CHOICE HOTELS INTERNATIONAL INC /DE Q3 FY2026 earnings call

• Strategic Priorities: CEO Dom Dragisich outlined three core priorities: (1) Accelerate U.S. net rooms growth to establish a sustainable trajectory; (2) Strengthen franchisee economics by improving commercial competitiveness, capturing demand, lowering costs, and operating effectively; (3) Return to a capital-efficient, asset-light model to generate stronger long-term free cash flow.
• Net Rooms Growth: U.S. Net Rooms were flat year-over-year in Q3 but are expected to accelerate to approximately 1% YoY in Q4. Global Net Rooms grew 1.7%. U.S. room openings increased 17% year-to-date, with conversions representing roughly 90% of 2026 U.S. openings. Approximately two-thirds of exiting rooms came from bottom-quartile guest satisfaction hotels, which generated 25% less royalty revenue per hotel.
• RevPAR Performance: U.S. RevPAR increased 3.8% YoY, driven primarily by higher occupancy (up 160 bps) and accelerating rate growth. International RevPAR increased 3.7% on a currency-neutral basis. Relative RevPAR performance improved sequentially, narrowing the gap with industry averages.
• Commercial Initiatives: Investments in commercial tools are yielding results. Choice Privileges membership grew 7% to 78 million, with new members generating 12% more revenue per member. The AI-enabled EasyBid platform improved RFP win rates by 210 bps, supporting 27% YoY growth in group revenue. Visits from large language models to choicehotels.com increased tenfold YoY.
• Cost Reductions: Reputation management fees were reduced by approximately 30% via an AI-enabled smart response tool. Targeted fee incentives were introduced for high-performing hotels. Distribution economics are being improved to lower costs for franchisees.
• Capital Allocation & Asset-Light Shift: Historical development programs are winding down. Net capital outlays for hotel development declined 56% YoY year-to-date. Two owned hotels were sold post-quarter-end for ~$34 million, retaining franchise agreements. The company aims to generate more proceeds from asset sales than it invests in development by 2027.
• Harvest Host Acquisition: Completed acquisition of Harvest Host for ~$130 million. It is an asset-light subscription platform with ~300,000 subscribers. It will be consolidated starting Q4 and is expected to support growth without significant incremental capital investment.

Choice Hotels operates as an asset-light franchisor. The transcript does not provide a granular financial breakdown by specific product segment (e.g., Extended Stay vs. Transient) in terms of absolute revenue contribution percentages for each brand. However, it highlights that Extended Stay represents more than 40% of the U.S. pipeline and has delivered 13 consecutive quarters of double-digit rooms growth. Revenue growth was driven by higher U.S. royalties (due to RevPAR and rate expansion), franchisee programs/services, and international revenues. Partnership services and fees decreased 2% to $28.3 million. Adjusted SG&A increased approximately 5% year-over-year.

• Full-Year 2026 Adjusted EBITDA: Raised to $641 million - $651 million (midpoint raised by $3.5 million). This reflects stronger global RevPAR expectations and higher U.S. royalty rate expansion, partially offset by higher adjusted SG&A.
• Full-Year 2026 Adjusted Diluted EPS: Narrowed range to $6.92 - $7.07. Reflects higher expected Adjusted EBITDA offset by higher interest expense and lower equity in earnings of affiliates.
• U.S. RevPAR Growth: Raised outlook to 1.5% - 2.5% for full-year 2026. Expectation is that Q4 U.S. RevPAR growth will be higher than Q3.
• Global RevPAR Growth: Raised outlook to 1.5% - 2.5% for full-year 2026.
• U.S. Royalty Rate Expansion: Now expects approximately 9 basis points of expansion for the full year.
• U.S. Net Rooms Growth: Expects approximately 1% growth by year-end, supported by improving retention and strong Q4 conversion openings.
• Global Net Rooms Growth: Continues to expect approximately 1.5% growth for the full year.
• Adjusted SG&A (Excluding Harvest Host): Now expects approximately 9% YoY increase (prior expectation was mid-single-digit). Growth is expected to moderate to low-to-mid single digits in 2027.
• Share Repurchases: Expects approximately $200 million in share repurchases for the full year.

• Operating Expenses: Higher in-year operating expenses have limited the full-year benefit flowing through to earnings. Adjusted SG&A is expected to grow significantly in 2026 due to strategic initiatives and AI investments.
• Capital Recycling Execution: The transition to an asset-light model relies on successful dispositions. Timing and economics vary based on property performance and market conditions. There is risk if dispositions do not proceed as planned or at expected multiples.
• Lease Exposure Termination: A one-time charge of approximately $24 million was incurred due to the termination of an agreement involving a European hospitality business, highlighting risks associated with legacy deals that drift away from the asset-light strategy.
• Marketing and Reservation System Deficit: Elevated investment in franchisee-facing capabilities resulted in a net deficit of approximately $135 million for the year. While expected to narrow in 2027, there is near-term pressure on cash flow.
• Conversion Dependency: Heavy reliance on conversions (90% of openings) makes the company sensitive to the conversion pipeline health and the ability to maintain attractive terms for owners amidst industry-wide key money trends.

Q: Lizzie Dove (Goldman Sachs) asked about confidence in the implied Q4 acceleration in U.S. rooms growth and the sustainability of the conversion-led model. / A: CEO Dom Dragisich expressed high confidence, citing three consecutive quarters of improvement in net rooms growth components: openings up 17% YTD, exits down 44%, and development agreements up 36%. He noted that historically one-third of annual openings occur in Q4, and with 90% of this year's openings being conversions, the pipeline provides good visibility. He emphasized that the conversion-led model is a durable differentiator with shorter timelines and lower upfront costs, positioning the company for sustainable momentum into 2027.

Q: Lizzie Dove followed up on the phasing and timeline for improvements in relative RevPAR performance versus the industry. / A: Dragisich stated they are in the early innings of commercial investments, including a $60M+ spend last year into this year. He highlighted that the gap with STR is narrowing quarter-over-quarter, driven by an occupancy-led recovery. He identified the 'RAISE' rate management tool as a potential game-changer for rate performance, with benefits expected to ramp through 2027. He believes the setup is strong for significant performance improvements next year.

Q: David Katz (Jefferies) asked for qualitative insight into the inventory available for sale from the owned portfolio and the progress of capital recycling. / A: CFO Scott Oaksmith detailed that after selling two hotels, the company has 17 owned assets remaining, valued at approximately $330 million. The focus is on selling nine mature Cambria hotels first, with Everhome properties to be disposed of once they mature. He confirmed that the company aims to generate more proceeds from asset sales than it invests in development by 2027, reinforcing the shift to an asset-light model.

Q: Michael Bellisario (Baird) inquired about the use of real estate sale proceeds for M&A, specifically regarding the Harvest Host acquisition and appetite for larger deals. / A: Dom Dragisich described Harvest Host as opportunistic and aligned with the asset-light strategy, noting it was underwritten on standalone economics. He emphasized that organic growth is the top priority, but smaller tuck-ins beneficial to owners and shareholders are considered. He also noted the stock is trading at a low multiple, making share repurchases an attractive use of capital, suggesting M&A would likely be immaterial tuck-ins rather than large-scale transactions.

Q: Robin Farley (UBS) asked about the long-term sustainability of domestic unit growth, questioning if it relies too heavily on lower removal rates, and inquired about key money usage. / A: Dragisich stated the goal is to return to 2-4% net rooms growth, viewing current trends as a 'both-and' scenario of sustained openings and improved retention. He noted the exit rate is improving by ~250 bps toward historical norms. Regarding key money, CFO Scott Oaksmith acknowledged industry-wide elevation but encouraged that the average incentive per deal has crested and stabilized, reflecting a strong value proposition that reduces the need for excessive incentives.