A tax-free spinoff to shareholders expected to be completed in the fall of 1997 will separate the Company's franchising and real estate operations, creating two separate publicly traded companies.

After the spinoff, the franchising company will retain the name Choice Hotels lnternational. It will focus exclusively on franchising and intends to pursue potential acquisition opportunities both inside and outside of the lodging industry.

A critical criterion for any acquisition opportunity is that it be a "good fit" with Choice, either by complementing the Company's existing businesses or by leveraging its core competencies in franchising.

The new real estate company will be named Sunburst Hospitality Corporation. Following the spinoff, it will pursue a four-part strategy:

  1. Optimize the operating performance and value of its existing portfolio through the consistent application of high-quality sales, marketing and operating programs;
  2. Capitalize on the underserved, high-growth, mid-priced, extended-stay all-suite segment with the development of MainStay Suites hotels;
  3. Develop other high-quality, consumer-focused products such as the Sleep Inn brand;
  4. Pursue the opportunistic acquisition of existing hotels where substantial value can be created.

Through a strategic alliance, Sunburst also will continue to help Choice create and test new products and success systems for the benefit of its franchisees.

   A Cinderella Story

The Company's real estate business truly is a Cinderella story.

It began in 1992 with just 12 hotels and $39.8 million in revenue and, by capitalizing on the soft real estate market, grew to 71 hotels in the United States with 10,330 rooms that generated $168 million in revenue this year.

The majority of the hotels were acquired by the Company since 1992 at prices below their replacement cost. All have benefitted from the Company's investment of capital that has been used to substantially renovate and upgrade the properties.

Since 1993, real estate division revenues have grown at a compound annual rate of 43.4 percent. At the same time, gross margins improved from 27.6 percent in 1993 to 36.5 percent four years later.

The division this year constructed and opened four Sleep Inn hotels in North Carolina and Texas as well as Choice's first MainStay Suites hotel in Plano, Texas. In addition, the division acquired two hotels with a total of 324 rooms in Florida and North Carolina.

The division this year improved the RevPAR performance of its portfolio by 9.9 percent to an average $40.96 based on an average daily rate of $59.62.

All of the division's hotels are part of the Choice brand family. They operate in one of the three principal segments of the lodging industry: all-suite, full service and limited service.


  A Year of Firsts     Financial Highlights     Letter to Our Stockholders     Focusing on the Franchisees     Optimizing the Brand Portfolio     Increasing Market Penetration     Improving Margins     Growing Overseas Operations     Leveraging the Spinoff of Franchise Operations