Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International's 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 Allie 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 update 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 Dom Dragisich, our 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.
With that, I'll turn the call over to Dom.
Thank you, Allie, 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'm grateful for the board's confidence, and I'm 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 U.S. 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 three priorities. Let me start with net rooms growth. Our U.S. 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, we expect a more meaningful acceleration in U.S. net rooms growth in the fourth quarter to approximately 1% year-over-year. U.S. 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. FIFA 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 U.S. hotels are located within 10 mi 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 U.S. 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 clearer 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 2/3 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. U.S. room openings increased 17% year to date, despite declining in the third quarter against strong prior year comparisons. We expect strong growth in U.S. room openings for the full year, supported by our historical year-end opening patterns, with roughly 1/3 of annual U.S. 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 opened year-to-date, approximately 2/3 opened within just three months of signing. We are also seeing strong development activity that supports future rooms growth. U.S. franchise agreements increased 24% year-over-year in the quarter, and our U.S. conversion pipeline grew 29% year-over-year and represents over 1/3 of total pipeline rooms. Together, improving retention and continued development activity are strengthening the foundation for sustained U.S. 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 two 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 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 are helping 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 two 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 one example. It is an asset-light subscription platform with recurring revenue that expands our reach into complementary outdoor travel, serving customers whose travel preferences align closely with those of Choice's value-minded guests. Harvest Hosts has approximately 300,000 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' standalone 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 U.S. 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 approximately 5%.
Underlying performance benefited from higher U.S. 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, U.S. 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, with growth across all regions led by a nearly 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, U.S. 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 U.S. 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. U.S. franchise agreements awarded for our midscale and economy transient brands increased 10% year-over-year, while the pipeline for these brands expanded approximately 2% sequentially.
Additional detail on our U.S. 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 and RevPAR, royalty rate expansion remains an important driver of our organic franchise revenue growth. During the third quarter, our U.S. 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 Dom 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 approximately 5% year-over-year during the quarter, primarily reflecting higher accounts receivable reserves, certain one-time 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 one-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 $103 million in 2025. We expect development capital outlays across our own hotels and joint ventures to decline substantially from the approximately $70 million-$75 million 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 two 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 than we invest in development by 2027, as our remaining commitments decline and dispositions progress. Our initial focus is on Cambria, given its more established operating history, while allowing our recently opened Everhome hotels 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 1st, we completed the acquisition of Harvest Hosts for approximately $130 million in cash and revolver borrowings. For the 12 months ended September 30th, 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 3.2x adjusted EBITDA, within our targeted range of 3x-4x . Our quarter-end cash balance reflects borrowings made in advance of the October 1st Harvest Hosts 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 nine months of the year, we 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 approximately $135 million, reflecting elevated investment in franchisee-facing and guest delivery capabilities. As a reminder, these programs are structured to operate at break-even over time, and we expect the deficit to begin narrowing in 2027. Through September 30th, 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've discussed today, we are raising our full year U.S. 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- $651 million, raising the midpoint by $3.5 million.
Our updated outlook reflects stronger global RevPAR expectations and higher U.S. royalty rate expansion, partially offset by higher adjusted SG&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-$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 U.S. RevPAR growth of 1.5%-2.5% and global RevPAR growth of 1.5%-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've seen into October. We estimate the full-year benefit of the FIFA World Cup at approximately 30 basis points. We now expect U.S. 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 U.S. net rooms growth in the fourth quarter. In the U.S., 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 last year. Excluding Harvest Hosts, we now expect full-year adjusted SG&A to increase approximately 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're making against our operating priorities. We're focused on translating these improvements into consistent results and sustainable long-term shareholder value. With that, Dom 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 star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question 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&A roster. Your first question comes from the line of Lizzie Dove with Goldman Sachs. Lizzie, your line is open. Please go ahead.
Morning. Thanks for taking the question. I wanted to ask about U.S. rooms growth. Obviously some progress there, and it's 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're seeing in particularly the conversion environment, given it's such a big driver for you, both in terms of Q4 and just longer term, given we've heard some mixed commentary across the space this quarter.
Absolutely. Thanks, Lizzie. I'll take that one. As I had mentioned, obviously in the prepared remarks, the net rooms growth is certainly my number one operating priority for the company. Obviously, we've seen very strong quarter-over-quarter improvements in that net rooms growth figure, three consecutive quarters of improvement. When you take a step back, though, I think what's even better is that you are seeing strong results across all three component parts, right? Where you have openings are up 17% year-to-date, exits are down 44% year-to-date, development agreements are up 36% year-to-date. That's really a good setup going forward, especially when you take a look at those development agreements. When you take a look at the mix, it gives me even more confidence, right?
Because we are still growing in that midscale plus category, but at the same time, we're seeing a little bit of a both/and. I mentioned this last quarter, consistent progress, I think, leads to confidence, and we're sitting in a very confident spot heading into Q4. We mentioned, historically, about 1/3 of our annual openings typically occur in Q4. Conversions are actually opening even more quickly. 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're seeing that conversion pipeline, we have really good visibility heading into Q4. So, feel great about that 1%, frankly. When you just take a look at just the conversion-led model, to your question around the sustainability and the setup for 2027, the conversion-led model that we have, it is a differentiator.
We think that this is absolutely momentum that's going to be sustainable as we head into 2027, feeling really good about the setup and feeling very good about the top operating priority for the year.
Great. Then one follow-up, slightly different topic, but the relative RevPAR performance has obviously been a big focus for you guys. You saw a little bit of sequential improvement. With these commercial initiatives that you're working on, could you give us some color of just how the phasing of that, and how long do you think those take to bear more fruit when it comes to the relative performance versus STR?
Sure. I mean, obviously, we're in the early innings of some of these commercial investments. We talked about the $60 million or so spent last year into this year, which is also driving that marketing and reservation system fund deficit. Obviously, we've leaned in on the commercial side, but certainly encouraged by the RevPAR improvement 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're seeing that gap continuing to narrow quarter-over-quarter, again, much like the net rooms growth metric. Part of the gap was geography, customer mix. We're under-indexed urban, event-driven, that type of business. Again, the most important thing is that we have to be focused on what we can control and the execution.
You mentioned the commercial tools, so we are encouraged, most importantly, that what we're 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 RAISE, which is our rate management tool. Brings together pricing, inventory, channel management all together in one place. So that's going to be rolled out this quarter, and so you're going to 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're 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 RAISE platform, because it really is rate where we have the ability to drive additional performance. You are going to see that probably showing up more in Q1, Q2 of next year. But again, I think the setup is there for a really strong 2027.
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 a little Morning. I appreciate all of the detail. I wonder if you could give us just a little more insight into what's available to be sold on the owned side. Help us gather an inventory, and you're not going to guide us to a specific number, but notionally, what's available to be sold? I imagine you have some estimates that maybe you can qualitatively give us a little insight. Thanks.
Thanks, David. I'll take that one. As we've highlighted in our supplemental materials, we do have several hotels that are on the owned side that we'll be able to sell. So we own 17 hotels when you adjust for the two that we've sold in the fourth quarter. Those are really the pool that we're focused on today. When you think about the total amount of capital related to that, we're really going to be focused more on the Cambrias today. Those are more mature assets that we looked at. We can move to sell those. Then as the Everhome Suites become more efficient, or excuse me, ramp up and are ready for disposition, those will come in the second half of that. So today, post-sale, we've got 11, excuse me, nine Cambrias left.
We still have two Radissons left and five Everhome Suites that we are ready to sell. So, we're focused on the Cambrias. We had some success in some early ones that we sold here in the second quarter, excuse me, in the fourth quarter. We have one more under contract that should close end of the quarter, beginning of next year, and continue to work through market by market of selling those. When you look at kind of the capital that's outstanding on that, as we've talked about in the past, really what we have is about $455 million coming into the quarter of owned assets available for sale. That'll be reduced by about the $38 million of the assets that we talked about. So that's kind of the pool we're working on today. About $330 million of that's Cambria.
Perfect. Thank you.
Thank you.
Your next question comes from the line of Dan Politzer with JPMorgan. Dan, 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're 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. Let me hit it at a high level, and then I'll hand it over to 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 free cash flow generation in 2027. 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 three primary drivers of that, right? Which is, first and foremost, it's the development capital requirements that are coming down significantly. We talked about the fact that we are completing the owned hotel development, minimal funding needs now with only one hotel under construction through first half of 2027. We are seeing capital recycling. We sold those two hotels.
We expect that additional disposition in early 2027, and obviously going to continue to look for more dispositions. Most importantly, I think, has really been the drag on the marketing and reservation system deficit in 2026. 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. When you take a look at that, our ability to flex that as we head into 2027, and really the revenue makeup, obviously what gives me the most optimism to return to free cash flow, improvements in 2027, it is the top line. You are seeing all three of our key revenue levers inflect with regards to net rooms growth, RevPAR, royalty rates continue to expand.
We think that that growth on the top line is very much sustainable heading into 2027. Those are all going to be tailwinds for us. As it pertains to the actual conversion, I will let Scott hit on that one.
Yeah. We see a real meaningful opportunity to improve the conversion. We are moving beyond a period of that elevated investment now that we have achieved our strategic objectives. The capital intensity of the business should decline materially here going forward. We talked about the development outlays being down 56% year-over-year and down 80% for the full year. As we look at our capital allocation hierarchy, first and foremost, we always want to invest in the organic growth of the business. As we get back to more of our asset-light roots here, we do not expect a material amount of capital needed to grow on an asset-light basis. Really provides us the opportunity to return that excess capital to shareholders. We still remain well within our targeted leverage levels.
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. We expect that to continue and really to prioritize shareholder returns as we go forward.
Got it. Thanks. Just to clarify, for the free cash flow conversion this year, any parameters through which to think about that, then maybe on a go-forward, if we can get back to that 50%-60% type range?
Yes. Going forward, where you will see the meaningful step-down, as Dom 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 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.
Thank you. Good morning, everyone.
Morning, Michael.
Dom, on M&A, 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? Then maybe just also remind us of your view on sort of just appetite for a couple 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. The Harvest Hosts deal was certainly opportunistic. I would tell you that what Scott said is spot on with regards to we're prioritizing organic growth first and foremost. Obviously, if there's smaller tuck-ins that are net beneficial both to our owners and our shareholders, we'll obviously consider that, and I think Harvest Hosts certainly fell in that bucket. We also think our stock is cheap right now, frankly. I think, to Scott's point, there's a reason why we gave share repurchase guidance this year. It's the first time in my 10 years since I've been here that we provided share repurchase guidance. We're trading at a historically low multiple, and we're seeing a lot of great inflection in the business itself. It's not to say that we wouldn't do something that's a little bit more tuck-in in nature, probably immaterial.
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 under-penetrated in. The reality is we underwrote this on a standalone basis. It was an attractive return even without the overlap. Obviously, we think that there's tremendous overlap with the 2 million customers that we talked about on the call, 300,000 subscribers. Even keeping this business as a standalone, we think that it's a really strong return. When you consider the CP overlap and whatnot, we think it's certainly more beneficial for our franchisees as it pertains to other demand-driven opportunities for them in the future. It could open up additional opportunities for them.
The reality is we want to keep this thing as a separate business unit. It doesn't distract from the core strategy, and most importantly, I think, as it pertains to that financial return for our investors as well. I think it passes the litmus test both for the franchisees as well as our investors.
Got it. Just one 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 three months?
Yeah, it was an opportunity for us. We actually had an option to purchase the business that eventually migrated to an obligation. 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 managed operation, but their growth increasingly became lease-based. While they were very healthy leases and it was a company with great growth potential, it just didn't align with the asset-light growth plans. We were not willing to take on additional lease exposure. We weren't willing to put that capital at risk, so to speak. The reality is we just made the decision to terminate the arrangement rather than pursue a transaction that no longer really aligned with those strategic priorities as a company.
Michael, just to answer your question, yeah, it was a legacy. We had this relationship going back four or five years now.
That's 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, Dom, on the permanent announcement here. I was just wondering if we could walk through a little bit of just the owned and leased bridge for next year. I think you guys gave a little bit of the comments around Harvest Hosts, but Scott, if you could just help us understand, one, where exactly is Harvest Hosts going to show up in the P&L? And then two, net of sales, and it sounds like with a third one coming here, directionally, can 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 Hosts, 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, where the members spend annual subscriptions that range from $99 to about $180, and then primarily the costs are technology and customer acquisition. So, most likely, we are still working through those disclosures, but that is where that will show up. When you think about the owned assets, the three 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 about $2 million for a full year in EBITDA.
The one 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 revenues 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. Stephen, your line is open. Please go ahead.
Hi, thank you. You mentioned in the 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 obviously one big component. 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 reducing certain fees, piloting insurance program, FF&E costs, et cetera. But when you take a look at just the distribution costs, this comes down to just the improvements that we are seeing in the new loyalty program in 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 continuing to increase that proprietary channel contribution to really protect our owner profitability.
And so, broadly, we are continuing to lean in as it pertains to AI and really positioning Choice for the shift that you are seeing on the distribution side. We have made ChoiceHotels.com accessible to AI agents, which really allows them to search, compare rates, complete bookings. So early innings in terms of the ability to talk about how the distribution landscape is going to change as it pertains to the cost, 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 to just give us a refresher on some of the sensitivities? Specifically, one point of RevPAR growth equals how much EBITDA? Same thing for net rooms growth, and then the royalty rates. I checked on the website for any presentation. I didn't see any updates on those, but thank you.
No problem, Patrick. Let me hit it on a high level. As you think about just the building blocks as we head into 2027, obviously not going to give 2027 guidance. We're working through the planning process as we speak, but the building blocks to consider, first and foremost, it's on that operating side. The three core levers, we're entering 2027 with improving U.S. rooms growth, stronger 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, we feel very good about the fact that you're seeing that momentum, and you see the opportunity on the rate side specifically as it pertains to RevPAR.
But you also see sustainable growth, obviously, with international and our platform business as well. Then when you layer in, obviously, expenses, we think that there's going to be a meaningful step down in SG&A to that low- to mid-single digits. So, you'll likely see, obviously, a little bit more information as we enter 2027 here and we provide official guidance in February, but 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. Thanks. The question I wanted to ask is, going back to Q4 and the sort of acceleration in the domestic unit growth that you are talking about, it sounds like you are saying it is mostly going to come from the removal rate being lower. I guess, how do we think about that long term? If you get to a point of growth because of sort of a reduction in removals or a 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 removals, or just how to think about that beyond just Q4? Thanks.
Yeah, so I think broadly it is a both/and. I think we are going to see continued strength in terms of openings. I think, 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 250 basis points, and we could actually see a slightly higher improvement than that, really returning back to our historical retention rates. 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&E and conversion costs, broadly speaking. What we have talked about publicly is, the goal is to eventually get back to that 2%-4% net unit growth or net rooms growth. Even in a new construction environment that is muted, you are seeing kind of 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 openings coming from conversions. I think you are going to need to see some tailwinds from a new construction perspective to get to that higher end in the long term. Broadly speaking, we feel very good about 1%+ for this year, obviously continuing to build on that as we enter 2027. The ultimate goal is to get to that 2%-4%.
As we move forward, Robin, our 2027 planning is still underway, but we would absolutely expect to see both an increase in openings year-over-year, as well as reduced terminations. I think you can really look at our pipeline and see the success we have had, particularly in the U.S. 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 executions up. They were up almost 25% in the quarter. So, we are seeing momentum on both sides. It will not be just a retention-led growth going forward, but that is certainly a big piece of it and something we are focused on getting back to where we have been historically.
Great. No, super helpful. Thank you. Just one other number, and you have thrown out lots of data, so I am terrified I missed this, but could you say what percent of your pipeline is using key money, just when you are talking about kind of reducing what you spend on new units or what you spend to get that unit growth? What percent of your projects are using key money, or pipeline now, and where 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 over the last 12 months or so.
So, we have seen that crest and some brands come down a little bit, and I 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 years, we do think that will come down as an industry, particularly as the new construction environment improves.
But it certainly has been elevated over the last two to three years.
Yeah, Robin, so I think the bottom line there is just 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've seen. Every deal continues to be evaluated on that long-term franchise revenue, the returns. We do IRR, paybacks, et cetera. But I think the most important thing that Scott said there is you're actually seeing the average incentive per deal come down through September, or stay approximately the same. So, again, we're encouraged that we're doing all the right things there and that we're actually seeing the progress on the top line as 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- $130 million this year. Is that still the expectation? 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 upper end of that guidance, but generally still holds. In terms of the go forward, as Dom and I both mentioned, we have seen the amount per deal hold, but we do expect an increase in openings here as we move forward. Really, any increase in key money going forward will be more a 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. Generally, I think kind of this year's level, slightly elevated for more openings is a good modeling assumption.
If I could just get a follow-up in. It sounds like you guys are placing the kind of revenue and adjusted EBITDA of these owned assets about $6 million and $1 million. Is the expectation from here we continue to see a kind of $17 million per property and 17x like that property's adjusted EBITDA? I mean, those seem like pretty great numbers. I guess the last point of that, my quick math says that is around $130,000 per key for a Cambria. Any kind of further detail around the individual asset sales would be amazing. Thanks.
Sure, Trey. It really varies. We have product in many different markets, some of them in more secondary markets and some in urban top 50 RevPAR markets. So, it is going to vary by asset. The Cambria Hotel sold at about 11x multiple of its EBITDA. The numbers are skewed a little bit by the Radisson RED we had in downtown Minneapolis that was not a contributor to EBITDA. The hotel was 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 generally, 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. I first want to 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's driving that. I'm assuming you would not say that there's 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? If it's not one of the first two buckets, what is it that you would describe as driving that progress?
Yeah, 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 made from 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 our field teams with better systems, better processes, et cetera, 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 own toes, so to speak, and we were fighting with one arm behind our back as it pertained to not having this information at our disposal.
I 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 2013, 2014. When you look at it from a timing perspective, there were a lot of windows and expirations. We took an opportunity last year to really exit the lowest performers. When you take a look at approximately 2/3 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 onto the best products possible.
This year, we've seen that subside quite a bit, and I think we're really executing on what we're talking about, kind of both/and, because we have a right to win, obviously, in that economy and lower midscale as well. I think the absolute worst is behind us, and I expect the trends that you're seeing this year to continue well into 2027 and beyond.
Okay. Thanks for that. On the comment you made about AI, the tenfold increase in web traffic coming from AI, I know that is still small, but if you kind of look at just 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, at some point next year? Just to give us some sense, big picture of where that is.
Yeah, it is a little too early to tell, to be honest with you. Visits did increase tenfold, but to put in perspective, when you think about direct visits, that is about 1% of our volume. I know that 50%, all the research we have done, 50% of research starts with an AI tool at this point, or they look at 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 ChoiceHotels.com accessible. A perfect example of this is you can complete the entire booking process right now through Mews, including secure payment.
Really what we have been focused on is really building on the foundation to have common shopping, booking, loyalty service to really connect directly with these emerging platforms, so that it does not require a customer integration or an installation by a guest. Again, it is the common infrastructure that we are building. Obviously, this is an opportunity, like I said earlier in the Q&A session, I think it is an opportunity to increase that 60% proprietary channel contribution. Again, at 1% of your volume coming through LLMs today, I am not going to 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 Jensen with HSBC. Meredith, your line is open. Please go ahead.
Good morning. I was hoping you might speak a little bit about international 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 to build infrastructure there for development, and how we should think about that going forward in the mix between direct and master franchise. Thank you.
Sure. Thank you. International obviously is going to continue to be part of our growth strategy going forward. What we talked about last quarter, and we have talked about this historically as well, we are focused on the Americas first and foremost. When you take a look at where direct franchising 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. When you take a look at international holistically, revenue, 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%.
When all is said and done, adjusted EBITDA is still on track to be about $50 million, a little over $50 million this year, and we expect to see that mid-single digits growth going forward. As it pertains to direct versus MFA, do you want to hit on some of that, next, Scott?
Sure, yeah. In the direct versus MFA, we're about 45% of our rooms now are on the direct side, and about 55% are MFAs. That's been a material improvement, particularly with the acquisition of the Canadian joint venture last year. Moving in the right direction, making sure that's more revenue-intensive. We're 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&A, really the growth in SG&A has been around the acquisition of Canada. We bought that on July 1st of last year, so we've now lapped the SG&A growth there. Just some small investments as we introduced our 22 brands up in the Canadian region versus the eight that the original JV had.
But I think the great news is with over 370 hotels in Canada, we already have scale, and so there shouldn't be a lot of SG&A needed to accelerate growth up there.
Super clear. Last, very quickly, just for modeling purposes, you noted on partnership services that there were some timing issues there, and so it would be doubled up in the fourth quarter to reach 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 didn't know if that might be something we could look forward to higher growth in future years. That's it. Thanks.
Yeah, I do think there's 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're now projecting low- to mid-single digit. But I think going forward, we're probably in the more mid-single digit increase as a base. As we continue to unlock more opportunities, both in procurement and through monetizing the millions of customers that come through our hotels going forward, there's an opportunity to grow that even faster. But I'd say in a 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 & Co. Alex, your line is open. Please go ahead.
Thank you so much. Just one question on RevPAR. I got less interested in forward expectations because the visibility is so low. But obviously, in the last few weeks and months, the gap between high-end RevPAR and the lower chain scale RevPAR in the U.S. 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'll hit that one, and I think a lot of it has to do with just broader macro demand trends and whatnot. I think simply put, the environment has become more constructive, right? Especially with our consumer. The growth, I think it's showing up in the growth. The growth is accelerating, right? 7% was our RevPAR in October. We're optimistic that Q4 is going to be stronger than Q3 was. I think a lot of this has to do with the fact that we're just more optimistic about the midscale consumer. Employment is holding up. Even at the lower end, you had stronger job reports. Wage growth, deposit levels are holding up. Consumer spending is holding up. Yes, I think you're seeing some of that C-shape that we've been referring to here over the course of the last couple months.
I think the most important trend that we're seeing is consumers still continue to prioritize travel, right? When you take a look on the leisure side, we're seeing the resilience there. It's showing up in the occupancy. Then on the business side, a lot of that is really project-based, workforce-related demand remaining resilient. Again, we're sitting in what I would classify right now as a little bit of a sweet spot in terms of where the demand drivers are coming from. When you take a look at the broader macro, obviously a nice setup for us, but we're going to continue to focus on what we can control. This goes back to commercial investments, midweek, et cetera. Again, I would say that those are the top reasons as to why you're seeing the 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 Dom 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.