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Acquisitions | 9 Months Ended
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Sep. 30, 2022
Business Combination and Asset Acquisition [Abstract] |
Acquisitions | Acquisitions April 2022 Asset Acquisition In April 2022, the Company reached a settlement with a borrower holding a senior and mezzanine loan classified as collateral-dependent, collateralized by an operating hotel. As a collateral-dependent financial asset, the expected credit losses as of March 31, 2022 were determined based on the fair value of the operating hotel. As of March 31, 2022, the Notes receivable, net of allowance for credit losses, balance was $20.4 million. The key terms of the settlement resulted in a deed in lieu of foreclosure on the operating hotel in exchange for releasing obligations pursuant to the senior and mezzanine loans and the associated franchise agreement. The property was exchanged in full settlement of the senior and mezzanine loans and recorded at the fair value of $20.4 million as of the acquisition date of April 14, 2022. The fair value was estimated using an income approach valuation method based on discounted cash flows of the collateralized operating hotel utilizing historical operating performance, industry projections for the market, and comparable sales capitalization rates. In accordance with the provisions of ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"), the purchase represents an asset acquisition based on the concentration of value in the acquired land and building. The $20.4 million was re-characterized from Notes receivable, net of allowance for credit losses, and attributed to each asset class based on a relative fair value allocation to qualifying assets, resulting in $3.3 million to land, $16.6 million to building and improvements, $1.3 million to furniture, fixtures, and equipment, and $(0.8) million to net liabilities assumed. August 2022 Radisson Hotels Americas Acquisition On August 11, 2022, the Company completed the acquisition of Radisson Hotels Americas. The accounting purchase price for the Transaction was $673.9 million, which includes the base purchase price of $675.2 million, adjusted for Disclosed Leakage (as defined in the Share Sale and Purchase Agreement) and certain other prepaid expenses. To fund the Transaction, Choice drew $175.0 million on the Company's existing $600.0 million unsecured credit facility (the "Revolver"), and funded the remainder with cash on hand. Additionally, in connection with the acquisition, we recorded $24.9 million and $29.0 million of transaction, transition, and severance expense, included within Selling, general and administrative, during the three and nine months ended September 30, 2022, respectively. Preliminary Fair Values of Assets Acquired and Liabilities Assumed The Company allocated the purchase price based upon a preliminary assessment of the fair value of the assets acquired and liabilities assumed as of August 11, 2022. These preliminary fair values are based on management’s estimates and assumptions, using the best information available at the time of this filing. The final valuation and related allocation of the purchase price will be completed no later than 12 months after the closing date. The final acquisition accounting adjustments may b e materially different and may include (1) changes in fair value of property and equipment and associated salvage values, (2) changes in allocations to intangible assets, such trade names, acquired franchise and management agreements, above and below market leases, as well as goodwill; and (3) other changes to assets and liabilities, such as working capital. The preliminary allocation of the purchase price, as presented in our Consolidated Balance Sheet:
Assets acquired | Amount
Cash and cash equivalents | $ | 113,023 |
Restricted cash | 10,403 |
Accounts receivable | 32,972 |
Notes receivables - current | 1,709 |
Prepaid expenses and other current assets | 8,139 |
Property and equipment | 125,441 |
Operating lease right-of-use of assets | 42,315 |
Intangible assets | 447,400 |
Notes receivable - noncurrent | 2,592 |
Investment in affiliates | 471 |
Other assets | 2,129 |
Total assets acquired | $ | 786,594 |
Liabilities assumed |
Accounts payable | 8,295 |
Accrued expenses and other current liabilities | 15,987 |
Deferred revenue - current(1) | 5,745 |
Liability for guest loyalty program - current(1) | 3,542 |
Long-term debt | 55,975 |
Long-term deferred revenue(1) | 26,499 |
Deferred compensation and retirement plan obligations | 9,265 |
Operating lease liabilities | 42,705 |
Liability for guest loyalty program - noncurrent(1) | 10,180 |
Other liabilities | 3,052 |
Total liabilities assumed | $ | 181,245 |
Fair value of net assets acquired | $ | 605,349 |
Goodwill | 68,507 |
Total purchase consideration | $ | 673,856 |
(1) The Deferred revenue (including deferred affiliation fees) and Liability for guest loyalty program balances were assumed at their carrying value at the date of the acquisition pursuant to the application of ASU 2021-08 (see Note 1). Property and Equipment The following table presents the preliminary estimates of fair value of the acquired property and equipment, which is primarily concentrated at three acquired hotel properties, and their estimated weighted average remaining useful lives.
| Estimated Useful Life | Estimated Fair Value
| (in years) | (in thousands)
Land | N/A | $ | 7,159 |
Construction in progress | N/A | 3,190 |
Building and leasehold improvements | 24.4 | 93,934 |
Site improvements | 23.1 | 586 |
Furniture, fixtures and equipment | 3.9 | 8,334 |
Computer equipment and software | 2.0 | 12,238 |
Total |  | $ | 125,441 |
We provisionally estimated the value of the property and equipment through a combination of income, cost and market approaches, which are primarily based on significant Level 2 and Level 3 assumptions, such as estimates of future income growth, discount rates, capitalization rates and capital expenditure needs of the hotels. We are continuing to assess the marketplace assumptions and property conditions, which could result in changes to these provisional values. Identified Intangible Assets The following table presents our preliminary estimates of the fair value of the acquired identified intangible assets and their estimated useful lives:
| Estimated Useful Life | Estimated Fair Value
| (in years) | (in thousands)
Trade names | N/A | $ | 223,700 |
Franchise agreements | 15.5 | 220,400 |
Management agreements | 15.5 | 3,300 |
Total |  | $ | 447,400 |
The fair value of the trade names was provisionally estimated using the relief-from-royalty method. This method applies an estimated royalty rate to forecasted future cash flows, discounted to present value. The fair value of the franchise and management agreements was preliminarily estimated using a multi-period excess earnings method, a variation of the income approach. This method uses the present value of incremental after-tax cash flows attributable to the intangible asset to estimate fair value. These valuation methodologies utilize Level 3 assumptions, and we are continuing to assess the assumptions used in estimating these values as well as the respective useful lives, which could result in changes to these provisional values. Debt Assumed As part of the Transaction, we assumed a mortgage of $56.0 million related to an acquired hotel property. Subsequent to the acquisition closing date, this amount was repaid in full using cash we acquired. Related to the mortgage, we acquired $10.4 million in restricted cash, for which restrictions were lifted upon repayment. Operating Leases The Company measured operating lease liabilities assumed at the present value of remaining payments as of the acquisition date, discounted using Choice's applicable incremental borrowing rate, in accordance with Leases (Topic 842). The corresponding right-of-use assets acquired were measured at the value of the lease liabilities, further adjusted for favorable or unfavorable lease terms as compared to market terms. We are continuing to assess market assumptions, which could change our preliminary estimate. Income Taxes Pursuant to the terms of the Transaction, the parties agree to jointly make a valid, timely election under Section 338(h)(10) of the U.S. Internal Revenue Code and under any similar provisions of state or local law with respect to the purchase of the shares of Radisson Hotels Americas. Under this election, the parties agreed to treat the Transaction for federal income tax purposes as if it had been structured as an asset sale and purchase. As a result of this election, the tax basis of the assets acquired and liabilities assumed by Choice were reset to fair value at the time of the acquisition, which results in the elimination of previously established deferred income tax balances and the establishment of new balances that reflect the new tax basis, including tax deductible goodwill. Because the accounting for the Transaction is ongoing, the resulting deferred tax balances are still being finalized. Pro Forma Results of Operations The following unaudited pro forma information presents the combined results of operations of Choice and Radisson Hotels Americas as if we had completed the Transaction on January 1, 2021, but using our preliminary fair values of assets acquired and liabilities assumed as of the acquisition date. The unaudited pro forma information reflects adjustments relating to (i) the allocation of purchase price and related adjustments, including incremental depreciation and amortization expense based on the preliminary fair values of the property and equipment assets and intangible assets acquired; (ii) the incremental impact of the Revolver draw on interest expense and amortization of financing costs; (iii) nonrecurring transaction costs; and (iv) income tax impact of the aforementioned pro forma adjustments. As required by GAAP, these unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the transaction had occurred at the beginning of the period presented, nor are they indicative of future results of operations.
| Nine Months Ended
| September 30,
(in thousands) | 2022 |  | 2021
Revenues | $ | 1,189,792 |  |  | $ | 928,669 |
Net income | 304,770 |  |  | 173,822 |
Radisson Hotels Americas Results of Operations The results of Radisson Hotels Americas have been consolidated with the Company since August 11, 2022 and are included in the Company’s Consolidated Statement of Income for the nine months ended September 30, 2022. The following table presents these results of the 51 days from the closing date through September 30, 2022.
(in thousands) | August 11, 2022 - September 30, 2022
Revenues | $ | 40,203 |
Net income (loss) | (1,380) |
Goodwill The excess value recorded in goodwill is primarily attributable to value we expect to realize from the existing customer base, improvements in RevPAR, cost synergies and new agreements signed with new franchisees and developers. Goodwill for the Transaction is fully attributable to the Hotel Franchising reportable segment and is fully deductible for tax purposes. The following table details the carrying amount of the Company's goodwill, including goodwill arising from the acquisition of Radisson Hotels Americas, as of September 30, 2022.
(in thousands) | September 30, 2022
Goodwill, excluding goodwill arising from Radisson Hotels Americas acquisition | $ | 166,774 |
Accumulated impairment losses | (7,578) |
Goodwill arising from Radisson Hotels Americas acquisition | 68,507 |
Goodwill, net carrying amount | $ | 227,703 |

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI https://asc.fasb.org/topic&trid=2303972 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 5 -Subparagraph (b) -URI https://asc.fasb.org/extlink&oid=128092470&loc=d3e4946-128472 + Details
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