Choice Hotels Intl Q3 2026 Earnings Call Transcript

Choice Hotels Intl (NYSE:CHH) reported third-quarter financial results on Monday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Choice Hotels Intl reported third-quarter adjusted EBITDA of $193 million, a 1% year-over-year increase, with revenues up 3% to $285 million.

U.S. RevPAR increased 3.8% year over year, driven by higher occupancy and rate growth, leading to an upward revision in full-year RevPAR and adjusted EBITDA guidance.

The company focused on strategic priorities including U.S. net rooms growth, improving franchisee economics, and returning to an asset-light model, with U.S. net rooms growth expected to accelerate to 1% in the fourth quarter.

Significant progress was made in U.S. franchise agreements and conversion pipeline, with U.S. franchise agreements up 24% year over year and conversions representing 90% of 2026 room openings.

Choice Hotels Intl completed the acquisition of Harvest Host for $130 million, expanding its reach into outdoor travel, and began capital recycling with the sale of two owned hotels.

Management expressed confidence in future growth, aiming to achieve 2-4% net rooms growth long-term, supported by strong development activity and improving franchisee retention.

Full Transcript

OPERATOR

2026 earnings call. At this time, all participants are in a listen-only mode. Following the prepared remarks, we will open the line for questions. I will now turn the call over to Ali Summers, Senior Director of Investor Relations. Please go ahead.

Ali Summers (Senior Director of Investor Relations)

Good morning and thank you for joining us. Before we begin, please note that today’s discussion includes forward-looking statements as defined under U.S. securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. For more information, please refer to our filings with the SEC, including our most recent Forms 10-K and 10-Q. These statements speak only as of today and we undertake no obligation to update them.

A reconciliation of any non-GAAP financial measures referenced in today’s remarks is included in our earnings press release available on the Investor Relations section of ChoiceHotels.com. Joining me this morning are Dominic Dragisich, our Chief Executive Officer, and Scott Oaksmith, our Chief Financial Officer. Dom will discuss our business performance and strategic progress, and Scott will review our financial results and outlook. And with that, I’ll turn the call over to Dom.

Dominic Dragisich (President and CEO)

Thank you, Ali, and good morning, everyone. Before I turn to our third quarter results, I want to say how honored I am to be appointed President and Chief Executive Officer. I’m grateful for the Board’s confidence and I’m excited about the opportunity ahead for Choice Hotels Intl. At our core, we are an asset-light franchisor serving value-minded travelers. The principle is simple: when our franchisees succeed, we succeed. Our focus is on returning to the fundamentals that have driven our success for decades: strengthening our core franchise business, delivering greater value to franchisees and guests, and executing with greater urgency, accountability, and discipline. Choice Hotels Intl’s operating priorities are clear. First, accelerate U.S. net rooms growth and establish a sustainable growth trajectory.

Second, strengthen franchisee economics by further improving our commercial competitiveness, helping our owners capture more demand, lower their costs, and operate more effectively. And third, return to a more capital-efficient model that generates stronger long-term free cash flow. In the third quarter we made progress against all three priorities. Let me start with net rooms growth. Our U.S. net rooms year-over-year growth rate improved for the third consecutive quarter and is now flat. Together with continued international expansion, global net rooms increased 1.7% year over year. As anticipated, we expect a more meaningful acceleration in U.S. net rooms growth in the fourth quarter to approximately 1% year over year.

U.S. RevPAR increased 3.8% year over year, ahead of our expectations and a clear step-up from the second quarter, driven primarily by higher occupancy. With rate growth also accelerating, we see further opportunity to improve rate performance over time as we advance our revenue management initiatives to optimize pricing. Demand growth was led by business travel, while leisure trends improved as the quarter progressed, reflecting the resilience of the value-minded travelers we serve.

World Cup demand contributed about 40 basis points to quarterly RevPAR growth. We also continue to benefit from infrastructure-related demand, including data center development. Approximately 30% of our U.S. hotels are located within 10 miles of a major data center, and those hotels delivered more than 400 basis points higher RevPAR growth than the rest of our system during the quarter. Importantly, our relative RevPAR performance also improved sequentially, an early indication that our commercial initiatives are helping us capture a greater share of demand.

The gap with the industry is narrowing, and we see further opportunity to improve our relative rate performance. Demand strength continued into October, with U.S. RevPAR up approximately 7% year over year for the month, supported by gains in both occupancy and rate. On that basis, we are raising our full-year RevPAR and adjusted EBITDA outlooks. While we are encouraged by the acceleration in our core top-line performance, we recognize that higher in-year operating expenses have limited the full-year benefit flowing through to earnings. We expect expense growth to step down in 2027, allowing more of our revenue growth to translate into earnings. Scott will walk through the details.

Finally, on capital allocation, our historical hotel development programs are nearing completion, capital recycling is underway, and we now expect significantly lower net capital outlays going forward. Turning to U.S. net rooms growth, we are focused on retaining and adding the right hotels to our portfolio. We are making steady progress in retaining hotels. We’re engaging franchisees earlier in the renewal process with clearer accountability across our development and retention teams.

Our focus is on improving retention while maintaining the quality and long-term economics of our franchise system. As a result of this disciplined approach, approximately two-thirds of rooms exiting our system came from hotels ranking in the bottom quartile for guest satisfaction, and these exiting hotels generated approximately 25% less royalty revenue per hotel than the system. Average U.S. room openings increased 17% year to date despite declining in the third quarter against strong prior-year comparisons. We expect strong growth in U.S. room openings for the full year, supported by our historical year-end opening patterns, with roughly one-third of annual U.S. room openings typically occurring in the fourth quarter. Conversions remain an important advantage for Choice Hotels Intl. We’ve reduced the cost of joining our system and tailored property improvement requirements to focus on what matters most to guests, making conversions faster and more attractive to owners.

Of the U.S. conversion rooms opened year to date, approximately two-thirds opened within just three months of signing. We’re also seeing strong development activity that supports future rooms growth. U.S. franchise agreements increased 24% year over year in the quarter, and our U.S. conversion pipeline grew 29% year over year and represents over one-third of total pipeline rooms. Together, improving retention and continued development activity are strengthening the foundation for sustained U.S. net rooms growth.

Stronger franchisee economics are fundamental to sustaining rooms growth. When owners are more profitable, they are better positioned to reinvest in their hotels, renew their franchise agreements, and grow with us over time. That translates to more durable earnings and stronger free cash flow for Choice Hotels Intl. Over the past two months, I’ve met directly with more than 900 franchisees across the U.S. and Canada. I’ve come away energized by the positive tone of these conversations and the alignment I’m hearing around our shared priorities.

To help franchisees grow revenue, our biggest opportunity is capturing a greater share of demand from the value-minded travelers we serve. We’re beginning to see encouraging results from our commercial investments, reflected in improving relative RevPAR performance. Choice Privileges is a good example. Since the relaunch earlier this year, new members who have stayed with us generated 12% more revenue per member than comparable new members last year.

The program grew 7% to 78 million members, while Choice Privileges members’ share of revenue increased by more than 140 basis points year over year during the quarter. We recently added point sharing to give members more flexibility in how they use their rewards. Choice Business Direct is also expanding our reach among small and medium-sized businesses. With approximately 75% of enrolled businesses new to Choice Hotels Intl since its launch in May, revenue from existing customers who adopted the platform has increased 25% year over year, contributing to growth in our broader small and medium-sized business segment, where revenue increased 18% year over year in the third quarter. Our AI-enabled EasyBid platform is helping owners win more group business, improving RFP win rates by 210 basis points and supporting 27% year-over-year growth in group revenue during the quarter.

We’re also adapting our digital content strategy as travelers increasingly use AI-powered search tools. Our investments in richer, more relevant hotel content are helping improve discoverability across these platforms. While still a very small share of overall website traffic, visits to ChoiceHotels.com originating directly from large language models increased more than tenfold year over year in the third quarter. To help franchisees lower costs, we are focused on making our hotels more affordable to build, convert, and operate. Building on the prototype and procurement savings we discussed last quarter, we’ve reduced reputation management fees by approximately 30% through our AI-enabled Smart Response tool. We’ve also introduced targeted fee incentives for hotels that achieve strong guest satisfaction and operating performance. In addition, we’re improving distribution economics to generate additional savings for franchisees and expanding the pilot of Charlie, our AI teammate within the property management system, to simplify routine tasks.

Together, these initiatives strengthen the value we deliver to franchisees, supporting stronger retention, future development, and sustainable, capital-efficient rooms growth. Our third priority is returning to our asset-light franchising roots. Our hotel development investments helped establish and grow Cambria and Everhome Suites. With our own development programs winding down, we’re reinforcing our focus on franchise-led growth and beginning to unlock capital from our owned hotel portfolio. We’ve already begun that process. Since quarter end, we’ve sold two owned hotels while retaining franchise agreements for both, preserving recurring franchise revenue.

Returning to our asset-light roots also means being disciplined about where we invest for growth. Harvest Hosts is one example. It’s an asset-light subscription platform with recurring revenue that expands our reach into complementary outdoor travel, serving customers whose travel preferences align closely with those of Choice Hotels Intl’s value-minded guests. Harvest Hosts has approximately 300,000 subscribers. Based on our consumer insights, we estimate that approximately 2 million Choice Privileges members participated in RV travel over the past year, highlighting a significant opportunity to expand Harvest Hosts’ reach.

We underwrote the acquisition based on Harvest Hosts’ standalone economics, with potential benefits from Choice Hotels Intl’s loyalty and commercial capabilities representing upside. Harvest Hosts will continue operating independently under its existing leadership, complementing our core hotel franchising business and expanding our opportunities for asset-light growth. The value-minded travelers we serve continue to demonstrate resilience, supporting travel demand across our system. Looking ahead to 2027, we see opportunities to build on this progress through continued U.S. net rooms and RevPAR growth supported by our strengthening commercial capabilities and the operational changes we’ve made across the business. I also want to thank our associates and franchisees for their continued commitment to Choice Hotels Intl and the guests we serve.

We are confident in our ability to translate this operating progress into stronger financial performance, more consistent results, and sustainable long-term value for our shareholders. With that, I’ll turn the call over to Scott.

Scott Oaksmith (Chief Financial Officer)

Thanks, Dom, and congratulations again. I look forward to working closely with you as we execute on our priorities and drive stronger performance. Good morning, everyone. This morning I’ll cover our third quarter financial results, the key drivers of our performance, and our updated full-year outlook. Third quarter adjusted EBITDA was approximately $193 million, up 1% year over year. Revenues, excluding reimbursable revenue from franchised and managed properties, increased 3% year over year to $285 million. Adjusted diluted earnings per share increased approximately 11% year over year to $2.33, benefiting from higher franchise and management fees and share repurchases. As we highlighted last quarter, our third quarter 2025 results included elevated liquidated damages revenues, which declined approximately $6.2 million year over year, consistent with our improving franchisee retention.

Excluding liquidated damages from both the current and prior-year quarters, adjusted EBITDA and revenue each grew approximately 5%. Underlying performance benefited from higher U.S. royalties driven by stronger RevPAR and royalty rate expansion along with growth in franchisee programs and services revenues and higher international revenues. These benefits were partially offset by higher adjusted SG&A expenses, which I’ll discuss shortly. Turning to RevPAR, global RevPAR increased 3.9% year over year in the third quarter on a currency-neutral basis. As Dom discussed, U.S. RevPAR increased 3.8% year over year, driven by a 160 basis point increase in occupancy and a 1% growth in rate. Performance was strongest in the West, South Central, and Midwest regions. International RevPAR increased 3.7% year over year on a currency-neutral basis with growth across all regions, led by a nearly 9% increase in the Caribbean and Latin America.

Turning to net rooms growth, global net rooms increased 1.7% year over year, reflecting continued international expansion. In the U.S., net rooms were approximately flat year over year, with room exits declining 23% and gross room openings declining 8% against strong prior-year comparisons. Importantly, U.S. room openings increased 17% year to date. As Dom discussed, we continue to expect stronger fourth quarter openings, with conversions expected to represent approximately 90% of our 2026 U.S. room openings.

Extended stay remains a key growth driver, delivering 13 consecutive quarters of double-digit rooms growth and representing more than 40% of our U.S. pipeline. We also recently opened our 600th extended stay hotel, marking another important milestone in the expansion of our portfolio. Beyond extended stay, we are seeing encouraging development activity across our core transient brands. U.S. franchise agreements awarded for our midscale and economy transient brands increased 10% year over year, while the pipeline for these brands expanded approximately 2% sequentially. Additional detail on our U.S. net rooms trends is included in today’s supplemental materials. International net rooms increased 7.3% year over year, reflecting growth across EMEA, Asia Pacific, and the Americas.

In Canada, net rooms increased 5.1% year over year, supported by our transition to a direct franchising model, which is increasing its earnings contribution and creating opportunities for future growth. Our global pipeline also expanded sequentially, supporting future rooms growth across the system. Along with rooms growth and RevPAR, royalty rate expansion remains an important driver of our organic franchise revenue growth. During the third quarter, our U.S. average royalty rate increased 8 basis points year over year to 5.23%, reflecting a continued mix shift towards higher royalty brands and contractual rate increases supported by the stronger franchisee value proposition Dom discussed. Beyond royalties, our franchisee programs and partnerships businesses leverage the scale of our system to generate additional fee-based revenue while strengthening franchisee economics.

Partnership services and fees decreased 2% to $28.3 million in the quarter, primarily reflecting the timing of certain revenues. We expect low- to mid-single-digit growth in this business for the full year. We’re also seeing growth across our franchisee technology solutions driven by increased adoption of our revenue management tools and higher fee revenue from our cloud-based property management system. Adjusted SG&A increased approximately 5% year over year during the quarter, primarily reflecting higher accounts receivable reserves, certain one-time investments in strategic initiatives, and higher international operating expenses. Separately, during the quarter, we terminated an agreement involving an option to acquire a European hospitality business operating primarily under a lease-based model. The termination resulted in a one-time charge of approximately $24 million, which impacted reported net income but is excluded from our adjusted results.

The termination eliminates any further funding obligations under the agreement. The decision reflects our disciplined approach to capital allocation and our focus on directing capital towards opportunities aligned with our asset-light franchising strategy. Turning to capital allocation, our transition back to a more asset-light franchising model continues to progress. Year to date, net capital outlays for hotel development declined 56% year over year to $36 million as we completed our own Cambria development program and continued winding down our remaining Everhome investments. We now expect full-year 2026 net capital outlays for hotel development-related activities to be approximately $20 million compared with $103 million in 2025.

We expect development capital outlays across our owned hotels and joint ventures to decline substantially from the approximately $70 to $75 million projected for 2026, with only minimal funding needs expected after the first half of 2027. We’ve also begun recycling capital. Subsequent to quarter end, we completed the sale of two owned hotels, generating estimated net cash proceeds of approximately $34 million while retaining franchise agreements for both properties. We expect an additional hotel disposition in or before the first quarter of 2027, subject to customary closing conditions. Additional modeling information on these initial dispositions is included in our supplemental materials.

As Dom noted, we are positioning Choice Hotels Intl to generate more proceeds from asset sales than we invest in development by 2027 as our remaining commitments decline and dispositions progress. Our initial focus is on Cambria, given its more established operating history, while allowing our recently opened Everhome hotels time to mature before pursuing dispositions. We are taking a disciplined, asset-by-asset approach to maximizing value while preserving long-term franchise relationships.

Transaction timing and economics will vary based on individual property performance, operating maturity, and market conditions. Separately, on October 1, we completed the acquisition of Harvest Host for approximately $130 million in cash and revolver borrowings. For the 12 months ended September 30, Harvest Host generated approximately $33 million in revenue and approximately $11 million in adjusted EBITDA. We will begin consolidating Harvest Host results in the fourth quarter and provide additional modeling context with our 2027 guidance in February. We expect Harvest Host to support growth without requiring significant incremental capital investment.

Our capital allocation framework remains unchanged. As we transition back to a more asset-light model, we will continue to prioritize attractive return investments that support long-term growth, maintain a stable dividend, and return excess capital to shareholders through share repurchases. Turning to the balance sheet, we ended the quarter with total liquidity of $928 million and a net leverage of 3.2 times adjusted EBITDA, within our targeted range of 3 to 4 times. Our quarter-end cash balance reflects borrowings made in advance of the October 1st Harvest Host acquisition. Following the acquisition, net leverage remains within our targeted range. In August, we completed a $500 million term loan refinancing, lowering our borrowing spread and increasing available capacity under our revolving credit facility.

During the first nine months of the year, we generated $122 million of operating cash flow compared to $185 million in the prior-year period. The year-over-year decline primarily reflected the contract termination payment, higher franchise agreement acquisition costs associated with increased year-to-date U.S. openings, and higher marketing and reservation system reimbursable expenses. For the full year, we expect a net marketing and reservation system reimbursable deficit of approximately $135 million, reflecting elevated investment in franchisee-facing and guest delivery capabilities.

As a reminder, these programs are structured to operate at a break-even over time, and we expect the deficit to begin narrowing in 2027. Through September 30, we returned $211 million to shareholders, including $172 million through share repurchases and $39 million through dividends. We now expect repurchases of approximately $200 million of shares for the full year. Based on our third quarter performance and the underlying operating trends we’ve discussed today, we are raising our full-year U.S. and global RevPAR outlooks and our adjusted EBITDA guidance while narrowing our adjusted EPS range. We now expect full-year 2026 adjusted EBITDA of $641 million to $651 million, raising the midpoint by $3.5 million. Our updated outlook reflects stronger global RevPAR expectations and higher U.S. royalty rate expansion, partially offset by higher adjusted SG&A. The fourth quarter contribution to adjusted EBITDA from Harvest Hosts, net of the impact of our recent hotel dispositions, is expected to be approximately $1 million. We are narrowing our full-year adjusted diluted earnings per share guidance to $6.92 to $7.07. The updated range reflects higher expected adjusted EBITDA, offset by higher interest expense and lower expected equity in earnings of affiliates.

We now expect full-year U.S. RevPAR growth of 1.5% to 2.5% and global RevPAR growth of 1.5% to 2.5%, reflecting stronger underlying operating trends and continued commercial execution. Based on the midpoint of our updated full-year outlook, we expect fourth quarter U.S. RevPAR growth to be higher than the third quarter, supported by the momentum we’ve seen into October. We estimate the full-year benefit of the FIFA World Cup at approximately 30 basis points.

We now expect U.S. average royalty rate expansion of approximately 9 basis points for the full year, incorporating tougher comparisons in the fourth quarter. We continue to expect approximately 1.5% global net rooms growth for the full year, supported by international expansion and a more meaningful acceleration in U.S. net rooms growth in the fourth quarter. In the U.S., we expect net rooms growth of approximately 1% by year end, supported by improving year-over-year retention, seasonally stronger fourth quarter conversion openings, and more favorable year-over-year comparisons.

We expect strong year-over-year growth in U.S. room openings for the full year and continue to anticipate an approximately 250 basis point improvement in the U.S. net exit rate compared with last year. Excluding Harvest Host, we now expect full-year adjusted SG&A to increase approximately 9% year over year compared with our prior expectation of mid-single-digit growth. This reflects increased spending on certain strategic initiatives and AI-enabled capabilities along with higher accounts receivable reserves. We do not expect the same level of spending on these initiatives next year and anticipate adjusted SG&A growth, excluding Harvest Host, moderating to the low- to mid-single digits in 2027.

With development capital requirements expected to decline substantially in 2027, capital recycling underway, and the reimbursable deficit expected to begin narrowing, we see an opportunity to strengthen free cash flow generation over time. Overall, our third quarter performance reinforces our confidence in the progress we’re making against our operating priorities. We’re focused on translating these improvements into consistent results and sustainable long-term shareholder value. With that, Dom and I are happy to take your questions. Operator.

OPERATOR

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Lizzie Dove with Goldman Sachs.

Lizzie, your line is open. Please go ahead.

Lizzie Dove (Analyst)

Morning. Thanks for taking the question. I wanted to ask about U.S. rooms growth. Obviously some progress there, and it’s a big acceleration implied in Q2, Q4. Could you talk more about your confidence of that? I know you talked about some seasonality there, but also just more broadly what you’re seeing in particularly the conversion environment, given it’s such a big driver for you both in terms of Q4 and just longer term, given we’ve heard some kind of mixed commentary across the space this quarter.

Dominic Dragisich (President and CEO)

Absolutely. Thanks, Lizzie. I’ll take that one. So as I had mentioned, obviously in the prepared remarks, the net rooms growth is certainly my number one operating priority for the company. Obviously we’ve seen very strong quarter-over-quarter improvements in that net rooms growth figure, three consecutive quarters of improvement. So when you take a step back, though, I think what’s even better is that you are seeing strong results across all three component parts. Right? Where you have openings are up 17% year to date, exits are down 44% year to date, development agreements are up 36% year to date. So that’s really a good setup going forward, especially when you take a look at those development agreements and when you take a look at the mix, it gives me even more confidence.

Right? Because we are still growing in that midscale plus category. But at the same time we’re seeing a little bit of a both. And so, you know, I mentioned this last quarter, you know, consistent progress I think leads to confidence, and we’re sitting in a very confident spot heading into Q4. We mentioned, you know, historically about one third of our annual openings typically occur in Q4. Conversions are actually opening even more quickly. And so when you take a look at that side of the business, with 90% of our openings this year really being conversions and just where you’re seeing that conversion pipeline, we have really good visibility heading into Q4, so feel great about that 1%, frankly.

And then when you just take a look at just the conversion-led model, to your question around, you know, the sustainability and the setup for 2027, you know, the conversion-led model that we have, it is a differentiator. So we think that this is absolutely momentum that’s going to be sustainable, you know, as we head into 2027. Feeling really good about the setup and feeling very good about, you know, the top operating priority for the year.

Lizzie Dove (Analyst)

Great. And then one follow-up, slightly different topic, but, you know, the relative RevPAR performance has obviously been a big focus for you guys. We saw a little bit of sequential improvement, but with these kind of commercial initiatives that you’re working on, could you give us some color of just how the kind of phasing of that and how long do you think those kind of take to kind of bear more fruit when it comes to the relative performance versus STR?

Dominic Dragisich (President and CEO)

Sure. I mean, obviously we’re in the early innings of some of these commercial investments. We talked about the $60 million or so spend last year into this year, which is also driving that marketing and reservations system fund deficit. Obviously we’ve leaned in on the commercial side, but certainly encouraged by the RevPAR improvement and the progress that you saw. You saw a pretty dramatic step up from Q2 into Q3. We did narrow the gap, to your point.

Obviously not where we want to necessarily be just on a relative basis, but we’re seeing that gap continuing to narrow quarter over quarter again, much like the net rooms growth metric. Part of the gap was, you know, geography, customer mix—we’re under-indexed urban, event-driven, that type of business. But again, the most important thing is that we have to be focused on what we can control and the execution, and you mentioned the commercial tools.

So we are encouraged, most importantly, that what we’re seeing is an occupancy-led recovery. So when you think about those commercial capabilities, we have the Easy Bid tool, we relaunched the loyalty program. I think the biggest game-changer for us on the rate side of the house is going to be RAISE, which is our rate management tool. Brings together pricing, inventory, channel management all together in one place. So that’s going to be rolled out this quarter, and so you’re going to continue to see the benefits of that, obviously, as the ramp occurs heading into 2027.

So when you take a look at the business side of the equation, we’re already starting to see the results of those commercial investments. I think the most important opportunity that we have in front of us today is on this RAISE platform because it really is rate where we have the ability to drive additional performance. So you’re going to see that probably showing up more in Q1, Q2 of next year. But again, I think the setup is there for a really strong 2027.

OPERATOR

Thank you. Thank you. Your next question comes from the line of David Katz with Jefferies. David, your line is open. Please go ahead.

David Katz (Analyst)

Hi, good morning. I appreciate all of the detail. I wonder if you could give us just a little more insight into, you know, what’s available to be sold on the owned side. Help us, you know, gather an inventory. And you’re not going to guide us to a specific number, you know, but notionally what’s available to be sold. I imagine you have some estimates that maybe you can qualitatively give us a little insight. Thanks.

Scott Oaksmith (Chief Financial Officer)

Well, thanks, David. I’ll pick that one. So, you know, as we highlighted in our supplemental materials, we do have several hotels that are on the owned side that will be able to be sold. So we own 17 hotels when you adjust for the two that we’ve sold in the fourth quarter, and so those are really the pool that we’re focused on today. When you think about the total amount of capital related to that, we’re really going to be focused more on the Cambrias today.

Those are more mature assets that we look that we can move to sell those, and then as the Everhomes become more efficient—or, excuse me, ramp up and are ready for disposition—those will come in the second half of that. So today post-sale, we’ve got 11—excuse me—nine Cambrias left. We still have two Radissons left and five Everhomes that we are ready to sell. So we’re focused on the Cambrias. We had some success in some early ones that we sold here in the fourth quarter, have one more under contract that should close end of the quarter, beginning of next year, and continue to work through market by market of selling those. When you look at kind of the capital that’s outstanding on that, as we’ve talked about in the past, you know, really what we have is about $455 million coming into the quarter of owned assets available for sale.

That’ll be reduced by about the $38 million of the assets that we talked about. So that’s kind of the pool we’re working on today. About $330 million of that’s Cambria.

David Katz (Analyst)

Perfect. Thank you.

OPERATOR

Thank you. Your next question comes from the line of Dan Pulitzer with JP Morgan. Dan, your line is open. Please go ahead.

Dan Pulitzer (Analyst)

Hey, good morning, everyone, and thanks for the question. I wanted to talk a little bit about free cash flow and the conversion in the quarter and how you think about that kind of evolving over time, especially to the extent you’re starting to recycle more capital into 2027. Any kind of way to also think about your kind of willingness to return capital to shareholders as that capital recycling ramps up? Thanks.

Dominic Dragisich (President and CEO)

Sure. So let me hit it at a high level and then I’ll hand it over to Scott more for the details on just capital allocation and whatnot. But I think when you take a step back, we absolutely see a meaningful opportunity to really strengthen free cash flow generation in 2027. And a lot of that is really what we talked about—returning to that asset-light franchising roots, a much more efficient capital model. I see three primary drivers of that, right, which is, you know, first and foremost, it’s the development capital requirements that are coming down significantly.

We talked about the fact that we are, you know, completing the owned hotel development, minimal funding needs now with only one hotel under construction, you know, through first half of 2027. We are seeing capital recycling, you know, we sold those two hotels. We expect that additional disposition in early 2027 and obviously going to continue to look for more dispositions. But most, you know, very importantly, I think has really been the drag on the marketing and reservations system deficit in 2026. And I talked about a lot of that is because of the commercial investments that we made. A lot of that in the first quarter of the year was a softer RevPAR environment. So when you take a look at that, our ability to flex that as we head into 2027 and really the revenue makeup—obviously what gives me the most optimism to return to free cash flow improvements in 2027—it’s the top line.

You’re seeing all three of our key revenue levers inflect with regards to net rooms growth, RevPAR, royalty rates continue to expand. So we think that that growth on the top line is very much sustainable heading into 2027. So those are all going to be tailwinds for us. And as it pertains to the actual conversion, I’ll let Scott hit on that one.

Scott Oaksmith (Chief Financial Officer)

Yeah, we see a real meaningful opportunity to improve the conversion. You know, we’re moving beyond a period of that elevated investment now that we’ve achieved our strategic objectives, and so the capital-intensive business should decline materially here going forward. And we talked about the development outlays being down 56% year over year and down 80% for the full year. So as we look at our capital allocation hierarchy, you know, first and foremost we always want to invest in the organic growth of the business.

But as we get back to more of our asset-light roots here, we don’t expect a material amount of capital needed to grow on an asset-light basis. So really provides us the opportunity to return that excess capital to shareholders. We still remain well within our targeted leverage levels, and as we talked about this year, we did give for the first time guidance on share repurchases now that we have more visibility into our cash flows given the step down in the capital outlays for self-development.

So we expect that to continue and really to prioritize shareholder returns as we go forward.

Dan Pulitzer (Analyst)

Got it, thanks. Just to clarify, for the free cash flow conversion this year, any parameters through which to think about that and then maybe on a go-forward if we can get back to that 50 to 60% type range.

Scott Oaksmith (Chief Financial Officer)

Yeah. So, you know, going forward, where you’ll see the meaningful step down, as Dom mentioned, is clearly on the marketing and reservations reimbursables. We are completing a more heavy investment in that this year. So we expect that to step down materially next year, to get us back over the next couple years to that 55–60% free cash flow conversion where we’ve been historically.

Dan Pulitzer (Analyst)

Got it. Thank you so much.

OPERATOR

Thank you. Your next question comes from the line of Michael Bellisario with Baird. Michael, your line is open. Please go ahead.

Michael Bellisario (Analyst)

Thank you. Good morning, everyone. Dom, on M&A, I mean, should we think about real estate sale proceeds being used to fund more asset-light M&A like Harvest Host, or are those kind of separate buckets? And then maybe just also remind us of your view on sort of just appetite for a couple buckets: larger-scale M&A, sort of the more traditional hotel brand M&A, and then adjacent businesses like the Harvest Host deal. Thanks.

Dominic Dragisich (President and CEO)

Absolutely. So the Harvest Host deal was certainly opportunistic, I would tell you that. You know, what Scott said is spot on with regards to we’re prioritizing organic growth first and foremost. Obviously if there’s smaller tuck-ins that are, you know, net beneficial both to our owners and our shareholders, you know, we’ll obviously consider that, and I think Harvest Host certainly fell in that bucket. But we also think our stock is cheap right now, frankly.

And I think to Scott’s point, there’s a reason why we gave share repurchase guidance this year. It’s the first time in my 10 years since I’ve been here that we provided share repurchase guidance. We’re trading at a historically low multiple and we’re seeing a lot of great inflection in the business itself. So it’s not to say that we wouldn’t do something that’s a little bit more tuck-in in nature, probably immaterial. But you mentioned Harvest Host and I think, broadly speaking, that was an acquisition that was very much aligned with the asset-light growth strategy. Right. It was a subscription-based recurring fee model. It expanded our reach into an outdoor travel segment that we actually were under-penetrated in. And the reality is we underwrote this on a standalone basis.

So it was an attractive return even without the overlap. Obviously we think that there’s tremendous overlap with the 2 million customers that we talked about on the call, 300,000 subscribers. So even, you know, keeping this business as a standalone, we think that it’s a really strong return. But then when you consider the CP overlap and whatnot, we think it’s certainly more beneficial for our franchisees, you know, as it pertains to other, you know, demand-driven opportunities for them in the future.

It could open up additional opportunities for them. And the reality is we want to keep this thing as a separate business unit. It doesn’t distract from the core strategy. And most importantly, I think as it pertains to that financial return for our investors as well. So I think it passes the litmus test both for the franchisees as well as our investors.

Michael Bellisario (Analyst)

Got it. And then just one follow-up on this termination payment. Was this for a legacy deal, or was that something that sort of came and went in the last plus or minus three months?

Dominic Dragisich (President and CEO)

Yeah, it was an opportunity for us. We actually had an option to purchase the business that eventually migrated to an obligation. But as I shared, we are very much focused on asset-light growth. This was a group, they were growing, they were supposed to continue growing through a franchise and managed operation. But their growth increasingly became lease-based. And so while they were very healthy leases and it was a company with great growth potential, [it] just didn’t align with the asset-light growth plans.

And so we were not willing to take on additional lease exposure. We weren’t willing to put that capital at risk, so to speak. And the reality is we just made the decision to terminate the arrangement rather than pursue a transaction that no longer really aligned with those strategic priorities as a company. And Michael,

Scott Oaksmith (Chief Financial Officer)

just to answer your question, yeah, it was a legacy. We had this relationship going back four or five years now.

Michael Bellisario (Analyst)

That’s helpful. Thank you.

OPERATOR

Thank you. Your next question comes from the line of Sean Kelly with Bank of America. Sean, your line is open. Please go ahead.

Sean Kelly (Analyst)

Yeah, thank you very much for taking my question. And congrats, Dom, on the permanent announcement here. So just wondering if we could walk through a little bit of the, just the owned and leased bridge for next year. Right. So I think you guys gave a little bit of the comments around Harvest Host. But Scott, if you could just help us understand one, where exactly is Harvest Host going to show up in the P&L, and then two, to net of sales? And it sounds like with the third one coming here directionally, can you give us some sense on just how much O&L headwind to expect next year as that line item starts to kind of shift down both in revenues and, more importantly, on EBITDA? Thanks.

Scott Oaksmith (Chief Financial Officer)

No problem, Sean. So when you think about Harvest Host, most likely, just given the size of it, we’ll probably include it in our other revenue line item, and it will also flow through in the SG&A. It’s a pretty simple business. It’s a subscription-based, you know, where the members spend, you know, annual subscriptions that range from, you know, $99 to about $180. And then primarily the costs are technology and customer acquisition. So most likely we’re still working through those disclosures, but that’s where that’ll show up.

When you think about the owned assets, the three assets that we are selling, they generate, you know, roughly about $12 million—excuse me, the ones that were sold were about $12 million in revenue and about $2 million for a full year in EBITDA. And the one that’s scheduled to be sold here at the end of the year is another $6 million and about $1 million in EBITDA. So total revenues somewhere between $18 and $19 million with an EBITDA impact of about $3 million.

Sean Kelly (Analyst)

Perfect. Thanks so much.

OPERATOR

Your next question comes from the line of Stephen Grambling with Morgan Stanley. Steven, your line is open. Please go ahead.

Stephen Grambling (Analyst)

Hi. Thank you. You mentioned in the intro remarks some improved distribution costs for owners. Can you just elaborate on what you’re seeing there and perhaps remind us where your distribution mix is right now and how that may be changing, or what tools you’re leveraging to do that.

Dominic Dragisich (President and CEO)

Yeah, so I think distribution costs are obviously one big component—broadly speaking, unit economics for our owners and just the entire ecosystem is critical here. And we talked a lot about some of the things last quarter with regards to, you know, reducing certain fees, piloting insurance program, FF&E costs, et cetera. But when you take a look at, you know, just the distribution cost, this comes down to just the improvements that we’re seeing. In the new loyalty program in particular, you saw about 200 basis points of loyalty increase, you know, the loyalty contribution last quarter. You’re seeing that sustain into Q3. You know, overall, what we’ve talked about historically is proprietary is about 60% of our distribution into our owners. And the goal there is obviously, you know, continuing to increase that proprietary channel contribution to really protect our owner profitability.

And so, you know, broadly, you know, we’re continuing to lean in as it pertains to, you know, AI and really positioning, you know, Choice for the shift that you’re seeing on the distribution side. We have made ChoiceHotels.com accessible to AI agents, which really allows them to search, compare rates, complete bookings, and so early innings in terms of the ability to talk about how the distribution landscape is going to change as it pertains to the cost.

But the reality is we think what’s sitting in front of us right now gives us an opportunity to wedge traffic away from those OTAs and ultimately increase that 60% going forward. Thank you.

OPERATOR

Your next question comes from the line of Patrick Scholes with Truist. Patrick, your line is open. Please go ahead.

Patrick Scholes (Analyst)

Thank you. Good morning, everyone. As we think about earnings growth for next year, would you be so kind to just give us a refresher on some of the sensitivities? Specifically, one point of RevPAR growth equals how much EBITDA? Same thing for net rooms growth and then the royalty rates. I checked on the website for any presentation. I didn’t see any updates on those, but thank you.

Scott Oaksmith (Chief Financial Officer)

No problem, Patrick. Let me hit it on a high level. I mean, as you think about just, you know, the building blocks as we head into 2027—obviously not going to give 2027 guidance, we’re working through the planning process as we speak. But the building blocks to consider, first and foremost, it’s on that operating side. So the three core levers, we’re entering 2027 with improving U.S. rooms growth, stronger RevPAR trends and the effective royalty rate.

So every 1% on both net rooms growth in the U.S. and RevPAR is about $5 million each. And then one basis point of effective royalty rate is another $1 million. So again, we feel very good about the fact that you’re seeing that momentum and you see the opportunity on the rate side specifically as it pertains to RevPAR, but you also see sustainable growth obviously with international and our platform business as well. And then when you layer in, obviously, expenses, we think that there’s going to be a meaningful step-down in SG&A to that low to mid-single digits. So you’ll likely see, obviously, a little bit more information as we enter 2027 here and we provide official guidance in February.

But those are really the building blocks at the highest level. Patrick, thank you for that update. All set? Thank you.

OPERATOR

Your next question comes from the line of Robin Farley with UBS. Robin, your line is open. Please go. A reminder, if you are muted locally, to please unmute your device. Can you hear us, Robin? Your next question comes from the line—oh, hi, Robin,

Robin Farley (Analyst)

Can you hear me?

OPERATOR

Okay, we can hear you, Robin. Now we can.

Robin Farley (Analyst)

Okay, great. I was not muted on my end for any of that, but okay, thanks. The question I wanted to ask is going back to Q4 and the sort of acceleration in the domestic unit growth that you’re talking about. It sounds like you’re saying it’s mostly going to come from the removal rate being lower. I guess, how do we think about that long term? Like if you get to a point of growth because of sort of a reduction in removals or a normalization of removals, what can we conclude about sort of next year and the year after in terms of domestic units?

Is it kind of back to maybe not necessarily growing if the growth here is really just coming from lower removals, or just how to think about that beyond just Q4? Thanks.

Dominic Dragisich (President and CEO)

So I think broadly it’s a both/and. So I think we’re going to see continued strength in terms of openings. I think, you know, obviously we’re up 17% year to date. I think that that sort of trend can carry us into Q4. And frankly, just with the volume that you see in Q4 historically, obviously we’re anticipating a really strong openings quarter, you know, coming up here. Now, I think on the removal rate, what you’re seeing, broadly speaking, is our exit rate is improving about 200–250 basis points, and we could actually see a slightly higher improvement than that, really returning back to our historical retention rates. And so we’re feeling good about that side of the equation as well. I do think what you’re seeing right now, Q4 into Q1 of next year, is absolutely sustainable. Obviously, the conversion-led model is an important advantage in this environment.

We have shorter development timelines, we have lower upfront investment costs, lower FF&E and conversion costs, broadly speaking. And so what we’ve talked about publicly is the goal is to eventually get back to that 2% to 4% net unit growth, or net rooms growth. And even in a new construction environment that is muted, you’re seeing kind of 50 basis points or less of supply growth. We think that we can get to that 2% even with a conversion-driven approach, with 90% of our openings coming from conversions.

I think you’re going to We need to see some tailwinds from a new construction perspective to get to that higher end in the long term. But broadly speaking, we feel very good about 1% plus for this year, obviously continuing to build on that as we enter 2027. And you know, the ultimate goal is to get to that 2% to 4%. And as we move forward, Robin, our 2027 planning is still underway, but we would absolutely expect to see both an increase in openings year over year as well as reduced terminations. And I think you can really look at our pipeline and see the success we’ve had, particularly in the US on the conversion pipeline, which is up 29% year over year and 6% sequentially over June 30th. So we’re seeing a lot of momentum there. We’re seeing our franchise agreement executions up.

They were up almost 25% in the quarter. So we’re seeing momentum on both sides. So it won’t be just a retention-led growth going forward, but that’s certainly a big piece of it and something we’re focused on getting back to where we have been historically.

Robin Farley (Analyst)

Great, super helpful, thank you. And just one other number, and you’ve thrown out lots of data, so I’m sorry if I missed this, but could you say what percent of things are or what percent of your pipeline is using key money? Just when you’re talking about, you know, kind of reducing what you spend on new units or what you spend to get that unit growth. What percent of your projects are using key money pipeline now and where do you think that goes next year?

Scott Oaksmith (Chief Financial Officer)

We haven’t given out specifically the percentages, but I will say that we have seen an increased use of key money across the industry over the last couple of years. So we are more elevated than we have been historically. But where we’re encouraged is that we haven’t seen the amount of key money needed per deal increase over the last 12 months or so. We’ve seen that crest in some brands and come down a little bit. And I think that’s really a reflection of the value proposition and what we’re offering owners, that we don’t need to continue to offer key money to affiliate with the system.

So we’re encouraged that it’s cresting. And we do believe that over the next couple years, we do think that will come down as an industry, particularly as the new construction environment improves, but certainly has been elevated over the last two to three years.

Dominic Dragisich (President and CEO)

Yeah, Robin. So I think the bottom line there is just when you take a look at the cumulative increase in key money, a lot of that has to do with the stronger development activity, the stronger net rooms growth that we’ve seen. You know, every deal continues to be evaluated on that long-term franchise revenue, the returns we do, IRR paybacks, et cetera. But I think the most important thing that Scott said there is you’re actually seeing the average incentive per deal come down through September or stay approximately the same.

So again, we’re encouraged that we’re doing all the right things there and that we’re actually seeing the progress on the top line as it pertains to the openings.

Robin Farley (Analyst)

Okay, great. Thank you.

OPERATOR

Thank you. Your next question comes from the line of Trey Bowers with Wells Fargo. Trey, your line is open. Please go ahead.

Trey Bowers (Analyst)

Hey, guys, thanks for the question. I guess first, just to put a finer point on that, I think the last time you gave us a key money update, it was around 120 to 130 million this year. Is that still the expectation? And it sounds like maybe you think that kind of flattens out or declines in the years to come, or is the expectation that’s kind of the run rate from here? Thanks.

Scott Oaksmith (Chief Financial Officer)

Yeah, we did give that guidance. We expect to be towards the upper end of that guidance, but generally still holds in terms of the go forward. As Dom and I both mentioned, we have seen the amount per deal hold, but we do expect an increase in openings here as we move forward. So really, any increase in key money going forward will be more a reflection of either the mix of moving higher up into the chain scales or the absolute number of openings for the key money to increase.

But generally, I think kind of this year’s level, slightly elevated for more openings, is a good modeling assumption.

Trey Bowers (Analyst)

And then if I could just get a follow-up in, it sounds like you guys are place in the kind of revenue and EBITDA. These owned assets about 6 million and a million is the expectation from here we continue to see a kind of 17 million per property and 17 times like that property’s EBITDA. I mean those seem like pretty, pretty great numbers. And I guess the last point of that, my quick math is that’s around 130,000 per key for a Cambria. And any kind of further detail around the individual asset sales would be amazing.

Scott Oaksmith (Chief Financial Officer)

It really varies. We know we have product in many different markets, some of them in more secondary markets and some in urban top 50 RevPAR markets. So it’s going to vary by asset. You know, the Columbia Hotel sold at about 11 times multiple of its EBITDA. The numbers are skewed a little bit by the Radisson Red we had in downtown Minneapolis. That was not a contributor to EBITDA. The hotel was really struggling in that market, as the whole market has been.

So that has pushed up the numbers a little bit. But I would say we’re generally, you know, most of these assets will probably trade around an 8 cap rate.

Trey Bowers (Analyst)

Great. Thanks for the questions, guys.

OPERATOR

Thank you. Your next question comes from the line of Brandt Montour with Barclays. Brandt, your line is open. Please go ahead.

Brandt Montour (Analyst)

Great, thanks for the question. First, want to hit on the termination progress and just sort of the year-over-year, cumulative year-to-date termination decline. I want to understand a little bit more about what’s driving that. You know, I’m assuming you would not say that there’s been a wholesale relaxation of brand standards, but in terms of maybe franchise agreement acquisition costs or key money, is there any money being applied to retaining some of those deals and if not one of the first two buckets, you know, what is it that you would describe as driving that progress?

Dominic Dragisich (President and CEO)

I think a lot of it had to do with the investments that we made in 2025 that are starting to come to fruition. It was an area that we were laser focused on. I mentioned the fact that this was m