Choice Hotels International, Inc. (CHH) Earnings

Management highlights

- Interim CEO Priorities • Core focus is improved execution to close the gap between current performance and the company's potential, with three guiding pillars: staying close to franchisees and guests, increasing operational urgency, and disciplined capital and time allocation. • Priority is unlocking value from prior investments in the commercial engine and technology platform to deliver stronger franchisee profitability, better guest experiences, and higher long-term shareholder value. - Franchisee Cost Reduction Initiatives • Reduced prototype costs by up to 25% across key mid-scale brands; the redesigned lower-cost Country Inn & Suites by Radisson prototype drove an 11% YoY increase in franchise agreements in H1 2026. • Launched a new FF&E procurement program leveraging system scale expected to reduce average costs by up to 20% across FF&E and building product categories. • Implements fee reduction incentives for franchisees that achieve higher guest review scores. - Commercial and Technology (AI) Progress • Relaunched the Choice Privileges loyalty program, which has delivered early positive results: membership grew 7% YoY to 77 million, loyalty contribution increased 250 basis points, and new members acquired post-relaunch generate higher average revenue than prior-year cohorts. • Launched the Business Direct platform for small and medium businesses; ~60% of enrolled businesses are new to Choice, and 90% of room nights are midweek, driving 8% YoY growth in SMB traveler revenue in Q2. • AI-enabled tools deliver tangible benefits: the EasyBid group RFP platform improved conversion by 360 basis points, contributing 16% YoY group revenue growth; the AI property management assistant Charlie reduced corporate operational support requests by 40% in early pilots, freeing staff for guest-facing work. • The company is partnering with major AI platforms to ensure Choice properties are discoverable as travel search shifts to AI, aiming to stay ahead of this industry curve. - Development and Net Rooms Growth • U.S. net rooms growth improved sequentially for the second consecutive quarter, reaching its strongest H1 performance since 2021; Q2 U.S. openings hit a seven-year high, and exits fell to a six-year low, reflecting improved franchisee economics and engagement. • 90% of 2026 U.S. openings are expected to be conversions, which have faster opening timelines and lower capital requirements than new construction; average time from signing to opening for conversions has been shortened by nearly one month, and 75% of YTD signed U.S. agreements are expected to open in 2026, providing strong near-term growth visibility. • The U.S. conversion pipeline expanded 6% sequentially, with extended stay remaining a key growth driver. - Capital Allocation Strategy • The company is transitioning back to a pure-play asset-light franchising model; H1 2026 capital outlays for hotel development declined 80% YoY, and the substantially capital-intensive phase of building the Cambria and Everhome brands is complete. • The company currently holds 19 wholly owned operating hotels and one under construction, with no additional wholly owned projects in the pipeline; the first asset disposition is expected in H1 2027, subject to market conditions, to recycle capital back to high-return opportunities and shareholders. • Capital allocation priorities remain: high-return internal investments, maintaining a stable dividend, and returning excess capital via share repurchases; YTD through July 31, 2026, the company has returned $172 million to shareholders, $133 million via repurchases and $39 million via dividends.

Guidance

Management raised full-year 2026 guidance across multiple core metrics, from prior levels: • Full-year adjusted EBITDA guidance raised to $635 million to $650 million, driven by stronger U.S. REVPAR, improved global net rooms growth, and higher U.S. royalty rate expansion. Adjusted diluted EPS guidance is set to $6.86 to $7.10, reflecting higher expected interest expense and an increased effective tax rate partially offset by share repurchase benefits. • U.S. REVPAR growth guidance raised to 0% to 1.25%; global REVPAR growth guidance range adjusted to 0% to 1%, with the lower end of the range raised. Third quarter U.S. REVPAR growth is expected to exceed Q2 levels, before moderating in Q4 due to calendar timing effects (Labor Day shifting to September reducing high-leisure weekend days in August). • U.S. average royalty rate expansion guidance raised to 7 to 9 basis points for the full year, incorporating tougher year-over-year comparisons in H2 2026. • Global net rooms growth guidance raised to approximately 1.5%, up from the prior expectation of ~1%, reflecting improved U.S. growth trajectory and stronger international performance. U.S. full-year net rooms growth is expected to turn positive, supported by a 250 basis point improvement in the U.S. net exit rate compared to 2025; Q3 U.S. net rooms growth is expected to be broadly consistent with Q2 levels, with a meaningful step-up in Q4 as conversion openings seasonally increase. • Full-year adjusted SG&A is expected to grow in the mid-single digits, with growth moderating in H2 from the H1 run rate. • Full-year 2026 share repurchase guidance is maintained at $175 million to $225 million. • Key money spending for 2026 is expected to come in $15 million to $20 million higher than prior expectations, driven by higher U.S. room openings and a shift to higher-mid-scale brands, but overall capital intensity continues to decline as the company exits capital-intensive owned development.

Segment performance

This call does not break out separate financial performance for individual product segments. Aggregate overall results for Q2 2026 are: adjusted EBITDA increased 6% YoY to $175 million; adjusted EPS increased 5% YoY to $2.02; revenue excluding reimbursable revenue increased 7% YoY to $277 million; partnership services and fees increased 6% to $28.7 million. U.S. REVPAR increased 1.3% YoY, with FIFA World Cup contributing ~60 basis points to the quarter; global REVPAR increased 1.7% YoY on a currency-neutral basis, and international REVPAR increased 2.1% YoY currency-neutral. U.S. average royalty rate increased 11 basis points YoY. Global net rooms growth was 2.6% YoY, with U.S. net rooms growth nearly flat YoY, and international net rooms growth up 13% YoY. U.S. gross room openings increased 27% YoY, while room exits declined 50% YoY; U.S. conversion franchise agreements increased 82% YoY, and global franchise agreements increased 20% YoY. Extended stay portfolio has delivered 12 consecutive quarters of double-digit rooms growth and represents over 40% of the U.S. pipeline.

Risks & headwinds

• REVPAR performance continues to lag the overall industry chain scale index, partially driven by the company's under-indexing to urban markets and business transient travel, which saw a stronger Q2 bounce-back that benefited peers more. While occupancy index gains are improving, the company still needs to drive rate improvements to close this gap. • EMEA (Europe) regional performance is being guided more conservatively due to ongoing macroeconomic uncertainty in the region. • Demand visibility for Q4 2026 remains limited due to the company's short booking windows, leading management to build in a moderation expectation for Q4 REVPAR. • The timing and proceeds from the disposition of wholly owned hotel assets are subject to market conditions, which could impact the timing and magnitude of capital recycling to shareholders.

Analyst Q&A

• Q: How can royalty rates increase while the company is focused on improving franchisee value proposition? /

  A: Most royalty rate expansion comes from mix shift, not raising rates on existing franchisees. Lower-revenue economy brands are exiting the portfolio faster than they are added, while new additions are concentrated in higher-revenue mid-scale and upper mid-scale segments that carry higher contractual royalty rates. The company has also implemented multiple initiatives to lower franchisee costs (25% lower prototype costs, 20% lower FF&E costs, fee discounts for high guest scores) that offset any royalty mix shift, with stronger development results proving the value proposition resonates with owners. Existing royalty growth is also contractual, as older lower-rate contracts are replaced with modern published rates from 2016-2017, so no existing franchisee sees rate increases. (358 words)

• Q: What operational and organizational changes have been made to increase execution urgency since the new interim CEO took over? /

  A: The core change is increased accountability, clearer communication, and reduced organizational friction by realigning overlapping functions to create single points of accountability for key priorities. The biggest focus has been improving franchisee retention, where investments made in H2 2025 are already paying off with a 50% YoY reduction in room exits in Q2. The company is also accelerating adoption of AI capabilities across the business to embed efficiency and value delivery, with increased transparency to avoid unexpected results for investors. (217 words)

• Q: Will the company rejoin the AHOA franchisee organization after pausing membership, and how have franchisee relationships improved since past dissatisfaction? /

  A: The company only paused membership, it never ended collaboration with AHOA, and the vast majority of industry issues are already aligned with AHOA. The company would entertain rejoining if the opportunity arises, but currently works very collaboratively with self-elected owner councils that include many AHOA member franchisees. Management reports franchisee relationships are the strongest they have ever been, proven by the 50% YoY drop in room exits, reflecting growing trust from improved value delivery and engagement. (198 words)

• Q: What is the long-term plan for the wholly owned hotel portfolio, and what magnitude of capital can be recycled from asset sales? /

  A: The company has no long-term plan to hold owned hotels; all existing owned assets were either for launching Cambria/Everhome brands or acquired as part of the Radisson Americas acquisition, and the company is purely focused on being an asset-light franchisor. There are ~$650 million in balance sheet value tied to these programs (including owned hotels, joint ventures, and lending), with ~$450 million of that tied directly to owned hotels that will be monetized. Once all assets are sold, the company expects to be a net recycler of capital, which will act as a tailwind to future free cash flow. (192 words)