Choice Hotels International

After announcing Dominic Dragisich as interim CEO on May 20, replacing Pat Pacious, Choice announced on Aug. 31 that he would permanently take the role. Dragisich has held the chief financial, strategy, and brand officer roles at the hotelier.

Why it matters: We think Dragisich's operational and financial experience at Choice will allow the company to successfully elevate its core midscale brand offering amid increasing competition from wide-moat peers Marriott and Hilton. Dragisich has already implemented value enhancements for owners as interim CEO. Using artificial intelligence and technology, Choice detailed earlier in August that new prototype buildout costs were down 25% and procurement expense had decreased 20%, increasing the proposition for owners.

The bottom line: We are maintaining our $131 per share fair value estimate for narrow-moat Choice. We see shares as undervalued, as uncertainty around the company's ability to reaccelerate unit growth has kept investors on the sidelines. Our Capital Allocation Rating is Standard. Under Dragisich, the company started to provide gross addition and termination room data in the second quarter, which allows increased insight into portfolio growth and quality. US room openings grew a healthy 27% in the second quarter, with unit exits decreasing about 50%. We see momentum continuing, with franchisee signings up 30%, supporting our US net room growth estimate of positive 0.3% in 2026 from a decrease of 2.9%, followed by 1% in 2027.

Between the lines: Although Choice is focused on reducing owned hotel development in favor of a franchisee position, as illustrated with its outlays down 80% in the second quarter, we expect a continuation of Choice's capital allocation framework of a staple dividend and share repurchases.

After reviewing Choice's second-quarter results, we have increased our fair value estimate to $131 per share from $129 for the time value of money. Our fair value estimate implies a 2027 enterprise value/adjusted EBITDA of 13 times. The key drivers of our financial model are revenue per available room, unit growth, and selling, general, and administrative expense.

Choice's second-quarter revenue per available room, or revPAR, increased 1.7%. Room growth was 2.6%. Adjusted EBITDA grew 6%. RevPAR guidance increased to 0%-1% from a minus 2%-1% and unit growth to 1.5% from 1% for 2026 driven by the US.

We forecast total annual room growth of 2.3% during 2026-30, which is above the 1%-2% supply lift we forecast for the US industry during this period. We expect Choice will grow above the industry, aided by its rejuvenated Comfort, its Cambria and Ascend upscale lifestyle brands, extended-stay brands, Radisson offerings, and international growth that is generating strong pipeline growth from third-party operators. The result is annual revenue growth averaging 5% over the next 10 years.

We forecast selling, general, and administrative expenses to average 34% of total revenue (excluding reimbursement revenue) over the next 10 years. As a result of our revenue and SG&A forecasts, we project operating margins to reach 33% in 2035, up from 29% in 2019.

We think Choice’s solid presence in the midscale and extended-stay segments has formed a narrow economic moat driven by a durable brand intangible asset, which also generates a switching cost edge. We believe Choice’s narrow moat is supported by its lasting unit growth demand from third-party owners, room and loyalty scale, and contract length of franchisee relationships.

Hotel owners are attracted to Choice’s brand portfolio of 657,000 rooms, the sixth-largest in the industry. The company’s scale allows owners to team up to spend around $700 million toward marketing, reservations, distribution, and loyalty, which far exceeds the amounts any boutique or independent hotel owner can afford. This ability to spend on marketing and loyalty helps support Choice’s brand intangible benefit.

Choice’s unit growth also illustrates its brand intangible asset. With all of its 7,600 properties franchised, Choice depends heavily on its brand to attract unit growth from third-party owners. We see clear signs that the company’s brand is resonating with owners, witnessed by its unit room growth, which remained positive even during the downturn in 2008 and 2009, up 4.5% and 3.1%, respectively. During the next 10 years, we forecast Choice’s unit growth to average above 2%, surpassing our 1%-2% estimate for the US industry.

Choice’s brand is also hitting home with travelers, supported by its leading position in the extended-stay category (about 9% of its total room base), which we expect to be a growth category for the company and industry for years to come due to the demand for long-term stays and aided by US AI, onshoring manufacturing, and infrastructure spending. Also, individuals flock to Choice’s hotels, illustrated by its solid loyalty program, which offers an immediate demand channel for third-party owners, further validating the company’s brand intangible advantage. Travelers are drawn to Choice’s loyalty program, as it provides the ability to use and accumulate points across 657,000 hotel rooms. As of Dec. 31, 2025, its loyalty program hosted 74 million members, up from 44 million at the end of 2019 (loyalty membership of wide-moat hoteliers InterContinental, Marriott, and Hilton are all above 100 million).

Choice also holds a switching cost advantage, based on managed and franchised contract lengths that are typically for 20-30 years (with opt-outs every five years). Termination in non-opt-out years of these contracts could require significant expenditures to renovate and rebrand a property to meet the new brand specifications, resulting in a loss of sales to business operations for the owner, while also leading to termination fees that must be paid by the owner. Choice received five years of forecast fees from 111 WoodSpring hotels that changed brands due to those units being acquired by a new owner in September 2022.

Choice’s healthy partnership with both owners and travelers has translated to its global revenue share holding at 2% since 2018, the eighth-largest globally behind Marriott, Hilton, InterContinental, Accor, Hyatt, Jinjiang, and Wyndham. Choice revenue share of the midscale segment has maintained at about 4% (fourth-largest in the industry) and its share of the economy segment has decreased to about 1% (10th) from about 2% in 2019 as the company has focused on adding midscale and upper scale hotels. Regionally, its US share has grown to 5.6% in 2025 from 5.3% in 2019 (number four in the market), helped by the acquisitions of WoodSpring and Radisson, with a nascent position in Asia-Pacific and Western Europe.

We have a strong conviction in awarding Choice a narrow moat rating but think a wide moat or network advantage is unwarranted for several reasons. Choice’s room and loyalty scale falls below those of Marriott, Hilton, and InterContinental, from a regional (wide-moat peers have strong revenue share in all major geographies, not just the US) as well as segment (wide-moat peers offer hotels across more price points, not just lower cost options) perspective. In turn, these wide-moat peers can spend between $3 billion and $19 billion on marketing, distribution, loyalty, and reservation systems annually versus $700 million for Choice, aiding their unit growth prospects relative to Choice.

Also, unlike Marriott, Hilton, and InterContinental, Choice’s portfolio is heavily weighted to the economy and midscale segments, which see higher termination rates, are characterized by lower service quality and amenities, and face increasing competition. We think higher relative termination rates may be due to the financial health of Choice’s third-party owners, which might have more challenges adhering to the renovation costs necessary to remain competitive over a long time horizon compared with owners in the upscale and luxury segments. As a result, Choice’s termination rate averaged a mid-single-digit percentage of its total room base annually during 2016-25 versus the roughly low-single-digit percentage for its wide-moat peers. Additionally, the lower service and decor requirements of the economy and midscale segments could hinder the ability to instill stronger brand loyalty and differentiation.

Another factor in not ascribing Choice a wide moat rating is that Marriott and Hilton have launched brands in Choice's core economy and midscale markets in recent years, presenting increased competition to obtain third-party owners. These headwinds are exacerbated by the alternative of individual hosts found on platforms like wide-moat Airbnb, which, taken together, dents our confidence in Choice’s ability to generate excess economic rents for the next two decades. Finally, Choice lacks material upscale and luxury exposure, which could lead to its loyalty base graduating out to more complete platform offerings found at wide-moat peers as household incomes grow.

Choice's expansion into upper-scale and extended-stay properties is driving units that generate higher revenue than the average of its overall existing base.

The Ascend and Cambria brands are well positioned to address the select-service and lifestyle concept sought by much of the millennial demographic, while Choice's portfolio of four extended-stay brands addresses that underserved and high-growth market.

Choice stands to benefit from secular US infrastructure investment with about 90% of the region's hotels within a mile of interstates.

Independent hotels and home and vacation rentals present a competitive threat, and the advancement of technology and its use by next-generation travelers increases the access and awareness of these properties.

Choice’s US hotels represent 78% of total rooms, exposing the company to an economic downturn in the US to a greater extent than competitors. The last recession led to revenue declining 12% in 2009.

Marriott, Hilton, and InterContinental are increasingly entering Choice's core midscale segment, presenting competition for unit growth.