Choice Hotels International, Inc. Q2 FY2025 earnings call

• Strategic investments drove adjusted EBITDA to $165 million and adjusted earnings per share 4% higher year-over-year. - International business had 10% growth in adjusted EBITDA and 5% expansion in rooms portfolio, with 15% increase in hotel openings. - Acquired remaining 50% interest in Choice Hotels Canada, transitioning to direct franchising model. - Extended master franchise agreement in South America, entered new European market in Poland, and signed master franchising agreement in China. - Domestic extended stay segment grew domestic room system size by 10% year-over-year, midscale segment's Comfort brand saw growth, and upscale portfolio expanded with 38% increase in domestic franchise agreements. - Guest satisfaction improved, rewards program expanded to 72 million members and was named top hotel rewards program. - Investments in franchisee-facing technology and guest experience initiatives.

In the second quarter, Choice Hotels International achieved an adjusted EBITDA of $165 million. There was a more than 2% year-over-year net increase in global rooms, including a 3% net increase in more revenue intense rooms. The international business drove 10% growth in adjusted EBITDA and expanded its rooms portfolio by 5% year-over-year, with a 15% increase in hotel openings. Domestically, the extended stay segment has expanded by over 20% in 5 years to nearly 54,000 rooms, with its pipeline constituting half of the total domestic rooms pipeline. The upscale segment saw a 15% year-over-year increase in global room system size to over 110,000 rooms.

• Full year 2025 adjusted EBITDA outlook range $615 million to $635 million. - Domestic RevPAR expected to be in range of minus 3% to flat. - Full year adjusted SG&A expected to grow at low-single-digit rate from 2024 base of $276 million. - Choice Hotels Canada's operations expected to generate approximately $18 million in EBITDA in U.S. dollars in 2025.

• Macroeconomic uncertainty impacting RevPAR. - International inbound and government travel affecting RevPAR. - Loan to a property defaulted, though mostly related to launching new brands and being worked through.

Q: So Pat, maybe if we look at your international expansion, just from a strategy perspective, this quarter, you're going direct in Canada, but in other regions like South America and China, they are master franchising. So how do you decide direct versus master franchise in any given market? And should we expect one over the other over time? And then maybe can you just remind us of the difference in economics between the two?

A: Yes. Sure, Dany. So effectively, the -- if you look at where we are in our international growth strategy, a lot of this goes back to the acquisition we did of Radisson. So we bought that brand at the end of 2022, effectively back half. 2023 was really a focus on the cost synergies, 2024 opened up a number of revenue synergy opportunities. And now in 2025, we're really leveraging that platform plus our existing business to expand internationally. The way we think about direct versus master franchise is really what are the fundamentals in each of those countries. And in markets where small business owners can aggregate capital and there's the correct regulatory environment, those are generally the 2 things that we look for where direct franchising makes sense. I would add to that the ability for owners to actually acquire the land. And so in certain markets, where we are doing direct franchising. So Canada now, Mexico, Australia, New Zealand, Europe, a good part of South America. All of those factors are present there. And if you look at our mix today, post acquisition of Canada. We're now more direct franchising than master franchising across the international portfolio. So those are the things that we look for. And as we said in our remarks, the Canadian opportunity, we've been in that market since 1955, built a great business there. Of the 70-year history, we had a 30-year great partnership with our JV partner. But since we acquired 9 additional brands from Radisson, we also have our Cambria brand and our extended stay brands, bringing all of those to be supported by our existing Canadian team just makes a ton of sense, both from an opportunity perspective, but also cost avoidance of going into market in both in the prior world, we were doing both direct franchising for those other brands and the MFA. So it really is a great opportunity for us to consolidate the operation there, leverage the talent of our team headquartered out of Toronto and really grow our business there.

Q: Two more follow-ups on Canada. I mean, firstly, can you just help us understand the growth outlook there over the coming years. I know, Pat, you mentioned sort of the demographic drivers, but maybe more specifically, how quickly can you open new hotels or convert hotels? And then can you quantify some of the revenue and cost synergies that you referenced maybe on a stabilized basis 2 to 3 years out?

A: Yes, Michael, I think the dynamics around development and hotel openings and the speed with which to do it in Canada looks very similar to what we have here in the U.S., the dynamics around conversion versus new construction, very similar. So if you look at an extended stay opportunity up there, given WoodSpring and Everhome, those are more new construction brands. So those will take some time, whereas Suburban and Mainstay are more conversion brands. So those could be showing up sooner. I think when we look at the health of that market, the reason we disclosed just some of the growth trajectories there, 5% healthy growth is really positive. So the other thing is the quality of the product in Canada. The RevPAR there of that system is pretty significant. So it's a good quality product and the franchisees up there, we already have an existing base of 200 who are interested in doing more brands with us. So really having that support team up there, supporting all of the brands, I think, is going to be a really exciting growth opportunity for us. I think as we get further into the ownership structure and some more details and maybe in the future, we can provide more unit growth expectations for that market. But we're pretty excited by the interest in our brands up there. And as I said, the long history we have with existing franchisees.