Choice Hotels (CHH) Q2 FY26 earnings call: guidance and Q&A

How can royalty rates be increasing while the company is simultaneously delivering greater value to franchisees?

Management explained that the increase in royalty rates is primarily due to a mix shift towards higher-revenue brands and new contractual rates for incoming hotel owners, not rate increases on existing franchisees. They highlighted various initiatives to lower franchisee costs and increase revenue, such as reduced prototype costs (25%), increased loyalty contribution (250 bps), and FF&E cost reductions (20%), which are driving stronger development results.

“This isn't raising rates on existing franchisees, but more contractual as new hotel owners come into the system and pay the published rates that we have today.”

asked by David Katz · answered by Scott Oaksmith

Could you elaborate on the encouraging U.S. rooms growth trend, particularly the improvement in room exits, and how much is due to the end of the revenue intensity strategy versus underlying improvements?

Dom stated that U.S. net rooms growth is a top priority, with Q2 openings up 27% and exits down 50%. He noted that 75% of franchise agreements signed this year are expected to open within the year due to the speed of the conversion engine. He clarified that while the revenue intensity strategy contributed, the goal is a 'both/and' approach, winning in both higher-revenue and economy segments, and that retention improvements are equally important.

“Our openings for the quarter were up 27%. Our exits were down about 50%. Franchise agreements were up 30%.”

asked by Elizabeth Dove · answered by Dominic Dragisich

Why did U.S. RevPAR of 1.3% lag the chain scale mix, and why is Q4 RevPAR expected to decelerate despite easier comparisons?

Dom acknowledged the RevPAR lag, attributing it to being under-indexed in urban markets and business transient, which saw a strong bounce-back. He noted occupancy index gains and sequential improvement, with July improving 100 bps over June. Scott explained that Q3 is expected to be stronger than Q2, but Q4 may moderate due to calendar shifts (Labor Day) and short booking windows, making visibility limited.

“We do see that moderating a little bit in Q4. As we've talked about in the past, our booking windows are fairly short, so we don't have a lot of visibility in that Q4.”

asked by Daniel Politzer · answered by Scott Oaksmith

Can you explain the increase in franchise agreement acquisition costs (key money) while overall capital intensity is declining?

Scott explained that key money was up due to a rise in room openings (27% YoY) and a mix shift towards higher-revenue brands, which sometimes require slightly higher key money. He emphasized that key money is disciplined, underwritten for attractive returns, and tied to property improvement plans. Overall capital intensity is declining because the company is winding down capital-intensive development programs for Cambria and Everhome, returning to an asset-light franchising model.

“With that, we do believe that our use of key money will be slightly higher than we originally talked about earlier in the year, probably in the order of $15 million to $20 million higher.”

asked by Michael Bellisario · answered by Scott Oaksmith

Will the owned hotel portfolio eventually go to zero, and what is the magnitude of capital expected from these sales?

Scott confirmed that owning hotels is not part of Choice's long-term strategy, as they aim to be an asset-light franchising company. The owned hotels were primarily for launching Cambria and Everhome or acquired with Radisson. He stated that the company does not plan on holding any of these assets long-term. Of the $650 million on the balance sheet related to these programs, approximately $450 million is in owned hotels, which represents the immediate monetization opportunity, with the first sales expected in H1 2027.

“At this point in time, we don't see any long-term strategic value into owning them. We are an asset-light franchising company. So we do not plan on holding any of the assets.”

asked by Raymond Bowers · answered by Scott Oaksmith

Could you discuss the impact of the loyalty program refresh, particularly on penetration/contribution, and the sustainability of partnership revenues?

Dom highlighted the 250 basis point increase in loyalty contribution and 7% growth in active members to 77 million, noting that new members are generating higher RevPAR. Scott explained that the growth of the loyalty program creates opportunities to cross-sell services to loyal members, driving partnership revenues. He also noted that leveraging the system's scale for procurement helps lower franchisee costs while generating fees from third-party vendors, supporting mid-single-digit growth for partnership services and fees this year with future acceleration potential.

“Membership grew 7% year-over-year to $77 million, while loyalty contribution increased more than 250 basis points during the quarter.”

asked by Meredith Jensen · answered by Dominic Dragisich

How will the widening gap in reimbursable revenue and expenses progress in outer years, and can you quantify the surplus that funded this?

Scott explained that the current elevated spending on marketing and reservation reimbursable is a temporary acceleration of investments in franchisee and guest value propositions. This spending was funded by accumulated surpluses of about $25 million from prior years. He expects this to be the high watermark for spending this year, with investments completing and expenses normalizing in future years, eventually returning to a breakeven model.

“Coming into the year, we had a little over -- I think it was about $25 million in surpluses. So we are going into more of a deficit with the spending levels this year.”

asked by Alex Brignall · answered by Scott Oaksmith