Choice Hotels International, Inc. (CHH) Q3 2026 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International third quarter 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.

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 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 Dragasich, our chief executive officer and Scott E. Oaksmith, our chief financial officer. Dominic will discuss our business performance and strategic progress. Scott will review our financial results and outlook. And with that, I will turn the call over to Dom.

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 am grateful for the board's confidence, and I am excited about the opportunity ahead for Choice Hotels. At our core, we are an asset light franchiser 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's operating priorities are clear. First, accelerate US 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 3 priorities. Let me start with net rooms growth. Our US 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, expect a more meaningful acceleration in US net rooms growth in the fourth quarter to approximately 1% year over year. US 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. The 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 US 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 US 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 are engaging franchisees earlier in the renewal process, with clear 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 2 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. US room openings increased 17% year to date despite declining in the third quarter against strong prior year comparisons. We expect strong growth in US room openings for the full year supported by our historical year end opening patterns with roughly 1 third of annual US room openings typically occurring in the fourth quarter. Conversions remain an important advantage for Choice. We have 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 open year to date, approximately 2 thirds opened within just 3 months of signing. We are also seeing strong development activity that supports future rooms growth. US franchise agreements increased 24% year over year in the quarter and our US conversion pipeline grew 29% year over year and represents over 1 third of total pipeline rooms. Together, improving retention and continued development activity are strengthening the foundation for sustained US 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. Over the past 2 months, I have met directly with more than 900 franchisees across the U.S. and Canada. I have come away energized by the positive tone of these conversations and the alignment I am 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 are 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. Since its launch in May, revenue from existing customers who had 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 are also adapting our digital content strategy as travelers increasingly use AI powered search tools. Our investments in richer, more relevant hotel content helping to 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 have reduced reputation management fees by approximately 30% through our AI enabled smart response tool. We have also introduced targeted fee incentives for hotels that achieve strong guest satisfaction and operating performance. In addition, we are 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 are reinforcing our focus on franchise led growth and beginning to unlock capital from our owned hotel portfolio. We have already begun that process. Since quarter end, we have sold 2 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 1 example. it is an asset light subscription platform with recurring revenue that expands our reach into complimentary outdoor travel, serving customers whose travel preferences align closely with those of Choice's value minded guests. Harvest Hosts has approximately 300 thousand 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' stand alone economics, with potential benefits from Choice'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 US net rooms and RevPAR growth. Supported by our strengthening commercial capabilities and the operational changes we have made across the business. I also want to thank our associates and franchisees for their continued commitment to Choice 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 will turn the call over to Scott.

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 will 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 5%. Underlying performance benefited from higher US 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 will 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, US 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, growth across all regions led by a nearly a 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, US 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 US 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. US franchise agreements awarded for our midscale and economy transient brands increased 10% year-over-year. While the pipeline for these brands expanded 2% sequentially. Additional detail on our US 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 in RevPAR, royalty rate expansion remains an important driver of our organic franchise revenue growth. During the third quarter, our US 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 Dominic 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 are 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 5% year over year during the quarter, primarily reflecting higher accounts receivable reserves certain onetime 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 1-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 a $103 million in 2025. We expect development capital outlays across our owned hotels and joint ventures to decline substantially from the approximately $7.075 billion projected for 2026 with only minimal funding needs expected after the first half of 2027. We have also begun recycling capital, Subsequent to quarter end, we completed the sale of 2 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 to generate more proceeds from asset sales then we invest in development by 2027. Our remaining commitments decline and dispositions progress. Our initial focus is on Cambria, giving its more established operating history while allowing our recently opened Everhome 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 Hosts for approximately $130 million in cash and revolver borrowings. For the 12 months ended September 30, Harvest Hosts generated approximately $33 million in revenue, and approximately $11 million in adjusted EBITDA. We will begin consolidating Harvest Hosts results in the fourth quarter and provide additional modeling context with our 2027 guidance in February. We expect Harvest Hosts 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 3x to 4x. Our quarter end cash balance reflects borrowings made in advance of the October 1 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 9 months of the year, 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 $135 million reflecting elevated investment in franchisee facing and guest delivery capabilities. As a reminder, these programs are structured to operate at breakeven 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 have discussed today, we are raising our full year US 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 US royalty rate expansion. Partially offset by higher adjusted SG and 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 and earnings of affiliates. We now expect full year US 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 have seen into October. We estimate the full year benefit of the FIFA World Cup at approximately 30 basis points. We now expect US 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 US net rooms growth in the fourth quarter. In The US, 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 the 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 the last year. Excluding Harvest Hosts, now expect full year adjusted SG&A to increase 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 Hosts, 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 are making against our operating priorities. We are focused on translating these improvements into consistent results and sustainable long term shareholder value. With that, Dominic and I are happy to take your questions. Operator?

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press 1 to raise your hand. To withdraw your question, press 1 again. We ask that you pick up your handset when asking a 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 and a roster. Your first question comes from the line of Lizzie Dove with Goldman Sachs. Lizzie, your line is open. Please go ahead.

Good morning. Thanks for taking the question. I wanted to ask about U.S. rooms growth. Obviously, progress there, and it is a big acceleration implied in 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 are seeing in, particularly the conversion environment given it is such a big driver for you both in terms of Q4 and just longer term given we have had some kind of mix commentary across the space this quarter?

Absolutely. Thanks, Lizzie. I will take that 1. So as I had mentioned, obviously, in the prepared remarks, the net rooms growth is certainly my number 1 operating prior. Priority for the company. Obviously, we have seen very strong quarter over quarter improvements in that net rooms growth figure. 3 consecutive quarters of improvement. So when you take a step back though, I think what is even better, is that you are seeing strong results across all 3 component parts, right, where you have openings are up 17% year to date, exits are down, you know, 44% year to date, Development agreements are up 36% year to date. So that is 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 is. It gives me even more confidence. Right? Because we are still growing in that midscale plus category, but at the same time, we are seeing a little bit of a bothand. And so I mentioned this last quarter, consistent progress, I think, leads to confidence. And we are sitting in a very confident spot heading into Q4 We mentioned, you know, historically about 1/3 of our annual openings typically occur in Q4. Conversions are actually opening even more quickly. 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 are 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 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 is 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 property for the year.

Great. And then 1 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 you know, sequential improvement. But with these kind of commercial initiatives that you are 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, you know, the relative performance versus, you know, SDR?

Sure. I mean, obviously, we are in the early innings of some of these commercial investments. We talked about, you know, the $60 million or so of spend last year into this year, which is also driving you know, that marketing and reservation system fund deficit. You know, obviously, we have we have leaned in on the commercial side, but, certainly encouraged by the RevPAR improvement and the 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 are 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 are 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 are seeing is an occupancy led recovery. When you think about those commercial capabilities, we have the EasyBid 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 RAIZ, which is our rate management tool, brings together pricing, inventory channel management altogether in 1 place. So that is going to be rolled out this quarter. So you are gonna 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 are 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 RAIZ platform because it really is rate. Where we have the ability to drive, additional performance. So you are gonna see that probably showing up more in Q1, Q2 of next year. But again, I think the setup is there for a really strong 27.

Thank you.

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

Hi. Good morning. I wonder if you could give us. Good morning. Appreciate all of the detail. I wonder if you could give us just a little more insight into you know, what is available to be sold on the owned side. Right? help us gather an inventory, and you are not gonna guide us to a specific number. You know? But, notionally, what is available to be sold I imagine you have some estimates that maybe you can qualitatively give us a little insight. Thanks.

Thanks, David. I will take that 1. So, you know, as we as we highlighted in our supplemental materials, we do have several hotels that are on the owned side that would be able to sold. So we own 17 hotels when you adjust for the 2 that we have sold in the fourth quarter. And so those are really the pool that we are focused on today. When you think about the total amount of capital related to that, we are really gonna be focused more on the Cambrias today. Those are more mature assets that we looked at. We can we can move to sell those And then as the Everhome has become more efficient or me, you know, ramp up and are ready for disposition, those will come in the second half of that. So today, post sale, we have got 11, excuse me. 9 Cambrias left. We still have 2 Radissons left and 5 Everhomes. That we are ready to sell. So we are focused on the Cambrias. We had some success with some early ones. That we sold here in the second quarter excuse me, in the fourth quarter. I have 1 more under contract that should close end of the quarter. Beginning of next year, and continue to work through market by market selling those. When you look at kind of the capital that is that is outstanding on that, as we have talked about in the past, really what we have was about $455 million coming into the quarter of owned assets available for sale. That will be reduced by about the $38 million of the assets that we talked about. So that is kind of the pool we are working on today. About $330 million of that is Cambria.

Perfect. Thank you.

Thank you. Your next question comes from the line of Daniel Politzer with JPMorgan. Daniel, your line is open. Please go ahead.

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 are 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.

Sure. So let me hit it at a high level, and then I will hand it over 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, you know, free cash flow generation in 2020 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 3 primary drivers of that, right, which is, you know, first and foremost, if the development capital requirements that are coming down significantly. We talked about the fact that we are know, completing the own hotel development, minimal funding needs now with only 1 hotel under construction. Construction through first half of 2027. We are seeing capital recycling. We sold those 2 hotels. We expect that additional disposition in early 2027, and obviously gonna continue to look for more dispositions. But most-- you know, very importantly, I think, has really been the drag on the marketing and reservation deficit in, you know, 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 rep, you know, makeup, you know, obviously, what gives me the most optimism to return to free cash flow, you know, improvements in 2027 it is the top line. You are seeing all 3 of our key revenue levers in flex. With regards to net rooms growth, RevPAR, royalty rates continue to expand. So we think that growth on the top line is very much sustainable heading into 2027. So those are all gonna be tailwinds for us.

And as it pertains to the actual conversion, I will let Scott hit on that 1. Yeah. We see a real, meaningful, to improve the conversion. You know, we are moving beyond a period of that elevated investment now that we have achieved our strategic objectives. And so the capital intensity of the 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 we look at our capital allocation hierarchy, 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 do not have 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 have 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.

Got it. And just to clarify, for the free cash flow conversion this year, any parameters to which to think about that? Then maybe on a go forward, if we can get back to that 50% to 60% type range?

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

Got it. Thank you so much.

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

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

Absolutely. So the Harvest Hosts deal was certainly opportunistic. I would tell you that, you know, what Scott said is spot on with regard to we are prioritizing organic growth first and foremost. Obviously, if there is smaller tuck ins that are know, net beneficial both to our owners and our shareholders, you know, we will obviously consider that. And I think Harvest Hosts certainly fell in that, fell in that bucket. But we also think our stock is cheap right now, frankly. And I think, you know, to Scott's point, there is a reason why we gave share repurchase guidance this year. it is first time in my 10 years since I have been here that we provided share repurchase guidance. We are trading at a historically low multiple, and we are seeing a lot of great inflection in the business itself. So it is not to say that we would not do something that is a little bit more, you know, tuck in nature, probably immaterial. But, you know, you mentioned Harvest Hosts, and I think broadly speaking, that was an acquisition that was very much aligned with the asset light growth strategy. Right? It was subscription based, recurring fee model, It expanded our reach into an outdoor travel segment that we actually were underpenetrated 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 is tremendous overlap with the 2 million customers that we talked about on the call. 300 thousand subscribers. So even, you know, keeping this business as a stand alone, we think that it is a really strong return. But then when you consider the CP overlap and whatnot, we think it is, 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 as we wanna keep this thing as a separate business unit. It does not distract from the core strategy. And most importantly, I think as it pertains to that financial return for our as well. So I think it passes the litmus test both for the franchisees as well as our investors.

Got it. And then just 1 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 3 months?

Yeah. Yeah. It was a-- 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 manage 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, just did not align with the asset light growth plans. And so we were not willing to take on additional lease exposure, are not 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 align with those strategic priorities as a company.

Michael, just to answer your question, yeah, it was a legacy.

We had this relationship. Know, going back 4 or 5 years now.

Helpful. Thank you.

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

Yeah. Thank you very much for taking my question. Congrats, Dominic, on the permanent announcement here. So just wondering if we could walk through a little bit of the just owned-and-leased bridge for next year, right? So we I think you guys gave a little bit of the comments around Harvest Hosts. But Scott, if you could just help us understand, 1, where exactly is Harvest Host going to show up in the P and L? And then 2, net of sales, it sounds like with the third 1 coming here, directionally, 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.

Sure. No problem, Shaun. When you think about Harvest Host, most likely just given the size of it, we will probably include it in our other revenue line item, and it will also flow through in the SG&A. it is a pretty simple business. it is a subscription based You know, we are about the members spend, you know, annual subscriptions that range from, $99 to about a $180, and then primarily the cost are technology and customer acquisition. So, most likely, we are still worth working through those disclosures, but that is where that will show up. When you think about the owned assets, the 3 assets that we are selling, they generate roughly about $12 million Excuse me. The ones that were sold were about $12 million in revenue and $2 million for a full year in EBITDA, the 1 that is scheduled to be sold here at the end of the year, is another $6 million and about $1 million in EBITDA. So total, revenue is somewhere between $18 million and $19 million with an EBITDA impact of about $3 million Perfect.

Thanks so much.

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

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

Yeah. So I think distribution costs are, you know, obviously, 1 big You know, 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 and E costs, etcetera. But when you take a look at, you know, just the distribution process, it comes down to just the improvements that we are seeing in the new loyalty program and particular. You saw about 200-basis-points of loyalty increase, the loyalty contribution last quarter. You are seeing that sustain into Q3. Overall, what we have 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, yeah, we are we are continuing to lean in, as it pertains to you know, AI and really positioning, you know, choice for the shift you are seeing on the distribution side. We have made, you know, choicehotels.com accessible to AI agents, which really allows them to search, compare rates, complete bookings. And so early innings in terms of our ability to talk about how the distribution landscape is going to change as it pertains to the but the reality is we think what is 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.

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

Thank you. Good morning, everyone. As we think about earnings growth for next year, would you be so kind of just give us a refresher on some of the sensitivities specifically 1 point of RevPAR growth equals how much EBITDA same thing for net. Rooms growth, and then the royalty rates. I checked on the web website for any presentation. I did not see any updates on those. But thank you.

No problem, Patrick. Let me let me hit it at a high level. I mean, as you think about just you know, the building blocks as we head into 2027, Obviously, not gonna give 2027 guidance. We are working through the planning process as we speak. But, the building blocks to consider, you know, first and foremost, it is on that operating side. So the 3 core levers, you know, we are entering 2027 with improving US rooms growth, stronger, you know, 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 1 basis point of effective royalty rate is another $1 million. So, again, feel very good about the fact that you are seeing that momentum. And you see the opportunity on the rate side specifically as it pertains to RevPAR. But you also see, you know, sustainable growth, with international and our platform business as well. And then when you layer in, obviously, expenses, we think that there is gonna be a meaningful step down in SG&A to that low to mid single digits. So you will likely see, you know, obviously, a little bit more information as we as we enter, you know, 2027 here and we provide official guidance in February. Those are really the building blocks at the highest level, Patrick.

Thank you for that update. All set.

Thank you. Your next question comes from the line of Robin Farley with UBS. Robin, your line is open. Please go ahead. 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. Can you hear me okay?

We can hear you, Robin. Now we can.

Okay. Great. I was not muted on my end for any of that, but. Okay. So the question I wanted to ask is going back to Q4 and the acceleration in the domestic unit growth that you are talking about It sounds like you are saying it is mostly gonna 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 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 renewables or just how to how to think about that beyond just Q4? Thanks.

So I think broadly, it is a both-and. So I think we are gonna see continued strength in terms of openings. I think, you know, obviously, we are 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 are anticipating a really strong openings quarter coming up here. Now I think on the removal rate, what you are seeing broadly speaking is our exit rate is improving, about 52 basis points, and we could actually see a slightly higher improvement than that really returning back to our historical retention rates. And so we are feeling good about that side of the equation as well. I do think it is what you are 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 and E and conversion broadly speaking. And so what we have 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 new construction environment that is muted, you know, you are seeing kinda 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 opening coming from conversions, I think you are gonna 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, I am. And our 2027 plan 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 have had, particularly in The US, on the conversion pipeline, which is up 29% year-over-year and 6% sequentially over June 30. So we are seeing a lot of momentum there. We are seeing our franchise agreement execution's up. They were up almost 25% in the quarter. So we are seeing momentum on both sides. So it will not be just a retention led growth going forward, but that. that is certainly a big piece of it and something we are focused on getting back to where we have been historically.

Great. Noha. Super helpful. Thank you. And just 1 other number, and you. You have thrown out lots of data, I am sure if I missed this. But did you say what percent of real things are. Or what percent of your pipeline is using key money just when you are talking about you know, kind of reducing what you have spent on new units or what you spend to get that unit growth. What percent of your projects are using key money pipeline now? And when do you think that goes next year?

We have not 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 are encouraged is that we have not seen the amount of key money needed per deal increase, you know, over the last, you know, 12 months or so. So we have seen that crest and some brands come down a little bit. And think that is really a reflection of the value proposition and what we are offering owners that we do not need to continue to offer key money to affiliate with the system. So we are encouraged that it is cresting, and we do believe that over the next couple of years, we do think that will come down as an industry, particularly as the new construction environment improves, but, certainly, it is been elevated over the last 2 to 3 years.

Yeah, Robin. So I think the bottom line there is just when you when you take a look at just 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 have seen. Every deal continues to be evaluated on that long term franchise revenue. The returns. We do IRR paybacks, etcetera. But I think the most important thing that Scott said there is you are actually seeing the average incentive per deal come down through September or stay approximately the same. So again, we are encouraged that we are doing all the right things there and that we are actually seeing the progress on the top line it pertains to the openings.

Okay. Great. Thank you.

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

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 million 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 is kind of the run rate from here? Thanks.

Yeah, we did give that guidance. We expect to be towards the end of that guidance, but generally still holds. In terms of the go forward, as Dominic and I both mentioned, that 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 reflection of either the mix of moving up 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, you know, slightly elevated for more openings is a good modeling assumption.

And then if I could just get a follow-up in. It sounds like you guys are placing the revenue and EBITDA of these owned assets, $6 million and $1 million Is the expectation from here we continue to see a kind of $17 million property and 17x, like, that property's EBITDA. I mean, those seem like pretty great numbers. I guess the last point of that, my quick math is that is around $130 thousand per key for a Cambria. And any kind of further detail around the end of the asset sales would be amazing. Thanks.

It really varies. Have product in many different markets some of them in more secondary markets and some in urban, you know, top 50 RevPAR markets. So it is gonna vary by asset. You know, the Columbia hotel sold at about an 11x multiple of its EBITDA. The numbers are skewed a little bit by the Radisson Red we had in Downtown That was not a contributor to EBITDA. The hotel was you know, 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 are we are generally, you know, most of these assets will probably trade around an 8 cap rate. Great.

Thanks for the questions, guys.

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

Great. Thanks for the question. First, wanna 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 is driving that. there is I am assuming you would not say that there is 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, 1 of the first 2 buckets, what is it that you would describe as driving that progress?

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 my top operating priority. If you think about just the investments that we need. Made from, you know, a people, process, and systems perspective, really assigning accountability across the development life cycle, both on the opening side as well as on the retention side. We enabled, you know, our field teams with better systems, better processes, etcetera, and we got ahead of expirations. I think in a lot of cases, if you look back to 2025 and previously, we were stubbing our, you know, our own toes, so to speak. When we were fighting with 1 arm behind our back as it pertained to not having this information at our disposal. Think we also had a pretty significant, set of expirations based on a lot of the comfort cleanup that we had previously done, which was back in 2020, you know, 13, 34. So when you look at it from a timing perspective, there were a lot of windows and expirations. And we took an opportunity last year to really exit the lowest performers. When you take a look at, you know, approximately you know, 2 thirds of our room exits last year and into this year are coming from the bottom quartile for guest satisfaction. Those are the types of things that we were looking at is really making sure that we were holding on to the best products possible. But this year, we have seen, you know, that subside. Quite a bit, and I think we are really executing on what we are talking about kind of both and because we have a right to win, obviously, in that economy and lower midscale as well. And so I think the absolute worst is behind us, and I expect the trends that you are seeing this year to continue well into 2027 and beyond.

Okay. And then on the comment you made about AI, the tenfold increase in web traffic coming from AI, know that is still small. If you kind of look at just sort of the month over month trend line and maybe take it out to next year, what could that be as a percentage of total mix by next year sort of some point next year? Just to give us some sort of sense, big picture of where of where that is?

Yeah. it is a little too early to tell, to be honest with you. I mean, visits did increase tenfold. But to put it in perspective, when you think about direct visits, that is about 1% of our volume. I know that, you know, 50%. All the research we have done, 50% of research starts, you know, with an AI tool at this point or they, you know, look at, you know, what is available in that particular market. But still very much in the infancy phases, I would say, I do think at the end of the day, like I said, the most important thing is making, you know, choicehotels.com accessible. And so you know, a perfect example of this is you can complete the entire booking process right now through Muse, including secure payment. And so, really, what we have been focused on is really building on the foundation to have kinda common shopping book. Booking, you know, loyalty service to really connect directly with these emerging platforms so that know, it does not require customer in-- integration or an installation by a guest. So, again, it is it is the common infrastructure that we are building. Obviously, this is an opportunity, like I said earlier, in the in the q and a session. I think it is an opportunity to increase that 60% proprietary channel contribution. But again, at 1% of your volume coming through LLMs today, I am not gonna opine on whether or not that grows to 10% or 20% next year.

Great. Thanks, everyone.

Thank you. Your next question comes from the line of Meredith Prichard Jensen with HSBC. Meredith, your line is open. Please go ahead.

Good morning. I was hoping you might speak a little bit about growth, excluding Canada. And particularly, as you were mentioning, some of the SG&A was related to international and I am wondering if that is sort of to build infrastructure there for development and how we should think about that going forward in sort of the mix between direct and master franchise. Thank you.

Sure. Thank you. So international, obviously, is gonna continue to be part of our growth strategy going forward. What we talked about, you know, last quarter, and we have talked about this historically as well, we are focused on The Americas. First and foremost. Right? When you take a look at where direct franchising is a is a common practice, those are the markets that we are laser focused on specifically in The Americas. There was a reason why we consolidated the ownership structure in Canada. Canada has been a really nice tailwind for us this year. So when you take a look at, you know, international holistically, revenue, you know, we look at it on a GRR basis. Revenue was up a little over 7% in Q3. it is up about 8% year to date. RevPAR internationally, 4% currency neutral, so to speak. Rooms are up 7%. And so when all is said and done, EBITDA is still on track to be about $50 million, you know, a little over $50 million this year. And we expect to see kind of that mid single digits growth going forward. As it pertains to direct versus MFA, do you want to hit on some of that Scott?

Sure, yeah. So in a direct versus MFA, we are about 45% of our rooms now are on the direct side, and about 55% are MFAs. So that is been a material improvement, particularly with the acquisition of the Canadian joint venture last year. So moving in the right direction, making sure that is more revenue in intensive. We are really focused on the direct markets where we think we can compete and has a more robust franchising environment. In terms of your question around SG and A, really the growth in SG&A has been around the acquisition of Canada. So we did bought that in July 1 of last year. So we have now lapped the SG&A growth there. So just some small investments as we introduced our 22 brands up in the Canadian region versus the 8 that the original JV had. But think the great news is with over 370 hotels, in Canada, we already have scale. And so there should not be a lot of SG&A needed to accelerate growth up there.

Super clear. And last, very quickly, just for modeling purposes. You noted on partnership services that there were some timing issues there, and so it would be sort of doubled up in the fourth quarter to reach sort of a target of low, I think, to mid single digits, something like that. Is that kind of the pace we should think about going forward? I know there was a lot of procurement opportunity there, so I did not know if that might be something we could look forward to higher growth in future years and that is it. Thanks.

Yeah. I do think that it is do think there is an opportunity to grow that more in accelerated fashion going forward. We did have some timing of revenues, that pushed this quarter into next quarter, and we are now projecting low to mid single digit. But I think going forward, we are probably in the more mid single digit increase as a base. And as we continue to unlock more opportunities both in procurement and through monetizing the, you know, the millions customers that come to our hotels going forward. there is an opportunity to grow that even faster. But say in more long term, that mid single digits is a good modeling assumption.

Awesome. Thanks so much.

Thank you. Your final question comes from the line of Alex Brignall with Rothschild and Co. Alex, your line is open. Please go ahead.

Thank you so much. Just 1 question on RevPAR. I got less interested in forward expectations because, you know, the visibility is so low. But, obviously, in the last few weeks and months, the gap between the high end RevPAR and the lower chain scale RevPAR in The US has closed dramatically. I wonder if you could just help us to put some reasoning behind that. Just to have a better understanding. Thank you.

Sure. Thank you. I will hit that 1. And I think it a lot of it has to do with just broader macro demand trends and whatnot. Know, I think simply put, the environment has become more constructive. Right? Especially with our consumer. You know, the growth I think it is showing up in the growth. The growth is accelerating. Right? 7% was our RevPAR in October. We are optimistic that Q4 is going to be stronger than Q3 was. And I think a lot of this has to do with the fact that we are just more optimistic about, you know, the mid scale consumer. You know, employment is holding up. Even at the lower end, you had stronger drop reports. You know, wage growth, deposit levels are holding up, consumer spending is holding up. And so, yes, I think you are seeing, you know, some of that C-shape that we have been referring to here over the course of the last couple months. But I think the most important trend that we are seeing is, you know, consumers still continue to prioritize travel. Right? So when you take a look on the leisure side, we are seeing the resilience there. It showing up in the occupancy. And then on the business side, a lot of that is really project based workforce related demand, you know, remaining resilient. So, again, we are sitting in what I would classify right now as a little bit of a sweet spot in terms of where demand drivers are coming from. So when you take a look at the broader macro obviously, a nice setup for us. But, you know, gonna continue to focus on what we can control. So this goes back to you know, commercial investments, midweek, etcetera. But, again, I would say that those are the top reasons as to why you are seeing RevPAR, especially in our segments bounce back.

Thank you so much.

Thank you. There are no further questions at this time. I will now turn the call back to Dominic E. Dragisich for closing remarks.

Thank you, operator, and thanks, everyone, for joining us this morning. We look forward to speaking with you again in February when we report our fourth quarter results. Have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.