CHOICE HOTELS INTERNATIONAL INC /DE Q4 FY2024 earnings call

• Choice Hotels exceeded guidance in 2024 with 12% YOY adjusted EBITDA growth and 13% YOY adjusted earnings per share growth. - Realized a 3.3% YOY net increase in global rooms, including 4.3% net increase in revenue-intense domestic rooms, and opened 21% more hotels worldwide in 2024. - 98% of rooms in global pipeline are in more revenue-intensive brands. - Relaunched four brands, expanded partnerships, increased international footprint, achieved record organic growth in rewards program, and completed Radisson Americas acquisition. - In Q4, outperformed industry by 90 basis points in domestic RevPAR, RevPAR increased 4.5% YOY, business travel and group travel showed positive trends. - Invested in franchisee-facing technology, relaunched website and mobile apps, and deployed a mobile-friendly one-stop platform for franchisees. - 2025 investments focus on improving franchisees' profitability, developing tools for small and medium-sized business customers, and strengthening rewards program.

In 2024, Choice Hotels saw strong results. Domestically, there was a 4.3% year-over-year net increase in revenue-intense domestic rooms. In the fourth quarter, domestic RevPAR outperformed the industry by 90 basis points, with RevPAR increasing 4.5% year-over-year. Business transient segment grew 14% year-over-year in Q4. Internationally, adjusted EBITDA increased 50% in Q4, rooms portfolio expanded 4.4% year-over-year, with a 58% increase in hotel openings and a 14% increase in new construction rooms pipeline. The extended stay segment added over 4,500 rooms in 2024, with domestic system size growing 10% year-over-year for six consecutive quarters. The upscale segment had a 12% increase in global openings and an 8% increase in domestic franchise agreements awarded in Q4. The midscale segment saw global rooms portfolio expand to approximately 422,000 rooms, with a 51% increase in global hotel openings and a 10% increase in domestic midscale franchise agreements.

• Expect adjusted EBITDA in 2025 to be in the range of $625 million to $640 million. - Anticipate full year 2025 adjusted diluted earnings per share to range between $6.98 and $7.24 per share. - Expect net global unit and room system size to grow approximately 1% year-over-year. - Project domestic RevPAR to range between 1% to 2% year-over-year. - Anticipate full year 2025 effective royalty rate to grow in the mid-single digits year-over-year. - Expect adjusted SG&A to grow in the low to mid-single digits from 2024 base of $276 million.

Q: Hoping to spend more time on other revenues from franchised and managed properties, unpacking line items backward-looking and forward-looking.

A: Scott Oaksmith referred to investor presentation for reconciliation. In Q4, about $161 million of reimbursable revenues and just under $40 million in non-reimbursables, non-reimbursable grew ~16% YOY. Full year non-reimbursable line items added ~$63 million of EBITDA, reimbursable side had a $18 million deficit favorable to guidance.

Q: Are we able to quantify the benefit to Q4 from hurricane in 4.5% RevPAR?

A: Scott Oaksmith said hurricane contributed an estimated 125 basis points lift in Q4, translating to roughly 30 basis points for full year.

Q: How should we think about investment spending levels in 2025 compared to '24?

A: Pat Pacious said investments focus on value prop, driving top-line revenue, reducing costs, and making it easier for franchisees to do business, with key investments around dynamic pricing capabilities.

Q: Question on net unit growth, what are assumptions for U.S. and international growth?

A: Pat Pacious said expecting international rooms to grow slightly above 3% and domestic slightly positive, overall global room growth around 1% with revenue-intense units similar to 2024.

Q: How many Blue-green rooms in Ascend collection and about Westgate deal fees?

A: Scott Oaksmith said roughly 3000 Blue-green rooms in Ascend collection, Westgate is a distribution agreement with higher fees for reservations delivered, blended rate south of royalty rate.

Q: Clarify economics from Westgate deal, equivalent of franchise fee?

A: Scott Oaksmith said hard to do direct correlation, higher than average royalty fees based on reservations delivered.

Q: Guidance for '25 full year effective royalty rate, include impact of higher contractually rates?

A: Scott Oaksmith said effective rate includes all franchise agreements, growth not muted by Westgate partnership.

Q: Pushback from owners on franchise fees competing with others?

A: Pat Pacious said no pushback, effective royalty rate reflects value proposition and voluntary retention rate at 97%-98%.

Q: Anticipate recyclable capital source or use in 2025?

A: Scott Oaksmith said net outlays around $115 million to $120 million in 2025, peaking investments in next year or two, then starting net recycler position.

Q: EBITDA contribution from owned assets?

A: Pat Pacious said owned hotels had $113 million of revenue in 2024, generating ~$30 million EBITDA.

Q: Why guide mid-single digits EBITDA growth vs previous high single digits?

A: Pat Pacious said due to muted new construction in industry, interest rates, but positive signs in business and group travel.

Q: Impact from immigration deportations on franchisees?

A: Pat Pacious said not a topic brought up in meetings with franchisees.

Q: Clarify marketing fund and EBITDA adjustment?

A: Scott Oaksmith said reconciliation in investor presentation, historical line item with $18 million deficit, pushing some into 2025.

Q: Bridge of OCF growth vs EBITDA since 2019?

A: Scott Oaksmith said key money increase with openings, free cash flow conversion ratio around mid-60s, key money use due to construction costs and interest rates.

Q: New owned hotel openings formats and management strategy?

A: Pat Pacious said management not looking to grow, owned hotels have 12 assets, expect to open two additional Everhomes and two additional Cambrias in 2025.

Q: Change in quarter seasonality with more business travel?

A: Pat Pacious said over time business travel mix may shift, but no major modeling changes expected.

Q: Retention rates in 2024 and going forward?

A: Pat Pacious said voluntary retention rate around 97%-98%, expected to increase further with growth in upscale and extended stay segments.