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ITEM 1.	FINANCIAL STATEMENTS

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Basis of Presentation

The accompanying unaudited consolidated financial statements of Choice Hotels International, Inc. and its subsidiaries (together the "Company") have been prepared by the Company in accordance with United States of America generally accepted accounting principles ("GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). These unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present the Company's financial position and results of operations. Except as otherwise disclosed, all adjustments are of a normal recurring nature.

Certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP have been omitted. The Company believes the disclosures made are adequate to make the information presented not misleading.

The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2019 and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 2, 2020. Interim results are not necessarily indicative of the entire year results. All inter-company transactions and balances between Choice Hotels International, Inc. and its subsidiaries have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are detailed in the “Summary of Significant Accounting Policies” section of Note 1 in the Annual Report on Form 10-K for the year ended December 31, 2019. The significant accounting policies that changed in 2020 are set forth below.

Recently Adopted Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) and issued subsequent amendments to the initial guidance at various points thereafter ("Topic 326"). Under legacy standards, we recognized an impairment of receivables when it was probable that a loss had been incurred. Topic 326 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts (which includes losses that may be incurred in future periods), and enhanced disclosures to provide insight to significant estimates and judgments used in estimating credit losses. The Company adopted Topic 326 on January 1, 2020 using the modified retrospective approach resulting in a cumulative-effect adjustment of $6.8 million (inclusive of deferred taxes) recorded in retained earnings as of the date of adoption. The scope and provisions of Topic 326 most significantly impacted the allowance for the Company's notes receivables. While trade receivables are in the scope, the provisions of Topic 326 did not significantly alter the accounting policy for allowance for trade receivables given the duration of such receivables is typically 30 days. Refer to Note 3 for further details on the adoption of Topic 326 and the impact to the Company's accounting policies for Notes Receivable.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 modifies disclosure requirements on fair value measurements. The Company adopted ASU 2018-13 on a retrospective basis on January 1, 2020, with limited modifications to its fair value footnote disclosure. Refer to Note 7.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted ASU

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2018-15 on a prospective basis on January 1, 2020. As the majority of the Company's hosting arrangements are service contracts, the capitalization and subsequent amortization of implementation costs incurred after adoption are expected to impact the timing, but not classification, of expense recognition.

Recently Issued Accounting Standard

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 enhances and simplifies various aspects of the income tax accounting guidance in Accounting Standards Codification ("ASC") 740, Income Taxes. The guidance is effective for annual reporting periods beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effect of adopting ASU 2019-12, but does not expect adoption will have a material impact on the consolidated financial statements and disclosures.

Contract Liabilities

Contract liabilities relate to (i) advance consideration received, such as initial franchise and relicensing fees paid when a franchise agreement is awarded and system implementation fees paid at time of installation, for services considered to be part of the brand intellectual property performance obligation and (ii) amounts received when Choice Privileges points are issued, but for which revenue is not yet recognized since the related points have not been redeemed.

Initial and relicensing fees are charged when (i) new hotels enter the franchise system, (ii) there is a change of ownership, or (iii) existing franchise agreements are extended. These revenues are recognized as revenue ratably as services are provided over the enforceable period of the franchise agreement. System implementation fees charged to franchisees are also deferred and recognized as revenue over the enforceable period of the franchise agreement. The enforceable period is the period from hotel opening to the first date the franchisee or the Company can terminate the franchise agreement without incurring a significant penalty. Deferred revenues from initial and relicensing fees and system implementation fees will typically be recognized over a five- to ten-year period, unless the franchise agreement is terminated and the hotel exits the franchise system whereby remaining deferred amounts will be recognized to revenue in the period of termination.

Loyalty points represent a performance obligation attributable to usage of the points, and thus revenues are recognized at the point in time when the loyalty points are redeemed by members for benefits. The estimated fair value of future redemptions is reflected in current and non-current Liability for guest loyalty program in the consolidated balance sheets. The amount of the loyalty program fees in excess of the point liability represents current and non-current deferred revenue, which is recognized to revenue as points are redeemed including an estimate of future forfeitures. The anticipated redemption pattern of the points is the basis for current and non-current designation of each liability, which was adjusted in the first quarter of 2020 to reflect an anticipated longer issuance to redemption period in light of impacts from the COVID-19 pandemic. Loyalty points are typically redeemed within three years of issuance.

Significant changes in the contract liabilities balances during the period December 31, 2019 to March 31, 2020 are as follows:

(in thousands)
Balance as of December 31, 2019	$	163,847
Increases to the contract liability balance due to cash received	20,137
Revenue recognized in the period	(19,068		)
Balance as of March 31, 2020	$	164,916

Remaining Performance Obligations

The aggregate amount of transaction price allocated to unsatisfied or partially unsatisfied performance obligations is $164.9 million as of March 31, 2020. This amount represents fixed transaction price that will be recognized as revenue in future periods, which is primarily captured in the consolidated balance sheet as current and non-current deferred revenue.

Based on practical expedient elections permitted by Topic 606, the Company does not disclose the value of unsatisfied performance obligations for (i) variable consideration subject to the sales or usage-based royalty constraint or comprising a component of a series (including franchise, partnership, qualified vendor, and software as a service ("SaaS") agreements), (ii) variable consideration for which we recognize revenue at the amount to which we have the right to invoice for services performed, or (iii) contracts with an expected original duration of one year or less.

Disaggregation of Revenue

	Three Months Ended												Three Months Ended
	March 31, 2020												March 31, 2019
(in thousands)	Over time				Point in time				Total				Over time				Point in time				Total
Royalty fees	$	70,339			$	—			$	70,339			$	80,353			$	—			$	80,353
Initial franchise and relicensing fees	7,284				—				7,284				6,807				—				6,807
Procurement services	13,288				509				13,797				11,487				460				11,947
Marketing and reservation system	99,329				11,056				110,385				104,078				5,986				110,064
Owned hotels	8,021				1,293				9,314				—				—				—
Other	6,687				—				6,687				8,869				—				8,869
Total Topic 606 revenues	$	204,948			$	12,858			217,806				$	211,594			$	6,446			218,040
Non-Topic 606 revenues									369												280
Total revenues									$	218,175											$	218,320

Non-Topic 606 revenues primarily represent revenue from leasing and are presented in Owned hotels and Other revenues in the consolidated statements of income.

As presented in Note 11, the Corporate & Other segment amounts represent $10.9 million and $3.3 million for the three months ended March 31, 2020 and 2019, respectively, and are included in the Over time column of Other revenues and the Owned Hotels and Non-Topic 606 revenues rows. The remaining revenues relate to the Hotel Franchising segment. Royalty fees and Marketing and reservation system revenues are presented net of $0.8 million in intersegment revenues for the three months ended March 31, 2020 as described in Note 11.

The Company has provided financing in the form of notes receivable loans to franchisees to support the development of properties in strategic markets. As of March 31, 2020 and December 31, 2019, the Company had $140.0 million and $133.0 million, respectively, in notes receivable loans outstanding.

The Company has developed a systematic methodology to determine its allowance for credit losses across our portfolio of notes receivable loans. The Company monitors the risk and performance of our portfolio by the level of security in collateral (i.e., senior, subordinated or unsecured). As each of the Company’s notes receivable loans has unique risk characteristics, the Company deploys its methodology to calculate allowances for credit losses at the individual notes receivable loan level.

The Company primarily utilizes a discounted cash flow ("DCF") approach to measure the credit allowance, influenced by the key economic variables of each note receivable loan. The Company identified the key economic variables for these loans to be loan-to-cost ("LTC") or loan-to-value ("LTV") ratios and debt service coverage ratio ("DSCR"). The LTC or LTV ratio represents the loan principal relative to the project cost or value and is an indication of the ability to be re-paid principal at loan maturity. The DSCR represents borrower net operating income as a percentage of the interest and principal payments incurred (i.e., debt service) on all debt of the borrower and is an indication of the ability of the borrower to timely pay amounts due during the term of the loan. The LTC or LTV ratios and DSCR are considered during loan underwriting as indications of risk and, accordingly, we believe these factors are the most representative risk indicators for calculating the allowance for credit loss. Loans with higher LTC or LTV ratios and lower DSCR ratios generally are representative of loans with greater risk and, accordingly, have higher credit allowances as a percentage of loan principal. Conversely, loans with lower LTC or LTV ratios and higher DSCR ratios generally are representative of loans with lesser risk and, accordingly, have lower credit allowances as a percentage of loan principal.

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The following table shows the composition of the Company's notes receivable balances based on the level of security credit quality indicator:

(in thousands)	March 31, 2020				December 31, 2019
Senior	$	104,924			$	98,545
Subordinated	32,643				32,153
Unsecured	2,455				2,316
Total notes receivable	140,022				133,014
Total allowance for notes receivable losses	13,102				4,556
Total notes receivable, net of allowance	$	126,920			$	128,458
Current portion, net of allowance	$	24,161			$	25,404
Long-term portion, net of allowance	$	102,759			$	103,054

Amortized cost basis by year of origination and level of security credit quality indicator are as follows:

(in thousands)	2020				2019				2018				Prior				Total
Senior	$	—			$	23,570			$	20,546			$	60,808			$	104,924
Subordinated	—				2,270				11,492				18,881				32,643
Unsecured	—				—				629				1,826				2,455
Total notes receivable	$	—			$	25,840			$	32,667			$	81,515			$	140,022

As disclosed in Note 1, Topic 326 requires a cumulative-effect adjustment to the consolidated balance sheet as of the beginning of the first reporting period in which the guidance is effective. As of the adoption date of January 1, 2020, the Company established a credit allowance on its notes receivable loans of $12.9 million, an increase from a previous loan allowance of $4.6 million as of December 31, 2019. The cumulative-effect adjustment of adopting Topic 326 of $6.8 million, net of tax impact, is recorded in the consolidated balance sheets in the Retained earnings line item.

The following table summarizes the activity related to the Company’s Notes Receivable allowance for credit losses, including the impacts of adopting Topic 326:

(in thousands)	March 31, 2020				December 31, 2019
Beginning balance	$	4,556			$	4,685
Reserves established from adoption of Topic 326	8,348				—
Provisions	198				—
Write-offs	—				(129		)
Ending balance	$	13,102			$	4,556

The Company considers loans to be past due and in default when payments are not made when due. Although the Company considers loans to be in default if payments are not received on the due date, the Company does not suspend the accrual of interest until those payments are more than 30 days past due. The Company applies payments received for loans on non-accrual status first to interest and then to principal. The Company does not resume interest accrual until all delinquent payments are received. The amortized cost basis of notes receivable on non-accrual status was $1.7 million at both March 31, 2020 and December 31, 2019.

The Company has identified loans totaling approximately $14.2 million and $16.3 million, respectively, with stated interest rates that are less than market rate, representing a total discount of $1.2 million and $1.3 million as of March 31, 2020 and December 31, 2019, respectively. These discounts are reflected as a reduction of the outstanding loan amounts and are amortized over the life of the related loan.

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Past due balances of notes receivable by credit quality indicators are as follows:

(in thousands)	30-89 days Past Due				> 90 days Past Due				Total Past Due				Current				Total  Notes Receivable
As of March 31, 2020
Senior	$	—			$	—			$	—			$	104,924			$	104,924
Subordinated	—				—				—				32,643				32,643
Unsecured	—				—				—				2,455				2,455
	$	—			$	—			$	—			$	140,022			$	140,022
As of December 31, 2019
Senior	$	—			$	—			$	—			$	98,545			$	98,545
Subordinated	—				—				—				32,153				32,153
Unsecured	—				—				—				2,316				2,316
	$	—			$	—			$	—			$	133,014			$	133,014

The Company evaluated its off-balance-sheet credit exposure for loan commitments and determined the likelihood of having to perform is remote as of March 31, 2020. Refer to Note 12.

Variable Interest through Notes Issued

The Company has issued notes receivables to certain entities that have created variable interests in these borrowers totaling $124.9 million and $126.5 million as of March 31, 2020 and December 31, 2019, respectively. The Company has determined that it is not the primary beneficiary of these variable interest entities ("VIEs"). These loans have stated fixed and/or variable interest amounts.

The Company maintains a portfolio of investments owned through noncontrolling interests in equity method investments with one or more partners. The Company has equity method investments in joint ventures that represent VIEs totaling $74.4 million on the consolidated balance sheets at both March 31, 2020 and December 31, 2019. These investments relate to the Company's program to offer equity support to qualified franchisees to develop and operate Cambria Hotels in strategic markets. Based on an analysis of who has the power to direct the activities that most significantly impact these entities performance and who has an obligation to absorb losses of these entities or a right to receive benefits from these entities that could potentially be significant to the entity, the Company determined that it is not the primary beneficiary of any of these VIEs. The Company based its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and the relevant development, operating management and financial agreements. Although the Company is not the primary beneficiary of these VIEs, it does exercise significant influence through its equity ownership and as a result the Company's investment in these entities is accounted for under the equity method. For the three months ended March 31, 2020 and 2019, the Company recognized losses totaling $2.0 million and $2.4 million, respectively, from these investments. The Company's maximum exposure to losses related to its investments in VIEs is limited to its equity investments as well as certain limited payment guaranties described in Note 12 of these financial statements.

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Debt consists of the following:

	March 31, 2020				December 31, 2019
	(in thousands)
$400 million senior unsecured notes due 2022 with an effective interest rate of 6.0% less deferred issuance costs of $2.1 million and $2.3 million at March 31, 2020 and December 31, 2019, respectively	$	397,896			$	397,680
$400 million senior unsecured notes due 2029 with an effective interest rate of 3.88%, less a discount and deferred issuance costs of $5.8 million and $6.0 million at March 31, 2020 and December 31, 2019, respectively	394,184				394,039
$600 million senior unsecured revolving credit facility with an effective interest rate of 1.91% and 2.76%, less deferred issuance costs of $2.6 million and $2.7 million at March 31, 2020 and December 31, 2019, respectively	412,449				15,502
Construction loan with an effective interest rate of 6.23%, less deferred issuance costs of $0.6 million at December 31, 2019.	—				32,465
Fixed rate collateralized mortgage with an effective interest rate of 4.57%, plus a fair value adjustment of $0.1 million and $0.2 million at March 31, 2020 and December 31, 2019, respectively	7,335				7,511
Economic development loans with an effective interest rate of 3.0% at March 31, 2020 and December 31, 2019, respectively	4,416				4,416
Total debt	$	1,216,280			$	851,613
Less current portion	7,335				7,511
Total long-term debt	$	1,208,945			$	844,102

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The following represents the changes in accumulated other comprehensive loss, net of tax, by component for the three months ended March 31, 2020 and 2019:

(in thousands)	Loss on Cash Flow Hedge				Foreign Currency Items				Total
Balance as of December 31, 2019	$	—			$	(4,550	)		$	(4,550	)
Other comprehensive loss before reclassification	—				(664		)		(664		)
Amounts reclassified from accumulated other comprehensive loss	—				—				—
Net current period other comprehensive income (loss)	—				(664		)		(664		)
Balance as of March 31, 2020	$	—			$	(5,214	)		$	(5,214	)

(in thousands)	Loss on Cash Flow Hedge				Foreign Currency Items				Total
Balance as of December 31, 2018	$	(1,436	)		$	(4,010	)		$	(5,446	)
Other comprehensive loss before reclassification	—				(207		)		(207		)
Amounts reclassified from accumulated other comprehensive loss	215				—				215
Net current period other comprehensive income (loss)	215				(207		)		8
Balance as of March 31, 2019	$	(1,221	)		$	(4,217	)		$	(5,438	)

During the three months ended March 31, 2019, $0.2 million was reclassified from accumulated other comprehensive loss to Interest expense in the Company's Consolidated Statements of Income with reference to a cash flow hedge loss on an interest rate contract. There was no income tax expense or benefit. There were no amounts reclassified during the three months ended March 31, 2020, as the debt related to the Interest rate contract was paid off in December 2019.

The Company estimates the fair value of its financial instruments utilizing a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The following summarizes the three levels of inputs, as well as the assets that the Company values using those levels of inputs.

Level 1: Quoted prices in active markets for identical assets and liabilities. The Company’s Level 1 assets consist of marketable securities (primarily mutual funds) held in the Deferred Compensation Plan.

Level 2: Observable inputs, other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable. The Company’s Level 2 assets consist of money market funds held in the Company's Deferred Compensation Plan.

Level 3: Unobservable inputs, supported by little or no market data available, where the reporting entity is required to develop its own assumptions to determine the fair value of the instrument. The Company does not currently have any assets recorded at fair value whose fair value was determined using Level 3 inputs and there were no transfers of Level 3 assets during the three months ended March 31, 2020.

As of March 31, 2020 and December 31, 2019, the Company had the following assets recorded in the consolidated balance sheets measured at fair value on a recurring basis:

	Fair Value Measurements at Reporting Date Using
(in thousands)	Total				Level 1				Level 2				Level 3
As of March 31, 2020
Mutual funds(1)	$	20,260			$	20,260			$	—			$	—
Money market funds(1)	2,429				—				2,429				—
Total	$	22,689			$	20,260			$	2,429			$	—
As of December 31, 2019
Mutual funds(1)	$	24,927			$	24,927			$	—			$	—
Money market funds(1)	2,192				—				2,192				—
Total	$	27,119			$	24,927			$	2,192			$	—

⁽¹⁾ Included in Investments, employee benefit plans, at fair value and Other current assets on the consolidated balance sheets.

Other financial instruments disclosure

The Company believes that the fair value of its current assets and current liabilities approximate their reported carrying amounts due to the short-term nature of these items. In addition, the interest rates of the Company's senior unsecured revolving credit facility adjust frequently based on current market rates; accordingly its carrying amount approximates fair value.

The Company estimates the fair value of notes receivable, which approximate their carrying value, utilizing an analysis of future cash flows and credit worthiness for similar types of arrangements. Based upon the availability of market data, the notes receivable have been classified as Level 3 inputs. The primary sensitivity in these calculations is based on the selection of appropriate interest and discount rates. For further information on the Notes Receivable, refer to Note 3.

The fair values of the Company's $400 million senior unsecured notes due 2022 and $400 million senior unsecured notes due 2029 are classified as Level 2, as the significant inputs are observable in an active market. At March 31, 2020 and December 31, 2019, the $400 million senior unsecured notes due 2022 had an approximate fair value of $374.8 million and $432.0 million, respectively. At March 31, 2020 and December 31, 2019, the $400 million senior unsecured notes due 2029 had an approximate fair value of $322.6 million and $403.4 million, respectively.

Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. Settlement of such fair value amounts may not be possible and may not be a prudent management decision.

The effective income tax rates were (82.5)% and 17.5% for the three months ended March 31, 2020 and 2019, respectively.

On January 1, 2018, the Company adopted ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other than Inventory ("ASU 2016-16"), which provides guidance on recognition of current income tax consequences for inter-company asset transfers (other than inventory) at the time of transfer. On January 1, 2020, the Company completed a reorganization of its foreign legal entity structure that resulted in a $30.6 million tax benefit. In accordance with ASU 2016-16, the Company recorded the $30.6 million benefit and a corresponding deferred tax asset in the first quarter of 2020. The effective income tax rate for the three months ended March 31, 2020 was further lowered by $2.4 million of excess tax benefits from share-based compensation, partially offset by state income taxes. The effective income tax rate for the three months ended March 31, 2020 would have been 18.1% without the reorganization of its foreign legal entity structure.

The effective income tax rate for the three months ended March 31, 2019 was lower than the U.S. federal income tax rate of 21.0% primarily due to $2.0 million of excess tax benefits from share-based compensation and the impact of foreign operations, partially offset by state income taxes.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act provides opportunities for additional liquidity, loan guarantees, and other government programs to support

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companies affected by the COVID-19 pandemic and their employees. Based on our preliminary analysis of the CARES Act, we do not expect a significant impact to our consolidated financial statements.

The components of the Company’s pretax share-based compensation activity and associated income tax (expense) benefit are as follows for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
(in thousands)	2020				2019
Stock options	$	491			$	591
Restricted stock	1,944				1,976
Performance vested restricted stock units	(5,187		)		1,150
Total	$	(2,752	)		$	3,717
Income tax (expense) benefit	$	(674	)		$	881

Refer to the discussion of Performance Vested Restricted Stock Units (“PVRSUs”) leveraging for unvested grants below.

A summary of stock-based award activity as of March 31, 2020 and changes during the three months ended are presented below:

	Stock Options									Restricted Stock							Performance Vested Restricted Stock Units
	Options			Weighted Average Exercise Price				Weighted Average Remaining Contractual Term		Shares			Weighted Average Grant Date Fair Value				Shares			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2020	873,895			$	61.69					312,097			$	75.23			330,716			$	70.03
Granted	158,620			91.28						112,563			91.28				93,388			91.28
Performance-Based Leveraging(1)	—			—						—			—				30,116			61.31
Exercised/Vested	(22,553	)		54.74						(81,926	)		69.27				(176,471	)		58.68
Expired	—			—									—				(16,117	)		60.50
Forfeited	—			—						(16,761	)		78.99				(8,173	)		78.19
Outstanding at March 31, 2020	1,009,962			$	66.49			2.8 years		325,973			$	82.08			253,459			$	85.00
Options exercisable at March 31, 2020	664,405			$	57.27			2.8 years

⁽¹⁾ PVRSUs outstanding have been increased by 30,116 units due to the Company exceeding the targeted performance conditions contained in PVRSUs granted in prior periods which vested in the three months ending March 31, 2020.

The stock options granted by the Company had an exercise price equal to the market price of the Company's common stock on the date of grant. The fair value of the options granted was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2020 Grants
Risk-free interest rate	0.99		%
Expected volatility	20.88		%
Expected life of stock option	5.9 years
Dividend yield	0.99		%
Requisite service period	4 years
Contractual life	10 years
Weighted average fair value of options granted (per option)	$	17.25

Restricted stock awards generally vest ratably over the service period beginning with the first anniversary of the grant date. Vesting service period of shares granted during the three months ended March 31, 2020 range from 36 to 48 months.

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The Company has granted PVRSUs to certain employees. The vesting of these stock awards is contingent upon the Company achieving performance targets over a 36 to 48 month requisite service period and the employees' continued employment. The performance conditions affect the number of shares that will ultimately vest and can range between 0% and 200% of the shares granted. Management monitors the leveraging of unvested PVRSUs and adjusts the leveraging percentages based on estimated achievement of performance targets. During the three months ended March 31, 2020, the Company reduced the leveraging factor for 227,114 unvested PVRSUs to 0%, based on management's estimate of achievement of performance targets with contemplation to impacts from the COVID-19 pandemic, contained in PVRSUs granted in the current and prior periods.

Share Repurchases and Redemptions

The computation of basic and diluted earnings per common share is as follows:    

	Three Months Ended
	March 31,
(in thousands, except per share amounts)	2020				2019
Computation of Basic Earnings Per Share:
Numerator:
Net income	$	55,463			$	30,081
Income allocated to participating securities	(317		)		(179		)
Net income available to common shareholders	$	55,146			$	29,902
Denominator:
Weighted average common shares outstanding – basic	55,343				55,347
Basic earnings per share	$	1.00			$	0.54
Computation of Diluted Earnings Per Share:
Numerator:
Net income	$	55,463			$	30,081
Income allocated to participating securities	(316		)		(179		)
Net income available to common shareholders	$	55,147			$	29,902
Denominator:
Weighted average common shares outstanding – basic	55,343				55,347
Diluted effect of stock options and PVRSUs	334				310
Weighted average common shares outstanding – diluted	55,677				55,657
Diluted earnings per share	$	0.99			$	0.54

The Company's unvested restricted shares contain rights to receive nonforfeitable dividends, and thus are participating securities requiring the two-class method of computing earnings per share ("EPS"). The calculation of EPS for common stock shown above excludes the income attributable to the unvested restricted share awards from the numerator and excludes the dilutive impact of those awards from the denominator.

At March 31, 2020 and 2019, the Company had 1.0 million and 1.1 million outstanding stock options, respectively. Stock options are included in the diluted EPS calculation using the treasury stock method and average market prices during the period, unless the stock options would be anti-dilutive.

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For the three months ended March 31, 2020, no anti-dilutive stock options were excluded from the diluted EPS calculation. For the three months ended March 31, 2019, 0.2 million anti-dilutive stock options were excluded from the diluted EPS calculation.

PVRSUs are also included in the diluted EPS calculation when the performance conditions have been met at the reporting date. However, at March 31, 2020 and 2019, PVRSUs totaling 253,459 and 324,140, respectively, were excluded from the computation since the performance conditions had not been met.

Hotel Franchising: Hotel Franchising includes the Company's hotel franchising operations consisting of its fourteen brands. The fourteen brands are aggregated within this segment considering their similar economic characteristics, types of customers, distribution channels and regulatory business environments. Revenues from the hotel franchising business include royalty fees, initial franchise and relicensing fees, marketing and reservation system fees, procurement services revenue and other hotel franchising related revenue. The Company is obligated under its hotel franchise agreements to provide marketing and reservation services appropriate for the operation of its systems. These services do not represent separate reportable segments as their operations are directly related to the Company's hotel franchising business. The revenues received from franchisees that are used to pay for part of the Company's ongoing operations are included in hotel franchising revenues and are offset by the related expenses paid for marketing and reservation activities to calculate hotel franchising operating income.

The Company evaluates its hotel franchising segment based primarily on the results of the segment without allocating corporate expenses, income taxes or indirect general and administrative expenses, which are included in the Corporate & Other column. Corporate & Other revenues include owned hotel revenues and rental income related to an office building owned by the Company, as well as revenues related to the Company's vacation rental activities and its SaaS technology solutions divisions which provide cloud-based property management software to non-franchised hoteliers and vacation rental management companies. Equity in earnings or losses from hotel franchising related joint ventures is allocated to the Company's hotel franchising segment. The Company does not allocate interest expense, interest income, other gains and losses or income taxes to its segments.

Intersegment revenue adjustment is from the elimination of Hotel Franchising revenue which include royalty and marketing and reservation system fees charged to our owned hotels against franchise fee expense recognized by our owned hotels in Corporate & Other operating income (loss).

Our President and Chief Executive Officer, who is our chief operating decision maker, does not use assets by operating segment when assessing performance or making operating segment resource allocations and therefore assets by segment are not disclosed below.

The following table presents the financial information for the Company's segments:

	Three Months Ended March 31, 2020
(in thousands)	Hotel Franchising				Corporate & Other				Intersegment Eliminations				Consolidated
Revenues	$	208,047			$	10,905			$	(777	)		$	218,175
Operating income (loss)	$	50,534			$	(4,204	)		$	—			$	46,330
Income (loss) before income taxes	$	48,579			$	(18,180	)		$	—			$	30,399
	Three Months Ended March 31, 2019
(in thousands)	Hotel Franchising				Corporate & Other				Intersegment Eliminations				Consolidated
Revenues	$	214,992			$	3,328			$	—			$	218,320
Operating income (loss)	$	70,457			$	(25,407	)		$	—			$	45,050
Income (loss) before income taxes	$	68,287			$	(31,808	)		$	—			$	36,479

The Company is not a party to any litigation other than litigation in the ordinary course of business. The Company's management and legal counsel do not expect that the ultimate outcome of any of its currently ongoing legal proceedings, individually or collectively, will have a material adverse effect on the Company's financial position, results of operations or cash flows.

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Contingencies

The Company entered into various limited payment guaranties with regards to the Company’s VIEs supporting the VIE’s efforts to develop and own hotels franchised under the Company’s brands. Under these limited payment guaranties, the Company has agreed to guarantee a portion of the outstanding debt until certain conditions are met such as (a) the loan matures, (b) certain debt covenants are achieved, (c) the maximum amount guaranteed by the Company is paid in full or (d) the Company, through its affiliates, ceases to be a member of the VIE. The maximum exposure of principal incidental to these limited payment guaranties is $7.5 million, plus unpaid expenses and accrued unpaid interest. As of March 31, 2020 and December 31, 2019, the Company believed the likelihood of having to perform under the aforementioned limited payment guaranties was remote. In the event of performance, the Company has recourse for two of the transactions in the form of a membership interest pledge as collateral for the guaranty.

Commitments

The Company has the following commitments outstanding at March 31, 2020:

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The Company provides financing in the form of franchise agreement acquisition payments to franchisees for property improvements, hotel development efforts and other purposes. These payments are typically made at commencement of construction or hotel opening, in accordance with agreed upon provisions in individual franchise agreements. At March 31, 2020, the Company had commitments to extend an additional $296.3 million for these purposes provided the conditions of the payment are met by its franchisees.

•	To the extent existing unconsolidated joint ventures proceed to the hotel construction phase, the Company is committed to make capital contributions totaling $9.5 million to support their efforts to construct Cambria hotels.

•	The Company committed to provide financing in the form of mezzanine loans or credit facilities to franchisees for Choice brand development efforts. The Company has committed to provide an aggregate of approximately $34.5 million, upon certain conditions being met. As of March 31, 2020, $23.8 million have been disbursed.

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In March 2018, the Company entered into a construction loan agreement for the rehabilitation and development of a former office building into a hotel through a consolidated joint venture with a commercial lender, which is secured by the building. The construction loan can be drawn up to $34.9 million. On March 5, 2020, the Company paid off the construction loan in the amount $33.1 million inclusive of accrued and unpaid interest and recorded a loss on extinguishment of debt of $0.6 million.

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The Company’s franchise agreements require the payment of franchise fees, which include marketing and reservation system fees. In accordance with terms of our franchise agreements, the Company is obligated to use the marketing and reservation system revenues it collects from the current franchisees comprising its various hotel brands to provide marketing and reservation services appropriate to support the operation of the overall system. To the extent revenues collected exceed expenditures incurred, the Company has a commitment to the franchisee system to make expenditures in future years. Conversely, to the extent expenditures incurred exceed revenues collected, the Company has the contractual enforceable right to assess and collect such amounts.

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The Company has a management fee arrangement for marketing services with a joint venture partner. For the three months ended March 31, 2020 and 2019, fees earned and payroll costs reimbursed under this arrangement totaled $0.4 million and $0.3 million, respectively.

The Company has entered into franchise agreements with certain of the unconsolidated joint ventures discussed in Note 4. Pursuant to these franchise agreements, for the three months ended March 31, 2020 and 2019, the Company recorded royalty and marketing reservation system fees of approximately $4.6 million and $4.6 million, respectively. The Company recorded $1.6 million and $1.4 million as a receivable due from these joint ventures as of March 31, 2020 and December 31, 2019, respectively. In addition, the Company paid commissions of $37 thousand and $50 thousand for the three months ended March 31, 2020 and 2019, respectively, to an on-line travel agent for which the Company is a joint venture member.

 

On April 16, 2020, the Company entered into the Credit Agreement, which provides for a $250 million Term Loan (the "Term Loan") with a scheduled maturity date of April 15, 2021, subject to an optional one-year extension that can be requested by the Company prior to the initial maturity date. The effectiveness of such extension is subject to the consent of the lenders under the Credit Agreement and certain customary conditions.

The Term Loan and all accrued but unpaid interest thereon must be repaid in full on the maturity date.  Upon the occurrence of certain asset sales, debt issuances and equity issuances, subject to the exceptions set forth in the Credit Agreement, the Company is required to make certain mandatory principal prepayments of the Term Loan in an amount equal to 100% of the net cash proceeds of such transactions.

The Credit Agreement provides that the Company may elect to have the Term Loan bear interest at a rate equal to (i) LIBOR (subject to a floor of 1.00%) plus a margin ranging from 200 to 275 basis points or (ii) a base rate plus a margin ranging from 100 to 175 basis points, in each case, with the margin determined according to the Company’s senior unsecured long-term debt rating.

The Credit Agreement requires that the Company and its restricted subsidiaries comply with various covenants, including with respect to restrictions on liens, incurring indebtedness, making investments and effecting mergers and/or asset sales. With respect to dividends and stock repurchases, the Company may not declare or make any payment, subject to certain exceptions set forth in the Credit Agreement, if (i) there is an existing event of default or if the payment would create an event of default or (ii) (x) the Company’s total leverage ratio exceeds 4.0 to 1.0 or (y) liquidity (defined in the Credit Agreement as the Company’s unrestricted cash and cash equivalents plus undrawn amounts under the Company’s existing senior unsecured revolving credit facility) is less than $250 million, in each case, both before or immediately after giving effect to such payment.

The Credit Agreement imposes financial maintenance covenants requiring the Company to maintain a consolidated fixed charge coverage ratio of at least 2.5 to 1.0 and a total leverage ratio of not more than 4.5 to 1.0. If the Company maintains an Investment Grade Rating, as defined in the Credit Agreement, then the Company will not need to comply with the consolidated fixed charge coverage ratio covenant.

The Credit Agreement includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Company under the Credit Agreement to be immediately due and payable.

The proceeds of the Term Loan were utilized to reduce borrowings on the Company’s senior unsecured revolving credit facility.

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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

•	Implemented fee-deferral programs for domestic and international franchisees.

•	Suspended one-time finance charges, reputation management fees and guest relations handling fees through June 30, 2020.

•	Extended capital-intensive brand deadlines and created more flexible brand standard options to assist franchisees.

•	Successfully advocated to expand the amount of and eligibility requirements for government relief SBA programs and other CARES Act benefits to help franchisees retain employees and service their debt.

•	Established a proactive, ongoing multi-channel franchisee outreach and education program that is actively helping thousands of hotel owners access this newly available capital.

•	Revised its guest cancellation policy to provide travelers greater flexibility during these challenging times and deferred the expiration of loyalty points.

•	Implemented travel restrictions and work-from-home practices for the Company’s employees.

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•	Reduced the compensation of the Board of Directors, chief executive officer, and other executive officers for the remainder of 2020.

•	Implemented furloughs of certain domestic and international positions through June 30, 2020, subject to reevaluation by the Company. During the furlough period, impacted employees will continue to be covered under the Company’s healthcare plans in which they currently participate, and the Company will cover each impacted employee’s portion of their healthcare premiums.

•	Terminated approximately 20 employees in connection with the consolidation of its call center operations.

•	Introduced a hiring freeze except with respect to certain critical positions and suspended associates’ 401(k) match.

•	Eliminated, reduced or deferred non-essential expenditures, discretionary capital expenditures and investments. We are actively working with vendors to achieve relief on fees or timing of fee payment.

•	Temporarily suspended activity under the Company’s share repurchase program.

•	Determined to suspend future, undeclared dividends for at least the remainder of 2020.

•	Entered into the Term Loan on a precautionary basis, enhancing the Company’s financial flexibility by increasing its borrowing capacity by $250 million.

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ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4.	CONTROLS AND PROCEDURES

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ITEM 1.	LEGAL PROCEEDINGS

ITEM 1A.	RISK FACTORS

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Risks Related to the Travelling Public: During the pandemic, the occupancy at our franchised hotels that remain open has been significantly and materially adversely impacted, and we expect that our hotels will continue to experience difficulties attracting guests, especially leisure travelers in the United States, which comprises the majority of our historical guest base, until the government-imposed travel restrictions implemented in response to the COVID-19 pandemic are loosened or eliminated. Even when travel restrictions are loosened or eliminated, we expect that certain of our hotels will continue to struggle to attract guests if commercial airline service is not readily accessible, if closures of attractions that promote leisure travel continue, or if there is a prevailing unwillingness of guests to travel and stay in hotels due to actual or perceived risks of contracting COVID-19. We cannot predict whether the COVID-19 pandemic will result in temporary or permanent changes to the travel preferences, expectations and behavior of hotel guests; however, if these changes result in reduction in travel or a decreased willingness of the travelling public to stay in hotels, these changes could have a significant negative impact on our franchised hotels and our business. In addition, the recent significant increase in unemployment in the United States and other regions due to the adoption of social distancing and other policies to slow the spread of COVID-19 is likely to have a sustained

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•

Risks Related to the Health of our Franchised Hotel Operations: With the global spread of COVID-19, our franchise system has experienced material decreases in demand, occupancy and system-wide RevPAR, accompanied by forced or voluntary hotel closures and disruptions. The effects of the pandemic have materially adversely affected, and we expect will continue to materially adversely affect, the revenues and profitability of our franchised properties and, in turn, the amount of royalty and other fees (which are primarily based on hotel revenue) that we are able to generate and collect from our franchisees. Financing difficulties and significant declines in revenues for our franchised hotels make it more likely that our franchisees could declare bankruptcy or face other difficulties with their lenders. While governments have and may continue to implement various stimulus and relief programs, it is uncertain whether and to what extent our franchisees will be eligible for or willing to participate in such programs, whether conditions or restrictions imposed under such programs will be acceptable to our franchisees, or whether such programs will have sufficient funds available to permit participation by our eligible franchisees. With the goal of reducing the near-term payment obligations of our franchisees, we have implemented fee deferral and fee relief programs for and agreed to similar arrangements with our franchisees. However, we cannot be certain whether the availability of government stimulus and relief programs or our fee deferral and similar relief programs and arrangements will be effective in avoiding or significantly mitigating the financial impacts on our franchisees of the COVID-19 pandemic. Even if franchisees do not declare bankruptcy, they may be unable or unwilling to pay us amounts that we are entitled to, without reductions or other concessions (or, in the case of our franchisees who are already participating in fee deferral and relief programs and arrangements, further reductions or other concessions), on a timely basis or at all, which would adversely affect our revenues and liquidity. Even after the COVID-19 pandemic subsides, our franchisees could experience a significant increase in their operating costs, including the need to invest in new equipment, technology, amenities, products, and services in order to satisfy newly issued heath, hygiene, and safety regulations and requirements or to conform to evolving guest expectations. If franchisees are unable to make these investments, their ability to continue operations or generate revenue may be adversely impacted, which would in turn have an adverse effect on our revenue and cash flow.

•

Risks Related to Our Operations and Employee Matters: In response to the uncertainty created by the global spread of COVID-19, we have taken and expect to continue to take corporate-level actions designed to manage operating expenses and enhance our future financial flexibility. These actions include implementation of furlough and layoffs for certain employees in the United States and Europe. As a result of these actions, we may be subject to increased risks related to employment matters, including increased litigation and claims for severance or other benefits. Additionally, because we have placed associates on temporary furlough and our remaining team members are currently required to work from home, COVID-19 could negatively affect our ability to ensure compliance with various regulatory regimes applicable to our business, including internal controls over financial reporting. The severity of the impact from this risk would increase if the availability and continuing service of executives and other key team members or their families become ill from COVID-19, rendering the impacted executive or other employee unable to perform their duties. In addition, some actions we have taken, or that we may take in the future, to reduce costs for us or our franchisees may negatively impact franchisee satisfaction or guest loyalty, and our reputation and market share may suffer as a result.

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Risks Related to Financial Condition and Indebtedness: On April 16, 2020, we entered into a $250 million term loan to enhance our cash position in response to the COVID-19 pandemic. As we manage through the effects of the pandemic, our level of indebtedness may increase substantially. A default under our revolving credit facility or term loan may enable the lenders to terminate their commitments thereunder and could trigger a cross-default, acceleration or other consequences under our other indebtedness or financial instruments. There is no guarantee that debt financings will be available in the future to fund our obligations or will be available on terms consistent with our expectations. The impact of the COVID-19 pandemic on the financial markets could adversely affect our ability or willingness to raise funds through equity financing. Changes in the credit ratings of our debt, including our revolving credit facility and outstanding notes, could have an adverse impact on our interest expense, and also negatively impact our access to capital and the cost of debt financing.

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Risks Related to Growth: Our plans for growth could be negatively impacted by the COVID-19 pandemic. The commitments of franchisees with whom we have signed agreements for hotels that are no yet open are subject to numerous conditions, and the eventual development and opening of our pipeline of new hotels is subject to numerous risks, including the ability of a franchisee to obtain adequate financing for development or renovation. As a result, some portion of our current development pipeline may not be completed and developed into new hotels, and those hotels may not open when anticipated, which will impact our net unit and rooms growth. Further, our development pipeline may not grow at the same rate as in the past, and properties in our existing system-wide inventory may be reduced as a result of the COVID-19 pandemic, which would further negatively impact our net unit and rooms growth.

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Risks Related to Capital Market Volatility: The global stock markets have experienced, and may continue to experience, significant volatility as a result of the COVID-19 pandemic, and the price of our common stock has been volatile and has decreased meaningfully in recent months. The COVID-19 pandemic and the significant uncertainties it has caused for the global economy, business activity and business confidence have had, and is likely to continue to have, a significant effect on the market price of securities generally, including our securities, and may adversely impact our ability to access capital markets and debt capital.

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

ITEM 4.	MINE SAFETY DISCLOSURES

ITEM 5.	OTHER INFORMATION

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ITEM 6.	EXHIBITS

(a)	Incorporated by reference to the identical document filed as an exhibit to Choice Hotels International, Inc.'s Registration Statement on Form S-4, filed August 31, 1998 (Reg. No. 333-62543).

(b)	Incorporated by reference to the identical document filed as an exhibit to Choice Hotels International, Inc.'s Current Report on Form 8-K filed May 1, 2013.

(c)	Incorporated by reference to the identical document filed as an exhibit to Choice Hotels International, Inc.'s Current Report on Form 8-K filed February 16, 2010.

(d)	Incorporated by reference to the identical document filed as an exhibit to Choice Hotels International, Inc.'s Current Report on Form 8-K filed April 29, 2015.

(e)	Incorporated by reference to the identical document filed as an exhibit to Choice Hotels International, Inc.'s Current Report on Form 8-K filed on January 13, 2016.

(f)	Incorporated by reference to the identical document filed as an exhibit to Choice Hotels International, Inc.'s Current Report on Form 8-K filed on February 21, 2020.

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