Executive Summary / Key Takeaways

• Choice Hotels has strategically transformed into a more revenue-intense, diversified, and resilient lodging franchisor, leveraging its asset-light model and scale to drive growth beyond traditional RevPAR metrics.
• The company's Q1 2025 results demonstrated the strength of this strategy, with adjusted EBITDA and EPS growth driven by RevPAR outperformance in key segments, effective royalty rate increases, and robust growth in non-RevPAR dependent ancillary revenues.
• A significant competitive advantage lies in Choice's best-in-class conversion capability, enabling rapid pipeline velocity, and its ongoing investments in proprietary technology to enhance franchisee profitability and guest experience.
• The global pipeline, heavily weighted towards revenue-intense brands, represents a substantial value premium over the existing portfolio, providing a clear runway for future high-quality unit growth despite macro uncertainties impacting new construction.
• Management's updated 2025 guidance reflects a cautious view on domestic RevPAR but confidence in offsetting factors like cost management and continued strength in ancillary revenues and international expansion, underscoring the versatility of the business model.

A Strategic Evolution in Hospitality

Choice Hotels International, Inc. stands as a leading global lodging franchisor, operating an asset-light business model that generates predictable fee-based revenues. With a history spanning decades, the company has strategically evolved, particularly accelerating its transformation over the past five years. This evolution has centered on repositioning the portfolio towards more revenue-intense segments and markets, diversifying its earnings streams, and enhancing its value proposition for franchisees and guests alike. The acquisition of the Radisson Hotels Americas portfolio, integrated starting in August 2023, marked a pivotal moment, significantly expanding Choice's scale, international footprint, and capabilities, including a nascent hotel management business.

The company's core business revolves around franchising, providing a platform of brands, technology, marketing, and reservation services to independent hotel owners. This model benefits from inherent economies of scale, where incremental unit growth can lead to disproportionate increases in profitability. While primarily focused on domestic operations, international markets, managed through a mix of direct and master franchising, represent a growing opportunity. The business is subject to seasonal fluctuations, with revenues typically lower in the first and fourth quarters.

In the competitive landscape, Choice operates alongside major players like Marriott (MAR), Hilton (HLT), Hyatt (H), and Wyndham (WH). While giants like Marriott and Hilton command significantly larger market shares (Marriott 33.46%, Hilton 14.73% as of Q1 2025), Choice has carved out a strong position, particularly in the midscale, economy, and increasingly, extended stay and upscale segments. As of Q1 2025, Choice holds an estimated 2.09% market share. Compared to its larger peers, Choice's model often allows for lower operating costs per unit, contributing to a higher Return on Assets (ROA) (11.9% TTM for CHH). However, it has historically lagged in overall profitability metrics like Return on Equity (ROE) and faces challenges in matching the sheer scale and innovation budgets of the largest players. Wyndham, a closer peer in the mid-market, presents direct competition, with Wyndham currently showing stronger TTM earnings growth (17.43%) compared to Choice (9.37%).

Choice strategically differentiates itself through its deep franchisee relationships, best-in-class conversion capabilities, and a focused investment in proprietary technology. The company's ability to rapidly onboard conversion hotels is a key advantage, particularly in the current environment where new construction faces headwinds. This velocity allows Choice to capture royalties faster than competitors reliant on longer new construction timelines.

Technological Edge and Innovation Roadmap

Technology is a critical pillar of Choice's strategy and a significant competitive differentiator. The company has invested heavily in its "franchisee success system" and guest-facing digital platforms, aiming to drive revenue, reduce costs for owners, and enhance the overall guest experience.

Choice's core technological advantage lies in its integrated digital ecosystem, including its website, mobile apps, and proprietary property management system (PMS), Choice Advantage. The new Choice Hotels website and mobile apps have demonstrably improved booking conversion rates across all chain scales, including double-digit increases for upscale properties. The Choice Advantage PMS provides seamless connectivity to the central reservation systems and facilitates efficient inventory management. This system has been successfully rolled out to the acquired Radisson properties and enhanced to support the specific needs of extended stay brands.

Beyond core systems, Choice is developing targeted hotel profitability tools, which management indicates can drive potential cost savings of up to 20% at the franchisee level. A recently launched mobile-friendly one-stop owners platform provides franchisees with easier access to actionable intelligence, streamlining business management.

The company's R&D efforts are focused on areas like dynamic pricing capabilities to help franchisees optimize rate management and exploring the potential of Generative AI to enhance tools and guest interactions. These initiatives are highlighted at events like the annual MasteryX tech innovation summit.

The "so what" for investors is clear: these technological investments are not merely operational expenses but strategic assets. They directly contribute to the franchisee value proposition, making Choice brands more attractive to potential and existing owners, which supports unit growth and retention. Quantifiable benefits like improved conversion rates and potential cost savings translate into better financial performance for franchisees, reinforcing the fee-based revenue model. While competitors like Marriott and Hilton also invest heavily in technology, Choice's focus on tools specifically tailored to its core segments and its proprietary PMS offer a distinct advantage in serving its target franchisee base, potentially providing processing speed or cost efficiencies that resonate strongly with midscale and economy operators, helping to counter the scale advantages of larger rivals.

Performance Reflecting Strategic Execution

Choice's recent financial performance underscores the impact of its strategic transformation. For the three months ended March 31, 2025, the company reported income before income taxes of $59.8 million, a significant $19.6 million increase from the same period in 2024. This was primarily driven by a $19.8 million increase in operating income.

Key revenue drivers in Q1 2025 included:

• Franchise and management fees of $145.1 million, up 1.2% year-over-year. Domestic royalty fees, the largest component, increased by $1.7 million to $94.6 million, fueled by a 2.3% increase in domestic system-wide RevPAR and an 8 basis points increase in the effective royalty rate to 5.11%.
• Partnership services and fees saw robust growth, increasing by $5.5 million (28.3%) to $25.4 million, primarily from the co-branded credit card agreement and qualified vendors. Management views this as a key, less RevPAR-dependent growth stream.
• Owned hotels contributed $27.9 million in revenue, though this segment recorded an operating loss of $23.5 million as the company strategically invests in developing new brand prototypes.

Operating expenses saw a notable decrease in business combination, diligence, and transition costs, falling by $15.7 million following the termination of the Wyndham acquisition pursuit in March 2024.

The Q1 2025 performance highlights the success of Choice's strategy to outperform its chain scales. Domestic RevPAR increased 2.3% year-over-year, driven by a 1.7% rise in ADR and a 30 basis points improvement in occupancy. Notably, the Extended Stay segment achieved RevPAR growth of 6.8%, outperforming the industry by over four percentage points, while the Economy segment grew 7.1%, also outpacing its chain scale by over four percentage points. This outperformance, coupled with the increase in the effective royalty rate and strong ancillary revenue growth, demonstrates the company's ability to drive financial results even in a variable macroeconomic environment.

The company's balance sheet as of March 31, 2025, shows total assets of $2.58 billion and total liabilities of $2.64 billion, resulting in a shareholders' deficit of $63.9 million. Long-term debt stood at $1.87 billion. Liquidity remains sound, with $40.1 million in cash and cash equivalents and $593.8 million in total available liquidity, including borrowing capacity under the $1.0 billion revolving credit facility (upsized and extended in July 2024). The total leverage ratio was 2.89x as of March 31, 2025, within management's targeted range and in compliance with covenants.

Cash flow generation remains a strength. Net cash provided by operating activities was $20.5 million in Q1 2025, an $18.8 million increase year-over-year, benefiting from lower business combination costs and franchise agreement acquisition cost payments. The company continues to deploy capital strategically, with $35.5 million invested in owned hotel properties and $5.4 million in equity method investments in affiliates in Q1 2025 to support the growth of Cambria and Everhome Suites brands, part of a recyclable capital strategy targeting dispositions within five years. Capital is also returned to shareholders; in Q1 2025, $64.6 million was used for share repurchases and $13.5 million for dividends paid.

Outlook and Growth Trajectory

Choice Hotels' outlook for 2025 reflects a nuanced view of the market, balancing caution regarding macroeconomic uncertainty with confidence in its strategic growth drivers. Management updated its full year 2025 guidance, projecting adjusted EBITDA in the range of $615 million to $635 million and adjusted diluted earnings per share between $6.90 and $7.22.

The guidance incorporates an adjustment to domestic RevPAR expectations, now anticipated to range from -1% to +1% year-over-year. This moderation reflects observed softening trends in late March and April 2025, influenced by factors like the Easter shift and tougher comparisons. However, management is confident that effective cost management and the strength of other growth levers will offset this.

Key assumptions and drivers for the 2025 outlook include:

• Net global unit and room system size growth of approximately 1% year-over-year. While seemingly modest, this growth is heavily weighted towards more revenue-intense brands, which generate higher royalties per unit.
• Continued growth in the effective royalty rate, driven by the favorable brand mix and value proposition.
• Mid-single-digit growth in partnership services and fees from a 2024 base of $99 million, highlighting the increasing importance of non-RevPAR dependent revenues.
• Adjusted SG&A growth anticipated at the lower end of the low to mid-single digits from the $276 million base, reflecting disciplined cost management.
• Continued contribution from international business expansion and incremental revenue-generating opportunities from the expanded scale following the Radisson integration.

The global pipeline, with 98% of rooms in more revenue-intense brands, remains a strong platform for long-term growth, expected to generate significantly higher revenue per hotel compared to the existing portfolio due to a substantial RevPAR premium, higher effective royalty rates, and larger room counts. The company's conversion capability, demonstrated by the rapid opening of hotels from recent agreements, is expected to be a key growth driver in 2025, mitigating some of the slowdown in new construction starts caused by elevated interest rates and construction costs.

Long-term trends such as the increasing number of retirees, flexible work arrangements, and infrastructure/manufacturing investments are viewed as favorable tailwinds for Choice's target segments, particularly extended stay and midscale, supporting future demand.

Risks and Considerations

Despite the strategic progress and diversified growth drivers, Choice Hotels faces several risks that could impact its performance and outlook. Macroeconomic uncertainty remains a primary concern, potentially affecting consumer discretionary spending, travel demand (both leisure and business), and the hotel lending environment crucial for new development and conversions. Changes in interest rates continue to influence financing availability and costs for franchisees, impacting the pace of pipeline conversion and new construction starts.

Competition within the lodging industry is intense. While Choice has specific advantages, larger competitors possess greater scale, brand recognition, and financial resources, which could lead to pricing pressures or increased investment requirements in technology and marketing. The success of the strategy relies on maintaining and enhancing the value proposition to franchisees; any perceived decline could impact retention rates and the ability to attract new owners.

Operational risks include the ability to effectively manage the expanded portfolio, integrate new technologies, and navigate labor shortages or increased operating costs at the property level, which could affect franchisee profitability and, indirectly, royalty revenues. International operations are subject to foreign currency fluctuations and varying market conditions and regulatory environments.

The company's investments in owned hotels and financial support for franchisees, while strategic, carry inherent real estate and credit risks, though the recyclable capital strategy aims to mitigate long-term exposure. Changes in tax regulations or accounting standards could also impact financial results.

Conclusion

Choice Hotels International has successfully executed a strategic transformation, building a more versatile and resilient business model less solely dependent on overall domestic RevPAR trends. By focusing on revenue-intense segments, leveraging its extensive franchising network, and investing in differentiated technology, the company has established multiple levers for growth, including accelerating unit expansion in high-value segments, increasing effective royalty rates, and expanding non-RevPAR dependent ancillary revenues.

The Q1 2025 results and the updated 2025 guidance demonstrate the tangible benefits of this strategy, showcasing RevPAR outperformance in key segments and robust growth in ancillary fees, which are expected to help offset a more cautious domestic RevPAR outlook. The strength of the pipeline and the company's conversion capabilities provide a clear path for future unit growth. While macroeconomic uncertainties and competitive pressures persist, Choice's diversified portfolio, tech-driven value proposition, and disciplined capital allocation position it to continue driving earnings growth and creating long-term value for shareholders. The ability to maintain momentum in pipeline conversion, realize the full potential of ancillary revenue streams, and navigate the evolving macroeconomic landscape will be key factors to watch.