clarion allows a more focused and efficient food and beverage operational model that works well with a variety of conversion property configurations. Clarion helps business and leisure guests "get together" by providing meeting/banquet facilities with catering, hot breakfast, a simplified menu of basic evening meals and lounge with at least beer and wine selections. Amenities include free high-speed internet access, a pool or fitness center, and a business center. Principal competitor brands include Four Points by Sheraton and Radisson. Clarion Pointe is a select service franchise that is ideal for owners who want to strategically reposition their limited service property into a brand with strong awareness and a concept that satisfies the expectations of emerging travelers-a convenient and affordable experience with premium elements in just the right places. The first Clarion Pointe hotel opened during 2019. Quality: Quality helps both guests and owners "get your money's worth" in the midscale category. Quality hotels provide clean, comfortable, and affordable accommodations, as well as the "Value Qs" - Q Bed, Q Breakfast, Q Shower, Q Service, and the Q Essentials including free high-speed internet access, coffee, and in-room refrigerators. Principal competitor brands include Best Western and Ramada. MainStay Suites: MainStay Suites competes in the mid-scale extended stay category. The Mainstay Suites guest experience delivers on a "Live Like Home" promise for guests whose stays are longer than a few nights. Typically, longer hotel stays involve relocations, leisure travel, training, or temporary job assignments. All MainStay guest rooms feature free high-speed internet, a sleeper sofa or lounge chair, fully equipped kitchens with a two-burner cooktop, dishes, utensils, dishwasher, sink with disposal, microwave, and full-size refrigerator. Rooms include a sleeper sofa or lounge chair and comfortable work area with ergonomic chair. MainStay Suites offer a well-equipped exercise room and a business center with computer and printer, as well as complimentary continental breakfast. Each hotel also has a "MainStay Marketplace" where guests may purchase a variety of food and sundry items. Guests also have complimentary access to small kitchen appliances, including blenders, toasters and slow cookers through the "Things I Use at Home" program. MainStay Suites' principal competitors include TownePlace Suites, Candlewood Suites and Hawthorn Suites. Everhome Suites: Everhome Suites are new construction, mid-scale extended stay hotels purposefully designed for the longer staying, value conscious guest. Everhome offers guests a choice of room type options with separate spaces to work, relax, and eat, including spacious studios and larger apartment style onebedroom suites with in-unit washers and dryers. All rooms include a fully equipped, modern kitchen complete with a full-sized refrigerator, dishwasher, stovetop, microwave, and ample counter space. Dishes, utensils, glassware, and cookware are provided in room for free to enable guests to cook their own meals. Guests have 24/7 access to laundry facilities, a modern fitness room with strength training and cardio equipment, and a marketplace with for purchase meal and snack options. Small appliances, such as blenders, crock-pots, and foreman grills are available to rent at the front desk. Free high speed internet and weekly housekeeping is provided. Principal national competitors include Candlewood Suites, Hawthorn Suites, Home2 Suites and TownePlace Suites. The Everhome Suites brand was launched in January 2020 and the Company expects the first hotel to open in 2021. Suburban Extended Stay Hotel: Suburban Extended Stay Hotel competes in the economy extended stay category and offers developers access to the extended stay category through conversion. Suburban Extended Stay Hotel suites are built with today’s 11 Table of Contents value-conscious extended stay guest in mind. All suites provide in-room kitchens, including a full-sized refrigerator, two-burner cooktop, microwave and sink, free high-speed internet access, and 24/7 access to on-site laundry facilities. Suburban’s “just what you need” philosophy matches attractive weekly and multi-week pricing with bi-weekly housekeeping to provide extended stay guests with the all-suite accommodations they want without the cost of services they do not need. Principal competitors include Extended Stay America, InTown Suites, MyPlace, HomeTowne Studios, Affordable Suites of America and Studio 6. WoodSpring Suites: WoodSpring Suites hotels are value-engineered, purpose built new construction hotels that operate in the economy extended stay category. WoodSpring guests typically stay longer than guests at a traditional hotel with stay occasions including relocations, traveling medical assignments, crew projects, and life circumstances necessitating alternatives to traditional hotels. WoodSpring developers adhere to strict prototype/design specifications. Every room is a suite with chairs or sofa, free premium movie channel, well-designed kitchen with full-size refrigerator, two-burner cooktop, and microwave oven. Free high-speed internet and bi-weekly housekeeping is included. Guests may purchase additional linen replacement/housekeeping services. Most hotels are pet-friendly and offer a 24/7 guest laundry room. Principal national competitors include Extended Stay America, HomeTowne Studios, MyPlace and Studio 6. Econo Lodge: Econo Lodge is Choice Hotel’s premiere economy brand, providing an “easy stop on the road” for value-oriented travelers. Free high-speed internet, a premium movie channel and complimentary continental breakfast are just some of the amenities that position Econo Lodge as a great value in the economy category. The brand competes primarily with Days Inn, Super 8 and Red Roof Inn. Rodeway Inn: Rodeway Inn offers sensible lodging for travelers on a budget. With free coffee to get guests started in the morning, free high-speed internet and a free premium movie channel, Rodeway is a great option for practical travelers looking for: “Good night. Great Savings.” Principal competitor brands include Americas Best Value Inn and Motel 6. 12 Table of Contents The following table presents key statistics related to the domestic system for our brands over the five years ended December 31, 2019: As of and For the Year Ended December 31, 2015 COMFORT DOMESTIC 2016 2017 2018 2019 SYSTEM(4) Number of properties, end of period Number of rooms, end of period Royalty fees ($000)(1) $ Average occupancy percentage 1,725 1,678 1,650 1,627 1,616 133,494 129,920 128,655 127,282 127,000 147,660 $ 149,554 66.1% $ 66.8% 153,009 $ 67.4% 153,013 $ 66.7% 151,885 66.4% ADR $ 91.10 $ 93.87 $ 95.22 $ 95.79 $ 95.56 RevPAR $ 60.17 $ 62.73 $ 64.20 $ 63.93 $ 63.46 QUALITY DOMESTIC SYSTEM Number of properties, end of period Number of rooms, end of period Royalty fees ($000)(1) 1,379 1,447 1,542 1,636 1,688 110,116 114,582 120,227 126,533 129,232 $ 59,554 ADR $ RevPAR $ Average occupancy percentage $ 69,799 75.06 $ 43.69 $ 58.2% $ 80,924 77.80 $ 45.99 $ 59.1% $ 90,128 79.25 $ 47.41 $ 59.8% $ 94,228 80.15 $ 79.51 48.20 $ 47.57 60.1% 59.8% CLARION DOMESTIC SYSTEM(5) Number of properties, end of period Number of rooms, end of period Royalty fees ($000)(1) 175 167 166 174 178 24,449 22,941 22,138 22,179 22,498 $ 11,479 ADR $ RevPAR $ Average occupancy percentage $ 12,137 79.85 $ 45.63 $ 57.2% $ 12,589 82.35 $ 48.01 $ 58.3% $ 12,798 84.62 $ 50.14 $ 59.3% $ 13,383 84.45 $ 84.64 48.90 $ 48.40 57.9% 57.2% SLEEP INN DOMESTIC SYSTEM Number of properties, end of period 377 Number of rooms, end of period Royalty fees ($000)(1) 379 27,047 $ Average occupancy percentage 20,226 384 27,097 $ 21,925 63.9% 393 27,410 $ 65.1% 23,093 402 27,962 $ 65.5% 24,003 28,361 $ 65.2% 24,747 64.5% ADR $ 80.41 $ 82.08 $ 82.96 $ 84.71 $ 84.19 RevPAR $ 51.41 $ 53.47 $ 54.35 $ 55.20 $ 54.34 MAINSTAY SUITES DOMESTIC SYSTEM Number of properties, end of period Number of rooms, end of period Royalty fees ($000)(1) $ Average occupancy percentage 52 56 60 63 73 3,846 4,108 4,249 4,268 4,636 2,693 $ 2,909 67.1% $ 65.2% 3,252 $ 68.4% 3,669 $ 4,110 69.7% 68.4% ADR $ 77.02 $ 76.29 $ 76.70 $ 83.08 $ 84.11 RevPAR $ 51.71 $ 49.70 $ 52.47 $ 57.89 $ 57.53 ECONO LODGE DOMESTIC SYSTEM Number of properties, end of period Number of rooms, end of period Royalty fees ($000)(1) 856 857 840 839 807 52,978 52,791 51,233 50,692 48,538 $ 20,784 ADR $ RevPAR $ Average occupancy percentage $ 22,598 59.61 $ 31.90 $ 53.5% $ 23,867 61.41 $ 33.22 $ 54.1% $ 24,455 62.95 $ 34.29 $ 54.5% $ 24,510 63.44 $ 63.09 34.68 $ 34.54 54.7% 54.8% RODEWAY INN DOMESTIC SYSTEM Number of properties, end of period 513 Number of rooms, end of period Royalty fees ($000)(1) 565 28,880 $ Average occupancy percentage 6,006 600 32,515 $ 7,010 56.3% 612 34,488 $ 55.7% 8,799 600 35,124 $ 56.0% 9,772 34,727 $ 56.4% 10,380 55.5% ADR $ 59.75 $ 63.04 $ 64.51 $ 64.26 $ 63.28 RevPAR $ 33.64 $ 35.08 $ 36.09 $ 36.21 $ 35.15 13 Table of Contents SUBURBAN EXTENDED STAY HOTEL DOMESTIC SYSTEM Number of properties, end of period Number of rooms, end of period Royalty fees ($000)(1) $ Average occupancy percentage 62 59 61 54 60 6,994 6,561 6,698 5,699 6,082 3,395 $ 3,511 75.5% $ 75.5% 3,716 $ 76.0% 3,725 $ 75.5% 3,783 73.3% ADR $ 47.61 $ 49.96 $ 51.76 $ 55.81 $ 56.61 RevPAR $ 35.95 $ 37.72 $ 39.31 $ 42.16 $ 41.51 CAMBRIA HOTEL DOMESTIC SYSTEM(2) Number of properties, end of period Number of rooms, end of period Royalty fees ($000)(1) Average occupancy $ percentage(2) 25 27 36 40 50 3,113 3,503 4,917 5,685 7,277 3,745 $ 4,955 N/A $ 6,731 76.3% $ 8,872 73.8% $ 10,527 71.5% 71.6% ADR(2) N/A $ 131.73 $ 137.86 $ 146.71 $ 144.25 RevPAR(2) N/A $ 100.46 $ 101.70 $ 104.84 $ 103.30 ASCEND HOTEL COLLECTION DOMESTIC SYSTEM Number of properties, end of period 112 Number of rooms, end of period 9,455 Royalty fees ($000)(1) $ Average occupancy percentage (2) (3) (4) (5) 5,558 162 10,480 $ 5,985 58.5% 176 13,000 $ 58.1% 7,694 211 14,693 $ 55.5% 10,085 22,143 $ 58.0% 11,942 57.8% ADR $ 127.27 $ 129.97 $ 127.96 $ 126.86 $ 126.54 RevPAR $ 74.47 $ 75.52 $ 71.05 $ 73.62 $ 72.69 WOODSPRING SUITES DOMESTIC (1) 127 SYSTEM(3) Number of properties, end of period N/A N/A N/A 249 270 Number of rooms, end of period N/A N/A N/A 29,911 32,479 Royalty fees ($000)(1) N/A N/A N/A Average occupancy percentage(3) N/A N/A N/A ADR(3) N/A N/A N/A $ RevPAR(3) N/A N/A N/A $ $ 18,982 $ 21,901 45.92 $ 47.10 36.77 $ 37.19 80.1% 79.0% Royalty fees exclude the impact of franchise agreement acquisition cost amortization. Statistics for average occupancy percentage, ADR and RevPAR exclude years in which the Cambria Hotel brand did not have 25 units open and operating for a twelve month period. Statistics prior to 2018 exclude WoodSpring Suites properties. Statistics for 2018 include royalties after acquisition on February 1. 2018 and full year statistics for average occupancy percentage, ADR and RevPAR. Includes Comfort family of brand extensions including Comfort and Comfort Suites. Includes Clarion family of brand extensions including Clarion and Clarion Pointe. International Franchise Operations The Company conducts its international franchise operations through a combination of direct franchising and master franchising relationships. Master franchising relationships are governed by master franchising agreements that generally provide the master franchisee with the right to use and sub-license the use of our brands in a specific geographic region, usually for a fee. Our business strategy 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 distribution. We typically 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. In some territories outside the United States hotel franchising is less prevalent, and many markets are served primarily by independent operators. We believe that chain and franchise affiliation will increase in certain international markets as local economies grow and hotel owners seek the economies of centralized reservations systems and marketing programs. We believe that international franchise operations will provide a significant long-term growth opportunity for the Company and as a result 14 Table of Contents we continue to invest in information technology and marketing which is expected to enhance the value proposition for prospective international franchisees. The following chart and narrative summarizes our franchise system outside of the United States(1): As of and For the Year Ended December 31, 2015 Number of properties, end of period Number of rooms, end of period Royalty fees ($000)(2) (1) (2) 2016 1,147 107,111 $ 20,166 2017 1,152 111,624 $ 19,887 2018 1,126 112,558 $ 21,396 2019 1,158 1,198 119,080 $ 22,005 127,924 $ 21,680 Reporting of operating statistics (e.g., average occupancy percentage and average daily room rate) of international franchisees is not required by all master franchise contracts, thus these statistics and RevPAR are not presented for all international franchisees. Royalty fees exclude the impact of franchise agreement acquisition cost amortization. The Company's direct franchising operations are primarily conducted in the following countries and territories: Continental Europe. The Company conducts direct franchising operations in Germany, Italy, Czech Republic, Austria and Hungary, and portions of Switzerland through Choice Hotels Licensing B.V. ("Choice BV"), a wholly-owned subsidiary, and in France, Portugal and Belgium through a wholly-owned subsidiary of Choice BV, Choice Hotels France SAS. The Company also operates in Spain through a strategic alliance with Sercotel Hotels. At December 31, 2019, the Company had 199 franchised properties open and operating in continental Europe. United Kingdom. The Company conducts direct franchising operations in the United Kingdom through Choice BV. At December 31, 2019, the Company had 33 franchised properties open and operating in the United Kingdom. India. The Company conducts direct franchising operations in India through wholly-owned subsidiaries for the Comfort, Quality, Sleep and Clarion brands. As of December 31, 2019, the Company had 32 franchised properties open and operating in India. Australasia. The Company conducts direct franchising operations in Australia, New Zealand, and Singapore through a wholly-owned subsidiary, Choice Hotels Asia-Pac Pty. Ltd. ("CHAP"). As of December 31, 2019, CHAP had 176 franchised properties open and operating in Australasia. Mexico. The Company’s wholly-owned subsidiary Choice Hotels Mexico S. de R.L. de C.V. ("CHM") conducts direct franchising operations in Mexico on behalf of Choice BV, which acts as the franchisor in Mexico. At December 31, 2019, the Company had 55 franchised properties open and operating in Mexico. Canada. The Company conducts direct franchising operations in Canada through its wholly-owned subsidiary, Choice Hotels International Licensing ULC, and had 2 properties open and operating at December 31, 2019. Other International Relationships. The Company, through Choice BV, has direct franchise relationships with properties in Colombia, and Turkey. At December 31, 2019, 4 properties were open and operating in Colombia and 4 properties were open and operating in Turkey. The Company utilizes master franchising relationships primarily in the following countries and territories: Scandinavia. We conduct our operations in Scandinavia through a master franchise relationship with Nordic Choice Commercial Services A/S ("NCH"), formerly known as Choice Hotels Scandinavia. As of December 31, 2019, NCH had 203 open properties in its development territory, which includes Denmark, Norway and Sweden on an exclusive basis and Latvia, Lithuania and Finland on a non-exclusive basis. The Company’s master franchise agreement with NCH grants rights to the Comfort, Quality, Sleep and Clarion brand and expires in 2023. Through a separate agreement signed in 2010, NCH also possesses the right to franchise Ascend Hotel Collection hotels in its territory. This agreement also expires in 2023. Japan. The Company conducts its operations in Japan through a master franchise relationship with Choice Hotels Japan Co. Ltd ("CHJ"). CHJ possesses exclusive rights to develop the Comfort and Quality brands and non-exclusive rights to the Sleep and Clarion brands. The Company’s master franchise agreement with CHJ was extended in 2019 and now expires in December 2033. As of December 31, 2019, CHJ had 63 open properties. 15 Table of Contents Canada. We conduct our operations in Canada for the majority of our brands through Choice Hotels Canada Inc. ("CHC"), a joint venture owned 50% by us and 50% by InnVest Management Holdings Ltd. CHC is one of the largest lodging organizations in Canada with 329 of our franchised properties open and operating as of December 31, 2019. Ireland. The Company is a party to a master franchising agreement with Luckwell Limited for the exclusive right to develop our Clarion, Quality and Comfort brands in Ireland and Northern Ireland. The agreement also provides Luckwell Limited with limited rights to franchise Ascend Hotel Collection hotels in the territory. The master franchise agreement with Luckwell Limited expires in 2027. As of December 31, 2019, Luckwell Limited had 3 properties open and operating in Ireland and Northern Ireland. South America. We conduct our operations in Brazil and certain other South American territories through a master franchise relationship with Atlantica Holdings International, Ltd. ("Atlantica"). As of December 31, 2019, Atlantica had 73 open properties in its development territory. The Company’s master franchise agreement with Atlantica grants rights to the Comfort, Quality, Sleep and Clarion brands, which rights are exclusive in Brazil and non-exclusive in Atlantica's remaining territory. The agreement expires in December 2024. Central America. We conduct our operations in certain Central American territories through a master franchise relationship with Real Hotels and Resorts, Inc. ("Real"). As of December 31, 2019, Real had 15 open properties in its development territory which consists of Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, and Panama. The Company’s master franchise agreement with Real grants rights to the Comfort, Quality, Sleep and Clarion brands. The agreement was executed in 1994 and is currently scheduled to expire in May of 2034, with certain rights by both parties to terminate the contract early. Through a separate agreement signed in 2011, we have also granted Real limited non-exclusive rights to franchise Ascend Hotel Collection hotels in Colombia, Costa Rica, Ecuador, Honduras and Panama. Other International Relationships. We also have non-exclusive master development and area representative arrangements in place with local hotel management and franchising companies doing business in China and Southeast Asia. At December 31, 2019, 7 properties were open and operating in China. The following table presents key worldwide system size statistics as of and for the year ended December 31, 2019: Approved for Development Open and Operational Hotels Rooms Hotels Rooms Comfort 2,118 172,942 311 Quality 27,203 2,012 164,650 81 6,410 Ascend Hotel Collection 346 40,750 86 14,105 Clarion 314 43,880 29 2,871 Sleep Inn 427 31,285 160 8,678 74 4,736 154 7,315 Econo Lodge 874 51,574 25 1,606 Rodeway Inn 608 35,242 38 2,406 60 6,082 17 1,073 MainStay Suites Suburban Cambria Hotel WoodSpring Suites Totals 50 7,277 90 11,847 270 32,479 144 17,354 7,153 590,897 1,135 100,868 Franchise Sales Brand growth is important to our business model. We have identified key market areas for hotel development based on supply/demand relationships and our strategic objectives. Development opportunities are typically offered to: (i) existing franchisees; (ii) developers of hotels or multi-family housing; (iii) owners of independent hotels and motels; (iv) owners of hotels leaving other franchisors’ brands; and, (v) franchisees of non-hotel related products such as restaurants. Our franchise sales organization is structured to support the continued growth of the Company through awarding franchise agreements. The franchise sales organization employs both sales managers as well as franchise sales directors. This organization emphasizes the benefits of affiliating with the Choice system, our commitment to helping hotels improve profitability, our central reservation delivery services, our marketing and customer loyalty programs, our revenue management 16 Table of Contents services, our training and support systems (including our proprietary property management systems) and our Company’s track record of delivering growth and profitability. Franchise sales directors are assigned to specific brands to leverage their brand expertise to enhance product consistency and deal flow. Our sales managers ensure each prospective hotel is placed in the appropriate brand, facilitate teamwork and information sharing amongst the sales directors and provide better service to our potential franchisees. The structure of this organization supports the Company’s efforts to leverage its core strengths in order to take advantage of opportunities for further growth. Integrating our brands and strategies allow our brand teams to focus on understanding, anticipating and meeting the unique needs of our customers. Our objective is to continue to grow our portfolio by continuing to sell our existing brands, creating extensions of our existing brands and introducing new brands, either ourselves or via acquisition, within the various lodging categories. Based on market conditions and other circumstances, we may offer certain incentives to developers to increase development of our brands such as discounting various fees including the initial franchise fee, royalty fee and system fee as well as provide financing for property improvements and other purposes. Because retention of existing franchisees is important to our growth strategy, we have a formal impact policy. For most of our brands, this policy offers existing franchisees protection from the opening of a same-brand property within a specified distance, depending upon the market in which the property is located. Investment, Financing and Guaranty Franchisee Support Our board of directors authorized a program which permits us to offer financing, investment, and guaranty support to qualified franchisees as well as allows us to acquire and resell real estate to incent franchise development for certain brands in strategic markets. We deploy capital pursuant to this program opportunistically to promote growth of our emerging brands. The amount and timing of the investment in this program will be dependent on market and other conditions and we generally expect to recycle these investments within a five year period. Franchise Agreements Our standard domestic franchise agreements grant franchisees the non-exclusive right to use certain trademarks we own and receive other benefits of our franchise system to facilitate the operation of their franchised hotel at a specified location. Our standard domestic franchise agreements generally have terms ranging between 10 and 30 years. Generally, either party to our standard domestic franchise agreement can terminate the agreement prior to the conclusion of the agreement’s term under certain circumstances, such as upon designated anniversaries of the agreement, subject to applicable law. Early termination options give us flexibility in eliminating or re-branding properties for reasons other than contractual failure by the franchisee. This allows us the opportunity to strengthen our brand portfolio in various markets by replacing weaker performing hotels. We also have the right to terminate a franchise agreement if a franchisee fails to bring the property into compliance with contractual or quality standards within specific time periods. The franchise agreements also typically contain liquidated damages provisions which represent a fair and reasonable measure of damages that both our franchisee and we agree should be paid to us upon an early termination of the franchise agreement. The Company utilizes master development agreements (“MDA”) with respect to the WoodSpring Suites brand (and on occasion other brands). In exchange for a non-refundable fee, developers are provided geographic exclusivity to enter into a specified number of franchise agreements and develop WoodSpring Suites properties. The upfront fees received on signing of the MDA are allocable to the affiliation fees due upon the execution of each franchise agreement between the parties in the regions covered by the MDA. The MDA specifies development schedules the developer must maintain; if not met, the Company can terminate the geographic exclusivity, however the upfront fees remain allocable to future franchise agreement affiliation fees as long as the MDA remains in effect. When the responsibility for development is transferred to an international master franchisee, that party has the responsibility to develop and grow our brands in the international master franchise area. Additionally, the international master franchisee generally must manage the delivery of certain necessary services (such as quality assurance, reservations and marketing) to support the franchised hotels in the international master franchise area. The international master franchisee collects the fees paid by the local franchisee and remits an agreed upon share to us. International Master franchise agreements generally have a term of at least 10 years. We have only entered into international master franchise agreements with respect to franchised hotels outside the United States. 17 Table of Contents Franchise agreements are generally individually negotiated and vary among the different Choice brands and franchises, but we believe they are competitive with the industry standard within their market group. Franchise fees usually have three primary components: an affiliation fee; a royalty fee; and a system fee (for marketing and reservation system). Our standard franchise fees are as follows: QUOTED FEES BY BRAND AS OF DECEMBER 31, 2019 Initial Fee Per Room/Minimum Brand Relicensing and Renewal Fee Per Room/Minimum Royalty Fees (1) Marketing and Reservation System Fees (1) Cambria Hotels $500/$60,000 $750/$65,000 6.00% 3.00% Comfort $500/$50,000 $750/$60,000 6.00% 3.50% Quality Inn $300/$35,000 $550/$45,000 5.25% 3.50% Ascend Hotel Collection $525/$45,000 N/A/$45,000 5.00% 2.50% Clarion $300/$40,000 $550/$45,000 5.00% 3.00% Clarion Pointe $400/$40,000 $650/$45,000 5.50% 3.25% Sleep Inn $300/$40,000 $550/$45,000 5.50% 3.50% MainStay Suites(2) $300/$50,000 $550/$30,000 6.00% 2.50% Econo Lodge $250/$25,000 $500/$30,000 5.00% 3.00% Rodeway Inn $125/$15,000 $375/$15,000 5.00% 3.00% Suburban Extended Stay Hotel(2) $225/$30,000 $475/$30,000 6.00% 2.50% WoodSpring Suites N/A/$50,000 N/A/$50,000 6.00% 2.50% Everhome Suites $300/$50,000 $550/$50,000 6.00% 2.50% (1) (2) Fees are based on a percentage of gross room revenue. For dual brand hotels that combine either the Mainstay Suites or Suburban Extended Stay Hotel brand with another Choice brand, we may increase the System Fee up to the standard amount for such other Choice brand. As previously noted, the Company’s franchise agreements are generally individually negotiated and therefore actual fees may differ from those noted above. From time to time, the Company may discount the standard royalty fees and/or system fees in the initial years of the agreement as a franchisee acquisition strategy. Typically, these discounts expire as the contract matures until the contractual fees reach the standard franchise fees in effect at the time the agreement was executed. Franchise Operations Our operations are designed to help our franchisees improve RevPAR and lower their operating and development costs, as these are the measures of performance that most directly impact franchisee profitability. Our focus is not only to help increase the number of reservations delivered to our franchisees but also to help increase the percentage of guest reservations processed through our proprietary channels. We believe that our proprietary channels, which include our loyalty program, propriety internet sites (including mobile and tablet applications), global sales programs and interfaces with global distribution systems, help deliver guests to our franchisees' hotels at the lowest cost to the franchisee. We believe that by helping our franchisees become more profitable we will enhance our ability to retain our existing franchisees, attract new franchisees, and improve the pricing of our franchise agreements. The key aspects of our franchise operations are: Brand Name Marketing and Advertising. Our franchised hotels are typically located in areas conveniently accessible to business and leisure travelers, and therefore, a significant portion of hotel room nights are sold to guests who either walk-in or contact the hotel directly. As a result, we believe that brand name recognition and the strength of the brand reputation are important factors in influencing business and leisure traveler hotel accommodation choices. Our marketing and advertising programs are designed to heighten consumer awareness and preference for our brands as offering the greatest value and convenience in the lodging categories in which we compete. Marketing and advertising efforts include national television, internet and radio advertising, online advertising, social media/digital advertising, print advertising in consumer and trade media and promotional events, including joint marketing promotions with qualified vendors and corporate partners. We also actively seek to maximize our presence on the internet by purchasing key search related terms from the various search engine providers to help ensure that our franchisees' hotels are prominently displayed to all potential guests. We conduct numerous marketing and sales programs and deploy field-based sales agents which target specific groups, including business travelers, senior citizens, automobile club members, families, government and military employees, educational organizations and meeting planners. Other marketing efforts include domestic and international trade show 18 Table of Contents programs, publication of group and tour rate directories, direct-mail programs, electronic direct marketing e-mail programs, centralized commissions for travel agents, fly-drive programs in conjunction with major airlines, and the publication of electronic travel and vacation directories. We operate a loyalty program, Choice Privileges, for all of the Choice brands to attract and retain travelers by rewarding stays with points towards free hotel nights and other rewards. Choice Privileges participants can earn points redeemable for free nights at Choice brand properties and through our partners that also provide travel related accommodations. The loyalty program also offers guests the ability to earn airline miles for qualifying stays redeemable for flights with various airline partners as well as redeem points for gift certificates at participating retailers. These programs allow us to conduct lower cost, more targeted marketing campaigns to our consumers, help us deliver business to our franchised hotels and are an important selling point for our franchise sales personnel. The Choice Privileges program had approximately 44 million members worldwide as of December 31, 2019. Growing the membership of the Choice Privileges program as well as increasing the number of room nights consumed by existing members will continue to be a focus of the Company. Marketing and advertising programs are directed by our marketing department, which utilizes the services of independent advertising agencies. We also employ home-based sales personnel geographically located across the United States using personal sales calls, telemarketing and other techniques to target specific customer groups, such as potential corporate clients in areas where our franchised hotels are located, the group travel market, and meeting planners. Our field-based franchise services area directors work with franchisees to help them maximize RevPAR and improve the efficiency of their hotel operations. These consultants advise franchisees on topics such as marketing their hotels, improving quality and maximizing the benefits offered by the Choice reservations system. Our proprietary property management system includes a rate and selling management tool to help our franchisees better manage rates and inventory which are designed to help them improve RevPAR by optimizing ADR and occupancy. In addition, we offer revenue management services to our franchisees to assist them in maximizing their room rates and minimize costs of reservation delivery. Central Reservation System ("CRS"). Our central reservation system consists of our toll-free telephone reservation system, our proprietary internet sites, mobile phone and tablet reservation applications, interfaces with global distribution systems, and other internet reservations sites. We strive to improve the percentage of business delivered by our CRS as room nights reserved through these channels are typically at higher average daily rates than reservations booked directly through the property. In addition, increasing the percentage of business delivered through the CRS improves our value proposition to a hotel owner and therefore assists in retention of existing franchisees and acquisition of new franchisees. Our CRS provides a data link to our franchised properties as well as to travel reservation systems such as Amadeus, Galileo, SABRE and Worldspan that facilitate the reservation process for travel agents and corporate travelers. We also offer rooms for rent on our own proprietary internet site (www.choicehotels.com) and mobile applications as well as those of OTA's and other third-party internet referral or booking services. Our toll-free telephone reservation system primarily utilizes third party call center service providers. Reservation agents trained on the reservation system have the goal of matching each caller with a Choice-branded hotel meeting the caller’s needs. We also operate a call forwarding program through which our franchisees can leverage our central reservation system capabilities by forwarding reservation calls received directly by the property to one of our reservation centers. Typically, this helps reduce the hotel’s front desk staffing needs, improves customer service and results in a higher average daily rate than reservations booked directly through the property. We continue to implement our integrated reservation and distribution strategy to help improve reservations delivery, reduce franchisee costs and improve franchisee satisfaction by enhancing our website, www.choicehotels.com. We design our marketing campaigns to drive reservation traffic directly to our proprietary channels to minimize the impact that third party reservation sites may have on the pricing of our franchisees' inventory. In addition, we have introduced programs such as our Lowest Price Guarantee program which has greatly reduced the ability of the travel intermediaries to undercut the published rates at our franchisees' hotels. Further, we selectively distribute our franchisees' inventory to key third party travel intermediaries that we have established agreements with to help drive additional business to our franchisees' hotels. These agreements typically offer our brands preferred placement on these third party sites at reduced transaction fees. We continue to educate our individual franchisees about the risk of an unfavorable impact to their business of contracting with sites with which we do not have preferred agreements. We currently have agreements with many, but not all, major online third party booking sites. We also continue to upgrade our technology to ensure that our CRS can effectively handle the current and future volume on digital channels and support the industry's shift toward accelerated digital communications and guest experience personalization. In support of these initiatives, in the first quarter of 2018, the Company transitioned to choiceEDGE, a cloud19 Table of Contents based software developed by the Company to manage all distribution for the Company by optimizing rate, inventory, availability, shopping, booking and reservations for its website, mobile apps and third-party distribution partners. Property Management Systems. Our proprietary property and yield management system, choiceADVANTAGE, is designed to help franchisees maximize profitability and compete more effectively by assisting them in managing their room inventory, rates and reservations. choiceADVANTAGE synchronizes each hotel’s inventory with our central reservation system, giving our reservation sales agents and other proprietary channels last room sell capabilities at every hotel. Our property management system also includes a proprietary revenue management feature ("SmartRates") that calculates and suggests optimum rates based on each hotel’s past performance and projected occupancy. These tools are critical to business delivery and yield improvement as they facilitate a franchisee's ability to effectively manage hotel operations, determine appropriate rates, help drive occupancy and participate in our marketing programs. As a cloud-based solution, the choiceADVANTAGE system helps reduce each hotel’s investment in on-site computer equipment, typically resulting in a lower total cost of ownership for property management systems than traditional on-site solutions. Quality Assurance Programs. Consistent quality standards are critical to the success of a hotel franchise. We have established quality standards for all of our franchised brands that cover cleanliness, condition, brand standards and minimum service offerings. We inspect most properties for compliance with our quality standards when application is made for admission to the franchise system. The compliance of existing franchisees with quality standards is monitored through scheduled and unannounced quality assurance reviews conducted by a third-party periodically at the property and through the use of guest surveys. Properties that fail to maintain a minimum score are reinspected on a more frequent basis until deficiencies are cured, or until such properties are terminated. To encourage compliance with quality standards, various brand-specific incentives and awards are used to reward franchisees that maintain consistent quality standards. We identify franchisees whose properties operate below minimum quality standards and assist them to comply with brand specifications. Franchisees who fail to improve on identified quality issues may be subject to consequences ranging from written warnings, the payment of re-inspection, non-compliance and guest satisfaction fees, attendance at mandatory training programs and ultimately to the termination of the franchise agreement. Actual consequences, if any, are determined in the Company’s discretion on a case-by-case basis and may take into account a variety of factors apart from a franchisee’s level of compliance with our quality standards and brand specifications. Training. We maintain a training department that conducts mandatory and voluntary training programs for all franchisees and general managers. Regularly scheduled regional and national training meetings are also conducted for owners and general managers. We offer an interactive computer and mobile-based training system to help train hotel employees in real-time as well as at their own pace. Additional training is conducted through a variety of methods, including group instruction seminars and live on-line instructor-led programs. Opening Services. We maintain an opening services department that ensures incoming hotels meet or exceed brand standards and are properly displayed in our various reservation distribution systems to help ensure that each incoming hotel opens successfully. We also maintain a design and construction department to assist franchisees in refurbishing, renovating, or constructing their properties prior to or after joining the system. Department p...
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