Prepared remarks
Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International Second Quarter 2026 Earnings Call. I will now turn the call over to Allie 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 used in today's remarks is included in our earnings press release available in the Investor Relations section of choicehotels.com. Joining me this morning are Dom Dragisich, our Interim 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.
Thank you, Allie, and good morning, everyone. The second quarter marked encouraging progress across our key priorities, highlighted by a 6% year-over-year increase in adjusted EBITDA. Most importantly, U.S. net rooms growth improved sequentially for the second consecutive quarter and is now nearly flat year-over-year. This reflects our strongest first half performance since 2021. These improving net rooms growth trends in the U.S. and continued international momentum led to global rooms growth of 2.6% in the second quarter. We also continued to drive strong franchise agreement results during the quarter, reinforcing our confidence in future global and U.S. rooms growth. U.S. RevPAR increased 1.3% year-over-year, reflecting strengthening demand trends and benefiting in part from the FIFA World Cup. The RevPAR improvement we saw during the second quarter, together with the trends since quarter end, show we are moving in the right direction. I am confident this business can perform at an even higher level as we continue to realize greater value from the investments we've made in our commercial engine and technology platform while maintaining a renewed focus on execution. Disciplined capital allocation also remains a key priority for Choice. In the first half of the year, capital outlays for hotel development declined 80% year-over-year as we continued our transition back to a pure-play asset-light franchising model while maintaining flexibility to make targeted investments in attractive franchise growth opportunities. There is still more work to do, but the progress we have made this quarter and the underlying operating trends we're seeing give us greater confidence in the outlook for the balance of the year. As a result, we're raising our full year outlook across several metrics, including adjusted EBITDA, U.S. and global RevPAR, U.S. royalty rate and global net rooms growth, which Scott will cover shortly. Now before I go into the quarter in more detail, I'd like to briefly share how I'm approaching this role. My focus is simple: execution. We have a meaningful opportunity to improve, and my job is to close the gap between where we are today and where I believe this business can perform. Since stepping in, I spent most of my time listening to our franchisees and teams across the company. Those conversations have reinforced three priorities for me. Staying close to our franchisees and the guests they serve, moving with greater urgency across the business and being disciplined about where we invest our time and capital. Years of working across the business have given me firsthand insight into our strengths, where we can perform at a higher level and where better execution will make the biggest difference. What's needed now is greater speed, discipline and accountability to deliver stronger results for our franchisees and shareholders. Over the past several years, we've invested in building a stronger commercial engine and technology platform. Today, I believe our biggest opportunity is realizing the full potential of what we've already built, turning those investments into stronger operating performance, improved franchisee profitability, better guest experience and ultimately greater long-term shareholder value. We'll be candid about where we're making progress and where we still have work to do. Ultimately, you'll measure us by the results we deliver, and that's the standard I hold us to. The way we'll achieve those results is by executing a business model that creates value for our franchisees and in turn, our shareholders. At Choice, we strengthen franchisee economics by lowering owners' costs and delivering higher RevPAR through our commercial capabilities. Stronger franchisee economics support rooms growth and in turn, more durable earnings and free cash flow. That gives us the flexibility to invest in the business while continuing to return capital to shareholders. My job is making sure we deliver on that consistently. In my conversations with franchisees, one message comes through consistently: they want a partner that lowers their costs, increases their revenue and helps them operate more effectively. Technology has been helping us deliver on each of those priorities, building on several years of investment in our commercial engine and cloud platform. More recently, AI has helped us move even faster. On costs, we've reduced prototype costs by up to 25% across key mid-scale brands. Country Inn & Suites by Radisson is a good example. The redesigned lower-cost prototype is driving renewed development momentum with franchise agreements up 11% year-over-year in the first half of 2026. We're also leveraging the scale of the Choice system to lower owners' ongoing cost through a new FF&E procurement program, which is expected to reduce cost up to an average of 20% across the program's FF&E and building product categories. On revenue, demand is strengthening, and I believe our biggest opportunity is earning a greater share of that demand by leveraging the commercial and technology investments we've made, particularly among our core value-oriented travelers. Earlier this year, we relaunched Choice Privileges to better serve that traveler by making our loyalty program more rewarding and better aligned with how our members travel. While it's still early, we're seeing encouraging signs. Membership grew 7% year-over-year to 77 million, while loyalty contribution increased more than 250 basis points during the quarter. Importantly, members acquired since the relaunch are already generating higher average revenue than comparable members acquired a year ago. We are also seeing early traction from our recently launched Business Direct platform for small- and medium-sized businesses. Approximately 60% of enrolled businesses are new to Choice and nearly 90% of room nights occur midweek. More broadly, revenue from small- and medium-sized business travelers increased 8% year-over-year in the second quarter. I mentioned AI allowing us to move faster, but we are also using AI to deliver tangible benefits for our franchisees. Our AI-enabled EasyBid platform improved group RFP conversion by 360 basis points, contributing to 16% year-over-year growth in group revenue in the second quarter. Inside the hotel, our AI teammate, Charlie, within our property management system reduced requests for operational support by about 40% in an early pilot, freeing up staff to spend more time with guests. And there is more ahead in how AI reshapes hotel discovery and booking. We're continuing to refine our content and data, so Choice properties are discoverable and desirable wherever guests are searching next, and we're working directly with the major AI platforms shaping that shift. It's early, but we intend to be ahead of that curve. I believe technology and AI are becoming the engine that powers everything we do, not as separate initiatives, but as capabilities embedded across every part of the business. That's how we create more value for our franchisees and ultimately, our shareholders. Turning to RevPAR. The demand environment was constructive, supported by our value-oriented brands, resilient workforce-related travel and our extended-stay portfolio. We also benefited from major event-driven travel over the past two months, including the FIFA World Cup. Importantly, the World Cup brought in a meaningful number of first-time Choice guests and international travelers, expanding our reach into segments where we have historically been underrepresented. While the demand environment was constructive, our objective is not to rely on market tailwinds alone. We are focused on improving our competitive RevPAR performance by earning a greater share of demand through the commercial capabilities we've built and will continue to strengthen. That's how we'll deliver more consistent performance over time. Net rooms growth remains my top operating priority. U.S. net rooms growth improved sequentially as second quarter openings reached a seven-year high, while exits declined to their lowest level in six years. The decline in exits reflects the growing value we're delivering to our franchisees through the Choice system, along with stronger franchisee engagement and improving owner economics. Our conversion-led development model continues to differentiate Choice through faster openings, lower owner investment requirements and earlier royalty generation. That advantage was evident again this quarter as our U.S. conversion pipeline expanded 6% sequentially. Importantly, about 75% of the U.S. agreements we've signed year-to-date are expected to open this year, providing strong visibility into near-term growth. International net rooms continue to grow in the double digits, providing another avenue for durable earnings growth over time. Global franchise agreements increased 20% year-over-year during the quarter, reflecting continued demand across both our conversion-led and our higher revenue brands. Taken together, these trends reinforce my confidence that we're building a stronger foundation for sustained global and U.S. net rooms growth. Beyond driving net rooms growth, we're also focused on disciplined capital allocation to maximize long-term shareholder value. Returning to our pure-play asset-light franchising roots remains an important part of that strategy. As development outlays continue to decline and market conditions improve, we expect to pursue additional capital recycling opportunities. Together, those actions strengthen our financial flexibility, allowing us to allocate capital towards the highest return opportunities while continuing to return excess capital to shareholders. We're encouraged by the progress we've made this quarter. Our focus now is on staying disciplined, holding ourselves accountable and following through on the commitments we make. Stronger franchisee economics and thoughtful capital allocation put us in a better position to deliver durable earnings growth and long-term shareholder value. I believe this business has significantly more potential and delivering on that potential is what I'm focused on every day. With that, I'll turn the call over to Scott.
Good morning, everyone, and thanks, Dom. It's great to have you back on our quarterly earnings calls in your new role. Our second quarter results demonstrate that improving U.S. operating fundamentals and the increasing contribution from our international business are translating into solid earnings growth. For the second quarter, adjusted EBITDA increased 6% to $175 million, primarily reflecting higher U.S. royalties from improving RevPAR and royalty rate expansion, growth in our franchisee programs and services revenues and higher partnership revenues as well as the continued benefit of our transition to direct franchising in Canada. These benefits were partially offset by higher SG&A expenses, which I'll discuss in more detail shortly. Our adjusted earnings per share increased 5% to $2.02, while revenues, excluding reimbursable revenue from franchised and managed properties, increased 7% year-over-year to $277 million. I will focus on three key operating priorities before discussing how they are shaping our updated earnings outlook. First, the improving trajectory of U.S. net rooms growth, supported by our stronger openings and lower exits. Second, the acceleration of RevPAR from the first quarter and continued U.S. royalty rate expansion; and third, lower development spend as investments associated with Cambria and Everhome continue to moderate. Net rooms growth remains one of our most important drivers of our long-term earnings growth and operating indicators across our development funnel continued to improve during the second quarter. Global rooms increased 2.6% year-over-year, driven by a 16% increase in room openings. In the U.S., gross room openings increased 27% year-over-year and 9% sequentially. At the same time, room exits declined 50% year-over-year. Franchise agreements awarded in the U.S. increased 30% year-over-year in the second quarter. We also shortened the average time from signing to opening for conversions by nearly one month, reinforcing the speed and efficiency of our development model. The important point is that the key stages of our U.S. development funnel are moving in the right direction from stronger signings and faster conversions to higher openings and lower exits. Additional information on our U.S. net rooms trends is included in today's supplemental materials on our Investor Relations website. Choice's conversion capabilities continue to provide an important competitive advantage with conversions expected to represent approximately 90% of our 2026 U.S. openings. Conversions generally enable owners to open hotels faster and with less capital than new construction, which remains important in the current development environment. During the quarter, U.S. conversion franchise agreements increased 82% year-over-year, reflecting the value our conversion model delivers to hotel owners. Extended stay remains a key growth driver with 12 consecutive quarters of double-digit rooms growth and representing more than 40% of our U.S. pipeline. Within our mid-scale and economy transient brands, developer interest also continued to strengthen. U.S. franchise agreements awarded increased more than 40% year-over-year, and the pipeline for these brands continues to build. Taken together, these trends reinforce our confidence that U.S. net rooms growth will return to positive territory in 2026. Our operations outside the U.S. continue to perform well with international net rooms increasing 13% year-over-year, reflecting growth across our EMEA, Asia Pacific and Americas regions. In Canada, net rooms increased 5.4% year-over-year. Our transition to a direct franchising model is producing both an immediate earnings benefit and a longer-term growth opportunity as the pipeline continues to expand. Turning to RevPAR. Global RevPAR increased 1.7% year-over-year on a currency-neutral basis in the second quarter. In the U.S., RevPAR increased 1.3% year-over-year during the quarter, supported by improving occupancy and rate trends. Together with encouraging preliminary third quarter trends, this supports our improved full year outlook. As anticipated, the FIFA World Cup contributed approximately 60 basis points to second quarter RevPAR. Because the event was concentrated in the second quarter with only limited activity in our markets during the third quarter, we estimate the full year benefit at approximately 30 basis points. Extended stay continues to benefit from a diverse mix of longer-stay demand drivers, including workforce-related travel, relocations, infrastructure investment and manufacturing activity. Approximately 45% of our U.S. extended stay portfolio is located within 10 miles of major data centers, where those hotels generated approximately 100 basis points higher RevPAR growth than the system average during the second quarter. This highlights the benefits of our portfolio's exposure to durable project-based sources of demand. International RevPAR was up 2.1% year-over-year on a currency-neutral basis, led by the Caribbean and Latin America and supported by continued strength across Canada and Asia Pacific. In addition to RevPAR and net rooms growth, we are also increasing the earnings contribution from each hotel in our system. During the second quarter, our U.S. average royalty rate increased 11 basis points. The increase reflects continued mix shift towards higher revenue brands and the benefits of the franchisee-focused initiatives Dom discussed. Our non-RevPAR fee streams also further diversify our earnings base. Franchisee adoption of our services continued to grow during the quarter, particularly our cloud-based property management system and revenue management solutions. Partnership services and fees increased 6% to $28.7 million in the quarter, mainly driven by higher procurement revenues. Together, royalty rate expansion and growth in our partnership services and fees reflect our strategy of creating more value for franchisees while generating higher fee revenue from each hotel in our system. Adjusted SG&A increased 7% during the quarter. The increase in our operating costs reflected our transition to direct franchising in Canada, which also contributed to the higher international earnings I discussed earlier. The remaining increase primarily reflected higher accounts receivable reserves. We expect adjusted SG&A growth in the second half of the year to moderate from the first half run rate, positioning us to deliver our full year guidance. Turning to capital allocation. Our framework remains unchanged. We prioritize high-return investments, maintaining a stable dividend and returning excess capital to shareholders through share repurchases. Our wholly-owned hotels were originally developed to establish and scale the Cambria and Everhome brands or were acquired as part of the Radisson Americas acquisition. Today, we wholly own 19 operating hotels and one hotel under construction. With no additional wholly-owned hotels in our pipeline, we have substantially completed the capital-intensive phase of building them. As a result, future growth will be driven through our franchise model rather than hotel ownership. Reflecting that transition, capital outlays for hotel development declined 80% year-over-year in the first half of the year. We are now well positioned to monetize those assets while continuing to grow through our franchise model. We currently expect the first disposition to occur in the first half of 2027, subject to market conditions. Turning to our balance sheet. We ended the quarter with total liquidity of $475 million and net leverage of 3.1x adjusted EBITDA, comfortably within our target range of 3x to 4x. During the first six months of the year, we generated $67 million of operating cash flow compared to $116 million in the prior year period. The year-over-year change primarily reflects two factors. First, franchise agreement acquisition costs increased as U.S. room openings grew 27% year-over-year. Second, operating cash flow was affected by higher marketing and reservation system reimbursable expenses, driven by increased investment in franchisee-facing tools and guest delivery capabilities. Year-to-date through July 31, we've returned $172 million to shareholders, including $133 million through share repurchases and $39 million through dividends. We continue to expect to repurchase between $175 million and $225 million of shares in 2026. Based on our second quarter performance and the underlying operating trends we've discussed today, we are raising our full year guidance for adjusted EBITDA, U.S. RevPAR, U.S. average royalty rate and global net rooms growth. We are also raising the lower end of our global RevPAR guidance range. We now expect full year 2026 adjusted EBITDA of $635 million to $650 million. The increase primarily reflects stronger U.S. RevPAR, improved global net rooms growth and continued U.S. royalty rate expansion. For modeling purposes, I'd note one item for the third quarter. The year-over-year adjusted EBITDA comparison includes approximately $9.5 million of liquidated damages within our other revenue line recognized in the prior year quarter that are not expected to recur, reflecting continued improvement in our franchisee retention. While our operating outlook has improved, we have updated our adjusted diluted earnings per share guidance to $6.86 to $7.10, primarily reflecting higher expected interest expense and a higher effective tax rate, partially offset by the benefit of share repurchases. We now expect full year 2026 U.S. RevPAR growth of 0% to 1.25% and global RevPAR growth of 0% to 1%, reflecting stronger underlying operating trends and continued commercial execution. Consistent with that outlook, U.S. RevPAR trends remain encouraging, and we currently expect third quarter U.S. RevPAR growth to exceed second quarter levels before moderating in the fourth quarter. We now expect U.S. average royalty rate expansion of 7 to 9 basis points for the full year, a range that incorporates tougher comparisons in the second half of the year. On net rooms growth, we now expect global net rooms growth of approximately 1.5% for full year, up from our prior expectation of approximately 1%. This reflects increasing confidence in the trajectory of U.S. net rooms growth together with stronger international performance. We remain on track to deliver positive U.S. net rooms growth for the full year, supported by both stronger gross openings and an expected 250 basis point improvement in our U.S. net exit rate compared with last year. We expect the third quarter U.S. net rooms growth to remain broadly consistent with the second quarter levels with a more meaningful step-up expected in the fourth quarter as conversion openings seasonally increase and comparisons become more favorable. Adjusted SG&A for the full year is expected to continue to grow in the mid-single digits, benefiting from operating efficiencies across the business, including the continued scaling of AI-enabled tools. We are also investing more this year in franchisee-facing tools and guest delivery capabilities, which has increased our net reimbursable deficit expectations relative to last year. As a reminder, these programs are structured to operate at a breakeven over time. Overall, the progress we've discussed this morning reinforces our confidence that improving execution is translating into stronger operating performance, positioning us to create long-term shareholder value. With that, Dom and I are happy to take your questions. Operator?
Questions and answers
Your first question comes from the line of David Katz with Jefferies.
Thanks for the comment. I appreciate it. I'm sure that there's some nuance and complexity to having royalty rates go up and at the same time, delivering greater value to franchisees. Can you help us unpack, how that exactly works and why the royalty rate is up during a period of time where you're clearly trying to increase the value proposition to franchisees?
Thanks, David. I'll kick things off. And if Scott wants to add any color, he certainly can. But I think first and foremost, this really goes back to the higher revenue-per-unit algorithm that we have. So when you take a look at the effective royalty rates increasing, a lot of that is really represented by the mix shift. What's turning out of the portfolio is more heavily the transient economy brands than what's coming into the portfolio. When you think about adding Comfort and other mid-scale and upper mid-scale brands, you effectively have that higher royalty rate across that portfolio. The other factor is simply the value we are driving for our franchisees. The focus has always been on driving franchisee profitability. That comes through a lot of different approaches. I think you heard that in the prepared remarks with regards to prototype costs being down 25%. Our loyalty contribution has increased 250 basis points. FF&E is down 20%. We have Charlie sitting in the property management system at this point. There are many other initiatives we've done to work with our franchisees to reduce their costs. I know one question in the past has been how we incentivize higher guest review scores. We have programs now to reduce business-as-usual fees and other loyalty fees for properties that are driving higher guest demand scores. We're working very closely with our franchisees, and candidly, we think the increased value that we're providing is showing up in the stronger development results.
The only thing I'd add is these are contractual rates. As some of our older fee contracts have burned off or have been replaced with these new higher royalty rates that were put in place in 2016 and 2017, you're seeing that move to more of the franchise agreements in the construct that we have today. So this isn't raising rates on existing franchisees, but more contractual as new hotel owners come into the system and pay the published rack rates that we have today.
Your next question comes from the line of Lizzie Dove with Goldman Sachs.
I just wanted to ask about the U.S. rooms growth trends, which looks pretty encouraging this quarter. In the deck you posted, I think there was some interesting information about U.S. rooms exit this year versus last year, which seemed to improve a lot. Could you unpack that a little more? I'm curious how much of this is maybe that revenue-intense strategy coming to an end versus underlying improvement and what you're seeing there?
Thanks for the question. As I mentioned, net rooms growth continues to be my top priority and the entire management team's top priority. The first thing I would say is consistent progress leads to our confidence. Right now, we are confident that we're doing the right things to drive sustained net rooms growth going forward. The Q2 results posted on the website reinforce that confidence. Our openings for the quarter were up 27%. Our exits were down about 50%. Franchise agreements were up 30%. What's great about the franchise agreements is we have strong visibility for the remainder of the year because roughly 75% of the agreements that we sold this year, given the speed of the conversion engine, will open this year. So we have good line of sight over the next six months. It's early innings, but we're encouraged by that progress. One point you mentioned is mix. You referred to revenue intensity. When you look at the net rooms growth figures in the higher revenue-intense segments, we're actually seeing about 100 basis points higher growth — 3.6% versus the 2.6% systemwide. I believe the net rooms growth algorithm can and should be a both/and. We'll continue to drive higher-quality units with higher revenue per unit, and there's no reason why we shouldn't be winning in the economy and lower mid-scale segments as well. We'll continue to see improvements there. Retention is equally important as development, and we're improving on that front as well. Overall, we're very satisfied with the continued progress and will continue to push for acceleration in the back half.
Your next question comes from the line of Daniel Politzer with JPMorgan.
I wanted to talk about the RevPAR for the quarter — domestically up 1.3%, which lagged your weighted chain scale mix. How should we reconcile that? And you mentioned cadence for third and fourth quarter; the fourth quarter comparison looks the easiest of the year. Why should we think about RevPAR decelerating from Q3 to Q4?
I'll start at the top. We're encouraged by the sequential progress, but there's more work to do. We've invested in a $60 million commercial engine that should drive sustained RevPAR growth, and now it's a matter of executing and activating those capabilities — EasyBid, Business Direct, loyalty. We were under-indexed in urban markets and business transient, which had a big bounce back in Q2, and the World Cup tailwind was concentrated in the second quarter. Having a lower number of units in those markets caused some of the gap. We're seeing occupancy index gains, and our biggest opportunity today is rate. Sequential improvements were visible in July, which improved about 100 basis points versus June. There is some lumpiness and timing in the back half that Scott can walk through.
Dan, our second half RevPAR guidance for the full six months is about 1.5%. We expect it to be a little stronger in Q3. As Dom mentioned, July was up about 100 basis points. There are calendar shifts in August with the Labor Day holiday pushed deeper into September and fewer weekend days in August than previous years, which mitigates a bit of our RevPAR given our higher concentration of leisure travel. We see some moderation in Q4. Our booking windows are fairly short, so we don't have a lot of visibility into Q4. When we gave our guidance of up to 1.25% for the full year U.S. RevPAR, that does assume a little bit stronger Q4 if that were to take place.
Your next question comes from the line of Michael Bellisario with Baird.
First question: you said moving with greater urgency is one of your priorities. Can you help us understand what people and processes have changed so far, what you've already seen impact in Q2, and what's still to come? Second, on guidance: you beat the internal forecast and flowed that through, but EBITDA is up only 0.5 percentage point while RevPAR and unit growth are higher. Any puts and takes to call out for the back half?
Broadly, stepping into the role reinforced rather than fundamentally changed much of my thinking. Staying close to franchisees matters most; owner economics is the linchpin. We made significant changes on the retention side. From people, process and systems perspective, several investments made in the second half of last year are paying dividends, including the roughly 50% reduction in exits this quarter. On commercial and technology, AI is a sustained capability, not just a trend, and we're holding those teams accountable. We've simplified parts of the organization by realigning functions that naturally work together, creating single points of accountability around key operating priorities. That reduces friction, makes faster decisions and translates into results. On the guidance question: we beat the internal forecast and flowed that beat through. Some puts and takes include timing differences and a one-time item: in Q3 of last year we had elevated liquidated damages tied to exits; those are not expected to recur, which benefits the long-term algorithm even though there's a one-time reduction in revenue year-over-year comparison. We're taking a cautious approach to EMEA, particularly Europe, given the environment there. If we continue to execute, we could push toward the higher end of guidance, but the midpoint is where we feel most comfortable today.
Your next question comes from the line of Shaun Kelley with Bank of America.
Dom, welcome back to the public calls. First, can you elaborate on owner health and the all-in costs of franchising to owners? How does that impact your philosophy around brands and offerings relative to competitors who are using scale to negotiate better deals or lower all-in fees for franchisees? Second, Scott, quick thought on the key money environment: contract acquisition costs were up materially in H1, but CapEx and renovation intensity are down. How should we weigh those two factors for key money investment for the balance of the year?
I'll start high level. We don't have perfect visibility into franchisee P&Ls, but we believe owner returns remain in the teens. We're seeing the improved value proposition in development results versus last year. We're lowering owners' costs via prototype costs down 25%, FF&E down 20%, exploring insurance options, and conversing about reduced commissions. We're confident our value proposition is competitive and that's reflected in the roughly 30% higher development results this quarter year-over-year. Profitability remains core. Franchisees consistently tell us they want lower costs, stronger top line, and tools that make their lives easier. The AI teammate Charlie has reduced operational requests to corporate by 40% in pilot, allowing staff to spend more time with guests. We're focused on continuing to drive franchisee profitability.
Shaun, on capital intensity: key money was up in the first half of 2026 versus 2025 primarily because U.S. room openings were up about 27% year-over-year. The mix of hotels that opened shifted toward core mid-scale, upper mid-scale and upscale brands, which bring higher revenues and sometimes slightly higher key money checks. Overall, we feel good about the amount of key money it takes to win deals; we haven't seen key money increase broadly and we underwrite those arrangements to attractive returns. We expect use of key money this year to be slightly higher than previously guided, in the order of $15 million to $20 million more. On the flip side, capital intensity is down as we wind down Cambria and Everhome development programs; capital outlays were down 80% in H1 and we expect them to be down about 70% for the full year. As we return to asset-light franchising, we will explore the sale of those assets, with expected dispositions beginning in the first half of 2027.
I'll add that we're being disciplined tying key money more closely to property improvement plans to lower conversion costs. Offering owners lower-cost conversion plans while tying key money to improving the product and guest experience is how we use key money effectively. We're comfortable with how we're applying it to improve the portfolio.
Your next question comes from the line of Patrick Scholes with Truist Securities.
Congratulations on the net rooms growth improvement. A high-level question: a couple of years ago around the failed Wyndham takeover, some dissatisfaction from franchisees surfaced and I recall Choice paused membership in AAHOA. Would you consider rejoining AAHOA?
Thanks. We paused the membership, but we never paused the relationship with AAHOA. We continue to work with them collaboratively on industry items that support a broader franchise business model. There was one specific issue where many hotel companies paused membership, but we're open to conversations about rejoining. More broadly, we work very collaboratively with our self-elected owners councils to address franchisee concerns. Many of our franchisees are AAHOA members as well. The relationship with our franchisees has never been better; we continue to see positive feedback, including at our franchisee convention two months ago. We believe that improved trust and performance explains why exits from the portfolio are down roughly 50% year-over-year.
One follow-up: shareholders request more granularity to address RevPAR improvement. Your index performance looked about 300 basis points below peers, and location or customer mix may not explain it all. Could you provide more granularity on plans to improve that?
Absolutely. Communication and transparency are critical. We're doing a better job showing puts and takes on net rooms growth in our prepared remarks and on RevPAR, and we'll continue to provide more granularity going forward.
Your next question comes from the line of Robin Farley with UBS.
Two questions. First, regarding the expected increase in U.S. rooms, it sounds like in Q4; it looks like your U.S. pipeline is down year-over-year. Is the growth more about fewer exits? Was there a purposeful program to remove certain properties that is now winding down? Second, on net capital outlays declining significantly but franchise agreement acquisition costs increasing, what is different about those two buckets?
Good question. It's both more openings and fewer exits. Openings were up 27% this quarter, and the vast majority — about 90% of our 2026 U.S. openings — are expected to be conversions, which open faster and require less capital than new construction. We've shortened the time from signing to opening for conversions by nearly a month, and roughly 75% of conversions signed this year are expected to open this year. Exits declined meaningfully and should continue to in the back half. New construction has been light across the industry, with supply growth below 1%, which influences pipeline dynamics. Overall, it's a both/and story: increasing openings via conversions and improving exits via better retention.
To elaborate on the two buckets: net development outlays are focused on building hotels through wholly owned ownership, joint ventures and loans — the capital-intensive programs we used to launch Cambria and Everhome. Those outlays have declined as we complete that phase and begin to recycle capital. Key money refers to the cost of acquiring a franchise agreement, often tied to helping owners transition and upgrade hotels. Key money is forgiven over time and generates very high IRRs. So key money is an acquisition cost, while net development outlays were direct investments in owned properties and development programs.
Your next question comes from the line of Stephen Grambling with Morgan Stanley.
A follow-up on key money: what percentage of key money expected this year supports existing owners versus pipeline deals? Also, some peers have incentive programs for owners to spend on properties and align the brand with owners. You're alluding to similar dynamics; should investors expect those to be funded through your P&L or a system fund, or are you finding outright reductions so the system fund stays breakeven over time?
When an owner is approaching an expiration, we expect capital outlay for property improvements to retain them, and we work with owners to tailor property improvement plans to their needs while improving guest experience and review scores. We use a range of creative approaches, including fee reductions tied to guest review thresholds and loyalty incentives, to support owners. There's the capital piece that flows through the P&L and P&L actions that do not materially impact effective royalty rates. Overall, we're meeting owners where they are and supporting retention while focusing on profitability.
On key money visibility, we have a good sense of how much key money is tied up in the current pipeline, though timing of disbursements can fluctuate. Most conversions open within three to six months, but unforeseen circumstances can accelerate or delay disbursements. We generally have a solid sense of total outlays over an 18-month period but expect some volatility in predicting exact timing in any one period.
Your next question comes from the line of Trey Bowers with Wells Fargo.
As you wrap up the capital-intensive programs, should we expect free cash flow dynamics to be net positive next year and improve? Also, over time will you aim to go to 100% franchised or will you keep a small owned portfolio for brand control? If you execute sales, what magnitude of proceeds might that represent?
We're largely done with the capital outlays tied to Cambria and Everhome. There may be a few dollars that trickle into 2027 as final projects finish, but we expect to be net recyclers of capital as we sell wholly-owned assets, wind up joint ventures and collect loans. Over the next 12 to 24 months, we expect to be net recyclers, which will be a tailwind to cash flow. Regarding ownership, long-term we do not plan to hold these assets. The hotels we own were to launch brands and came with the Radisson acquisition. We are an asset-light franchising company and will not plan to hold assets long term. In terms of magnitude, we have about $650 million on the balance sheet related to those programs, with approximately $450 million in owned hotels that are the more immediate assets we could sell and monetize.
Your next question comes from the line of Meredith Jensen with HSBC.
Two quick things. Scott, you mentioned loyalty penetration and contribution since the refresh. Could you discuss what's changed since the relaunch and opportunities going forward given increased engagement? Secondly, can you speak about partnership revenues, the moving parts there, and how sustainable that is for modeling over the longer term?
On loyalty, we're encouraged by the progress. Loyalty contribution increased about 250 basis points, and membership grew 7% year-over-year to 77 million. The relaunch of Choice Privileges is one part of a broader commercial ecosystem — guest data platform, EasyBid, business direct — all designed to close the RevPAR gap and drive higher same-store sales over time. New members acquired since the relaunch are generating higher revenue than comparable members acquired a year ago. It's early days, but encouraging, and we see loyalty as a critical part of our commercial engine.
On partnership revenues, the growth of the loyalty program enables us to monetize guests in other ways and cross-sell travel-adjacent services to our most loyal members, which earns fees. Another area is leveraging our scale to reduce franchisee operating costs through procurement and conversion savings. As we drive down owners' costs and provide scale benefits, we also earn fees from third-party vendors. Our guide for this year is mid-single-digit growth in partnership services and fees, and we see opportunity to accelerate that growth in the future.
Did you mention a penetration or contribution percentage for loyalty so we can track progress?
We didn't disclose a specific overall penetration this quarter. In the past we've referenced loyalty contribution north of 40% across the system. Penetration varies by chain scale — below 30% in economy brands and closer to 50% to 60% in upper mid-scale and upscale, which blends to roughly 40% for the system.
Your next question comes from the line of Alex Brignall with Rothschild & Co.
First, on churn: is the expected 250 basis point improvement in the U.S. exit rate applicable systemwide, or are there differences across regions? Second, on reimbursable revenue and expenses, the deficit widened — how should we think about progression in outer years?
On international and churn, we expect international growth to remain positive, though we are lapping a tough comp in the second half given the strong prior-year growth. International net rooms were up 13% this quarter, and we expect more moderate low-to-mid single-digit growth going forward. The 250 basis point improvement we referenced is specific to the U.S. net exit rate year-over-year. International churn rates are expected to stay stable, and we see momentum in Canada following the transition to direct franchising and opportunities in CALA given the Radisson acquisition. Asia Pacific is more distribution-focused outside Australia. We expect global net rooms growth of roughly 1.5% for the full year, reflecting U.S. trajectory plus international moderation.
On reimbursable marketing and reservation expenses: we've temporarily accelerated investments in franchisee and guest capabilities — distribution, reservation delivery, loyalty technology, and rate-setting tools. These are intended to improve franchisee economics and will not be a permanent elevated run rate. We had accumulated surpluses from prior years that we are using to fund this defined period of investment. As these programs complete this year, reimbursable expenses should come down and the programs are structured to recover and return to breakeven over time.
Could you quantify the surplus you had coming into the year?
Coming into the year, we had a little over $25 million in surpluses. We're moving into a deficit with current spending levels, but our contracts are designed to recover that over the next several years and return to breakeven.
A final question coming from Brandt Montour with Barclays.
On the domestic pipeline: it's down quarter-over-quarter and year-over-year while franchise agreements and signings are up. You're conversion-heavy, so why are those numbers moving in the opposite direction, and why not show conversion deals in the pipeline?
There are several elements. Globally, international openings reduced the overall pipeline, so global pipeline comparisons were influenced by those dynamics. Domestically, the pipeline is effectively flat year-over-year, down about 0.4%. New construction has been muted, and we're seeing more conversions. Conversions open faster — often within the year or quarter — and therefore may not show up in the pipeline the same way as longer-lead new construction projects. Our conversion pipeline in the U.S. is up 24% year-over-year and 6% sequentially, and we've reduced time to open by 10% to 15%. So higher velocity in conversion signing and opening can reduce the static pipeline measure while still supporting unit growth.
To add, historically the U.S. pipeline had more new construction, but today about 90% of our U.S. openings are conversions. That causes the pipeline to be less representative of unit growth potential at any snapshot in time because conversions move through faster.
There are no further questions at this time. I will now turn the call back to Dom Dragisich for closing remarks.
Thank you, operator, and thanks, everyone, for joining us this morning. We're looking forward to meeting with you again in November when we report our third quarter results. But in the meantime, we both hope you have a great rest of your summer.
This concludes today's call. Thank you for attending. You may now disconnect.