Choice Hotels International Inc. Q3 2026 Earnings Call - CHOICE HOTELS INTERNATIONAL INC

Financial Performance:

• Third quarter adjusted EBITDA rose 1% YoY to $193 million, with underlying performance (excluding liquidated damages) growing 5% across revenue and EBITDA.
• Total revenue excluding reimbursable amounts increased 3% YoY to $285 million, driven by higher U.S. royalties, franchise programs, and international growth.
• Diluted EPS increased 11% YoY to $2.33, supported by fee growth and share repurchases; a one-time $24 million charge related to a European deal termination impacted reported net income but was excluded from adjusted results.
• Net capital outlays for hotel development declined 56% YoY to $36 million year-to-date; full-year 2026 outlays expected to drop to $20 million (vs. $103 million in 2025).
• Operating cash flow for the first nine months was $122 million (down from $185 million prior year), primarily due to the termination payment and higher marketing/system investments.
• Shareholder returns totaled $211 million YTD ($172M repurchases, $39M dividends); full-year repurchase guidance is approximately $200 million.
• Net leverage stands at 3.2x adjusted EBITDA, within the 3.0–4.0x target range, with total liquidity of $928 million.
• Marketing and reservation system reimbursable deficit is projected at ~$135 million for the full year, expected to narrow in 2027 as investment cycles complete.

Guidance and Future Outlook:

• Raised full-year 2026 adjusted EBITDA guidance to $641–$651 million (midpoint up $3.5 million) and narrowed EPS guidance to $6.92–$7.07.
• Updated full-year U.S. RevPAR growth outlook to 1.5–2.5% and global RevPAR to 1.5–2.5%, citing momentum into October and infrastructure demand.
• Expects U.S. net rooms growth to accelerate in Q4 to ~1% YoY, with conversions representing ~90% of 2026 openings; long-term goal is 2–4% net unit growth.
• Projected 2027 SG&A growth (excluding Harvest Hosts) to moderate to low-to-mid-single digits, down from the ~9% increase expected for 2026.
• Anticipates free cash flow conversion to return to historical 55–60% levels by 2027–2028, driven by lower capital requirements and narrowing reimbursable deficits.
• Harvest Hosts (acquired Oct 1) is expected to contribute ~$1 million in Q4 EBITDA net of dispositions, with full 2027 impact to be detailed in February.

Business Segments and Product Lines:

• U.S. Net Rooms: Flat YoY in Q3, but openings up 17% YTD; U.S. development agreements up 24% and conversion pipeline up 29%.
• Extended Stay: Delivers 13 consecutive quarters of double-digit room growth, representing >40% of the U.S. pipeline; 600th Extended Stay Hotel opened.
• Commercial Initiatives: Choice Privileges members grew 7% to 78M, contributing +140 bps to revenue; revenue per new member up 12%.
• Technology & AI: AI-enabled "EasyBid" platform improved RFP win rates by 210 bps; AI traffic to choicehotels.com increased tenfold YoY; "RAISE" rate management tool rolling out in Q4 to optimize pricing.
• Harvest Hosts: Acquired for $130M; operates as a standalone asset-light subscription platform serving outdoor travelers with ~300,000 subscribers.
• International: Net rooms grew 7.3% YoY, led by Caribbean/Latin America (+9%) and Canada (+5.1% via direct franchising); global revenue up >7% YTD.
• Brand Mix: Continued shift toward higher-royalty brands, with U.S. average royalty rate expanding 8 bps YoY to 5.23%.

Market and Competitive Landscape:

• U.S. RevPAR grew 3.8% YoY (up from Q2), driven by higher occupancy and accelerating rates; industry gap is narrowing sequentially.
• Specific demand drivers included World Cup (+40 bps) and data center infrastructure; hotels within 10 miles of major data centers outperformed system average by 400 bps.
• Relative RevPAR performance improved, with occupancy-led recovery observed; management attributes this to commercial investments and loyalty program relaunch.
• Value-minded travelers demonstrated resilience, supporting both business and leisure segments.
• Conversion model remains a key differentiator, reducing upfront costs for owners and accelerating time-to-market compared to new construction.

Risks and Challenges:

• Expense Growth: Elevated 2026 SG&A driven by strategic investments, AI capabilities, and higher accounts receivable reserves; expected to normalize in 2027.
• Reimbursable Deficit: A projected $135 million deficit for the year impacts short-term cash flow, though structured to break even over time.
• Macroeconomic Sensitivity: RevPAR performance remains sensitive to broader macroeconomic trends and consumer spending on travel.
• One-Time Charges: The $24 million termination charge of a European lease-based acquisition option highlights risks in deviating from the asset-light strategy.
• Conversion Dependency: Heavy reliance on conversions (90% of openings) requires sustained pipeline activity and effective retention of converted properties.

Management Commentary and Tone:

• CEO Dom Dragisic expressed strong confidence in the "asset-light" strategy, emphasizing a return to fundamentals with a focus on franchisee economics and disciplined capital allocation.
• Tone was constructive and forward-looking; management highlighted "accelerating momentum" in RevPAR and room growth, positioning 2027 as a year of strengthened FCF generation.
• Leadership emphasized a "both-and" approach to growth: improving retention while maintaining portfolio quality by exiting bottom-quartile assets (25% less revenue than average).
• Management indicated that while commercial investments are impacting short-term costs, they are successfully narrowing the RevPAR gap with the industry.

Analyst Questions and Answers:

• Room Growth Confidence: Management confirmed confidence in Q4 U.S. net rooms acceleration to ~1%, citing 90% conversion mix and strong pipeline visibility.
• Capital Recycling: Detailed that ~$330M of owned assets (mostly Cambria) are available for sale, with initial dispositions targeting 8x cap rates; proceeds expected to fund organic growth or share buybacks.
• Free Cash Flow: Confirmed FCF conversion should return to 55–60% by 2027–2028 due to the step-down in development capital and marketing deficits.
• M&A Strategy: Clarified that future M&A will prioritize small, asset-light "tuck-ins" like Harvest Hosts; larger traditional hotel acquisitions are not the current focus.
• AI & Distribution: Discussed the tenfold increase in AI-originated traffic; while currently ~1% of volume, the goal is to leverage AI accessibility to increase proprietary channel share from 60%.
• Termination Charge: The $24M charge was related to a legacy European deal that had shifted toward a lease-based model, conflicting with the company's asset-light strategy.

Other Key Points:

• The company sold two owned hotels post-quarter end for ~$34M in net proceeds, retaining franchise agreements to preserve recurring revenue.
• Approximately 30% of U.S. hotels are located near major data centers, contributing significantly to RevPAR outperformance.
• Choice Privileges launched point sharing, and "Choice Business Direct" revenue grew 25% YoY for existing customers, aiding the SMB segment.
• Royalty rate expansion is expected to contribute ~$5M in EBITDA for every 1% increase in effective royalty rate in the long term.