Executive Summary / Key Takeaways

• The Step-Function Transformation: Choice Hotels' 2022 Radisson acquisition created a permanent repositioning into revenue-intense segments—upscale, extended stay, and direct international franchising—that now comprise 98% of the global pipeline and generate 1.7x higher returns than the legacy portfolio.

• International as the Earnings Engine: While domestic RevPAR faces headwinds, international operations have tripled per-unit EBITDA and expanded margins to 70% over three years, with management targeting $50M+ in international EBITDA by 2027 (doubling from 2024 baseline).

• Domestic Headwinds Masking Operational Leverage: Q3 2025 adjusted EBITDA grew 7% to $190M despite a 3.2% domestic RevPAR decline, driven by 18.6% partnership revenue growth, 73.8% international royalty growth, and disciplined cost management—demonstrating the earnings power of the transformed revenue mix.

• Capital Discipline in a Challenging Environment: The owned hotel segment's widening losses reflect a deliberate capital recycling strategy—seeding Cambria and Everhome brands for future franchising—while average key money per deal fell 11% year-to-date, signaling brand strength that reduces franchisee acquisition costs.

• Valuation Disconnect: Trading at 11.5x EV/EBITDA with 51.8% operating margins, the market prices CHH as a stagnant domestic franchisor while undervaluing the margin inflection from international direct franchising and the 70% EBITDA margins that rival asset-light software models.

Setting the Scene: From Midscale Operator to Revenue-Intensity Platform

Choice Hotels International, founded in 1939 and headquartered in Rockville, Maryland, has spent 85 years building one of America's most recognizable midscale lodging franchises. For most of that history, the company operated as a conventional franchisor—collecting royalty fees from economy and midscale properties while competing on brand awareness and distribution reach. That model generated steady cash flows but offered limited pricing power in a segment where RevPAR growth closely tracks GDP and consumer spending.

The lodging industry's structure explains why this traditional model faces headwinds. The U.S. market is dominated by four major franchisors—Marriott International (MAR), Hilton Worldwide (HLT), Wyndham Hotels & Resorts (WH), and InterContinental Hotels Group (IHG)—each competing for franchisees across overlapping segments. In this environment, economy and midscale brands face constant pressure from both upscale players moving down-market and alternative accommodations platforms capturing leisure travelers. The key demand drivers—business travel recovery, retiree demographics, and infrastructure-driven extended stay demand—favor players with exposure to higher-revenue segments and direct franchising models that capture more value per room.

Choice Hotels' position in this landscape shifted dramatically in late 2022 with the Radisson Hotels Americas acquisition. Management described this as a "step function change" that meaningfully expanded scale while repositioning the company into revenue-intense segments. The strategy is clear: move up the value chain into upscale and extended stay, expand internationally through direct franchising, and leverage technology to create operational leverage. By Q3 2025, this transformation had reached an inflection point where international operations and partnership revenues were generating enough earnings power to offset domestic RevPAR softness, yet the stock continued to trade as if the legacy midscale model remained intact.

Technology and Strategic Differentiation: The Silent Moat

Choice Hotels' $60 million technology investment program—nearing completion with the Q3 2025 rollout of a new ERP and enterprise performance management system—represents more than back-office modernization. The company has built a cloud-based property management ecosystem that serves both franchisees and non-affiliated hoteliers through SaaS arrangements. This creates two sources of competitive advantage: operational leverage that reduces corporate overhead growth, and a value proposition that lowers franchisee acquisition costs.

The franchisee-facing tools, developed over a decade of AI integration, optimize rate and revenue management while streamlining operations. This matters because it directly addresses the biggest pain point for midscale and economy owners: thin margins that make technology investments difficult to justify. By providing these tools as part of the franchise package, Choice Hotels increases switching costs while improving franchisee profitability—a combination that reduces the need for key money incentives. The 11% year-to-date decline in average key money per deal demonstrates this dynamic in action. When franchisees see tangible ROI from the technology stack, the brand's value proposition strengthens, allowing Choice to win contracts with less upfront capital.

The redesigned website and mobile app, launched in 2024, serve a similar strategic function. In an industry where direct bookings reduce OTA commissions and loyalty program engagement drives repeat stays, these platforms are not just marketing tools—they're margin expansion vehicles. The 69 million Choice Privileges members represent a direct channel that becomes more valuable as the company adds upscale brands like Radisson Blu and extended stay properties that generate longer stays and higher ancillary spending.

Financial Performance: Evidence of the Transformation

Choice Hotels' Q3 2025 results provide clear evidence that the revenue-intensity strategy is working, even if domestic RevPAR headwinds obscure the progress. The Hotel Franchising Management segment grew revenue 4.4% to $413.2M while expanding operating income 11.3% to $193.2M—a 160 basis point margin improvement that demonstrates operational leverage. This occurred despite domestic royalty fees declining $4.9M due to the 3.2% RevPAR drop, as the company offset volume weakness with a 10 basis point increase in effective royalty rates and surging international and partnership revenues.

The segment mix shift tells the real story. International royalty fees jumped 73.8% to $14.6M, driven by the Canada acquisition and 8% year-over-year portfolio expansion to over 150,000 rooms outside the U.S. Partnership services and fees grew 18.6% to $28.9M, reflecting higher co-branded credit card and qualified vendor revenues. These streams carry minimal incremental cost, flowing directly to EBITDA and explaining why adjusted EBITDA grew 7% despite domestic RevPAR pressure.

The owned hotel segment's deteriorating performance—operating losses widening to $50.8M in Q3—requires context. Choice Hotels owns 13 hotels (8 Cambrias, 3 Radissons, 2 Everhomes) with 4 more under construction, but explicitly states it is in the "moving business, not the storage business." This segment is a strategic incubator, not a permanent asset base. The losses reflect development costs for Cambria and Everhome brands that will eventually be sold to franchisees, recycling capital at a premium. As interest rates improve and transaction markets recover, management expects this capital recycling to accelerate, turning current losses into future franchise gains.

Outlook and Guidance: The International Growth Algorithm

Management's 2025 guidance reveals a company confident in its strategic trajectory despite macro uncertainty. The full-year adjusted EBITDA range of $620-632M, with the midpoint raised by $1M after Q3, signals that international momentum and cost discipline will more than offset domestic RevPAR softness. The U.S. RevPAR outlook of -3% to -2% reflects realistic assumptions about midscale and economy segment challenges, while the international EBITDA target of $50M+ by 2027 (doubling from 2024) provides a concrete earnings growth algorithm.

The key to this algorithm lies in unit economics. International EBITDA margins have expanded to 70% over three years, with per-unit EBITDA tripling. The July 2025 acquisition of the remaining 50% of Choice Hotels Canada for $112M demonstrates the model's power: the transition to direct franchising immediately boosted Canadian RevPAR 7% in Q3, while the effective royalty rate in Canada approaches 4% versus 2.7% for other international markets. This 130 basis point premium, applied to a growing base of 150,000+ international rooms, creates a visible path to the $50M EBITDA target.

Domestically, the strategy focuses on segments that outperform the cycle. Extended stay now represents nearly half the U.S. pipeline, with 55,000+ rooms and 12% year-over-year growth. This segment benefits from manufacturing and data center build-outs that drive long-term demand. The upscale pipeline of nearly 25,000 rooms provides aspirational locations that command RevPAR premiums and higher royalty rates. Meanwhile, the economy transient segment is gaining RevPAR index share through deliberate portfolio optimization, replacing lower-performing assets with higher-quality, more profitable hotels.

Risks: What Could Break the Thesis

The revenue-intensity transformation faces three material risks that could derail the investment case. First, domestic RevPAR softness could deepen beyond the current -3% to -2% outlook if macroeconomic conditions deteriorate. The midscale and economy segments, which still represent a meaningful portion of the U.S. portfolio, have limited pricing power and high sensitivity to consumer spending. While international growth provides a hedge, a severe U.S. downturn would pressure overall results and potentially slow the capital recycling needed to fund brand development.

Second, the international expansion strategy assumes successful execution of direct franchising in diverse markets. The China master franchising agreement targeting 10,000 midscale rooms over five years and the distribution agreement adding 9,500 upscale rooms by Q3 2025 represent massive commitments that require local market expertise, regulatory navigation, and brand adaptation. Failure to achieve scale in these markets would leave the company with stranded investments and missed EBITDA targets.

Third, technology and capital allocation execution risk remains. The $60M ERP investment must deliver the promised operational leverage and franchisee productivity gains. The owned hotel segment's $107.5M nine-month operating loss cannot persist indefinitely; if capital recycling fails to accelerate as interest rates improve, the strategy becomes a value destroyer rather than incubator. Management's comment that 2025 will be the final year for new Cambria developments and 2026 for Everhome suggests a clear timeline, but execution must match the rhetoric.

Competitive Context: The Value Player's Edge

Choice Hotels competes directly with four larger franchisors, each with distinct advantages. Marriott and Hilton dominate upscale and luxury with loyalty programs that drive higher RevPAR but require higher development costs and complex systems. Wyndham leads in economy property count but lacks meaningful upscale presence. IHG balances segments but shows slower U.S. growth.

Choice's competitive edge lies in its value-oriented, asset-light model combined with technology-enabled operational efficiency. The 11% decline in key money per deal demonstrates stronger franchisee value proposition than competitors who must subsidize conversions with larger upfront payments. In extended stay, Choice commands 40% of economy and midscale rooms under construction, with WoodSpring Suites ranking #1 in J.D. Power satisfaction for three consecutive years. This segment leadership, combined with lower franchise fees and faster development cycles, creates a defensible position in the value tier.

Internationally, Choice's repositioning toward direct franchising (growing from 18% to 40% of international rooms over three years) mirrors Marriott and Hilton's strategies but at a smaller, more agile scale. The 70% EBITDA margins rival the best-in-class economics of larger players while the 2.7-4.0% effective royalty rates provide room to grow. The recent entry into China, Poland, Kenya, and Argentina shows a willingness to pursue greenfield opportunities that larger competitors might deem too small, building a diversified international footprint that reduces U.S. dependence.

Valuation Context: Pricing the Transformation

At $85.76 per share, Choice Hotels trades at an enterprise value of $5.94B, representing 11.5x trailing EBITDA and 10.6x earnings. These multiples place CHH at a significant discount to peers: Marriott trades at 20.8x EBITDA, Hilton at 27.5x, Wyndham at 13.1x, and IHG at 20.1x. The discount reflects the market's focus on domestic RevPAR headwinds and skepticism about the revenue-intensity transformation's durability.

However, the underlying metrics support a higher valuation. Operating margins of 51.8% and profit margins of 46.6% demonstrate the asset-light model's power.

Return on equity of 14.25% and return on assets of 10.65% show efficient capital deployment, particularly when compared to Marriott's and Hilton's negative book values resulting from acquisition-heavy strategies. The 1.34% dividend yield, supported by a 14.18% payout ratio, provides income while the company reinvests in growth.

The critical valuation question is whether the market is correctly pricing the international EBITDA margin expansion. If Choice achieves its $50M international EBITDA target by 2027, and domestic operations stabilize, the company would generate approximately $650M in EBITDA, placing the current valuation at just 9.1x forward EBITDA—a multiple that would be difficult to justify for a business with 70% margin international operations and a 46.6% profit margin. The disconnect suggests the market is pricing CHH as a stagnant domestic franchisor while the company is engineering a margin inflection through revenue-intensity and international scale.

Conclusion: The International Margin Inflection Story

Choice Hotels International is executing a revenue-intensity transformation that the market has yet to recognize. The 2022 Radisson acquisition repositioned the company into upscale, extended stay, and direct international franchising segments that generate superior unit economics. While domestic RevPAR headwinds create near-term noise, the underlying earnings power is visible in the 70% international EBITDA margins, 18.6% partnership revenue growth, and disciplined cost management that delivered 7% EBITDA growth despite a 3.2% domestic RevPAR decline.

The investment thesis hinges on two variables: international execution and domestic stabilization. The path to $50M+ international EBITDA by 2027 is credible given the Canada acquisition's immediate 7% RevPAR lift and the 130 basis point royalty rate premium from direct franchising. Domestically, the extended stay and upscale pipelines provide revenue-intense growth vectors that should outperform traditional midscale segments as supply growth remains constrained and demographic tailwinds from retirees and infrastructure build-outs accelerate demand.

Trading at 11.5x EBITDA with 51.8% operating margins, Choice Hotels offers a compelling risk-reward profile for investors willing to look past near-term domestic headwinds and focus on the margin inflection from international operations. The technology investments and capital recycling strategy demonstrate management's discipline in deploying capital for franchisee value creation rather than asset accumulation. If the company executes on its international growth algorithm while maintaining cost discipline, the current valuation will prove difficult to sustain, making the revenue-intensity transformation a story of underappreciated earnings power rather than a simple turnaround.