2006 ANNUAL REPORT TABLE OF CONTENTS FINANCIAL HIGHLIGHTS . 2 LETTER TO SHAREHOLDERS . 3 A CHOICE YEAR IN REVIEW . 6 FINANCIAL REVIEW . 9 ABOUT CHOICE Choice Hotels International (NYSE: CHH) is one In 1990, in order to better reflect its growing number of of the largest and most successful lodging companies brands and its presence in other countries, the company in the world. Choice currently franchises more than changed its name to Choice Hotels International, and in 5,300 hotels, representing more than 435,000 rooms, 1996, Choice became a public company trading on the in the United States and more than 40 countries New York Stock Exchange under the symbol CHH. and territories. Choice is committed to serving the traveling public by Choice Hotels International was founded as a marketing offering high-standard accommodations at an affordable cooperative by a group of Florida motor court owners price and to strive to deliver an outstanding return in 1941. Operating under the name Quality Courts on investment for its hotel owners and shareholders. United – the nation’s first hotel chain – the owners The company’s mission is to deliver a franchise success sought to refer business to each other’s hotels, as well as system of strong brands, exceptional services, vast establish quality and service standards for their properties, consumer reach, and size, scale and distribution that in order to better meet the needs and expectations of delivers guests, satisfies guests and reduces costs for our their guests. hotel owners. Over the years, more hotels joined the Quality Courts Choice hotels, which include Cambria Suites, Clarion, system, which had become an influential force in the Quality, Comfort Suites, Comfort Inn, Sleep Inn, lodging industry and had established a reputation for MainStay Suites, Suburban Extended Stay Hotel, providing quality, affordable lodging in convenient Econo Lodge and Rodeway Inn, are among the and popular locations. The company established a rich world’s most recognized brands. Ranging from limited history of innovation, as it was the first in the industry service to full service hotels in the economy, mid-scale to require wall-to-wall carpeting, offer 24-hour front and upscale segments, Choice-branded properties desk service and in-room telephones, guarantee reserva- provide business and leisure travelers with a range of tions, offer 24-hour-a-day, toll free reservations, segment high-quality,high-value lodging options throughout brands, develop a global marketing and reservations the United States and internationally. system, and offer non-smoking rooms in every hotel. 1 FINANCIAL HIGHLIGHTS (amounts in millions, except unit and per share data) COMPANY RESULTS 2006 2005 2004 2003 2002 Total Revenues $544.7 $477.4 $428.2 $385.9 $365.6 Net Income $112.8 $87.6 $74.3 $71.9 $60.8 Basic Earnings per Share1 $1.72 $1.36 $1.12 $1.01 $0.78 Diluted Earnings per Share1 $1.68 $1.32 $1.08 $0.98 $0.76 Cash Dividends Declared per Share1 $0.56 $0.485 $0.425 $0.10 — DOMESTIC FRANCHISE SYSTEM Hotels Open and Operating 4,211 4,048 3,834 3,636 3,482 Hotels Under Development 860 603 460 401 310 Rooms Open and Operating 339,441 329,353 309,586 294,268 282,423 TOTAL FRANCHISE SYSTEM (Domestic and International) Hotels Open and Operating 5,376 5,210 4,977 4,810 4,664 Hotels Under Development 930 687 569 491 474 Rooms Open and Operating 437,385 427,056 403,806 388,618 373,722 1 Per share amounts have been retroactively adjusted for the two-for-one stock split effected in the form of a stock dividend distributed on October 21, 2005, to shareholders of record on October 7, 2005. $112.8 $544.7 930 $1.68 $477.4 5,376 $87.6 $1.32 5,210 687 $428.2 $74.3 4,977 $0.98 $1.08 569 $385.9 $71.9 $365.6 4,810 $0.76 474 491 $60.8 4,664 ’02 ’03 ’04 ’05 ’06 ’02 ’03 ’04 ’05 ’06 ’02 ’03 ’04 ’05 ’06 ’02 ’03 ’04 ’05 ’06 ’02 ’03 ’04 ’05 ’06 Revenues Net Income Diluted Earnings Hotels Open Hotels Under Per Share Worldwide Development Worldwide 2 LETTER FROM THE VICE CHAIRMAN AND CEO DEAR SHAREHOLDER: Industry fundamentals were strong in 2006, and I’m very pleased to report that 2006 was yet another Choice’s brands performed well. For our domestic strong year for Choice Hotels International. We grew system, Revenue Per Available Room (RevPAR) rose the business and our market share through prudent 6.1%. In 2007, demand growth for hotel rooms is still management of our brands, outstanding services to forecasted to outpace supply growth while RevPAR our franchisees, and record sales of new domestic growth is expected to moderate. franchise contracts. Our proven business model and To continue to grow our business, our strategic focus our balance sheet remain strong. Additionally, our in 2007 will be on system growth, differentiating franchisee satisfaction ratings our brands, optimizing property-level performance have never been higher, with and delivering business to our hotel owners. If we 86% of our owners giving us execute our strategy in these four areas, we will be a high rating as a franchisor. best positioned to maximize financial and shareholder For 2006, Choice’s financial returns, to optimize franchisee profitability, and to results were excellent, with elevate guest satisfaction. diluted earnings per share up STRATEGICALLY GROW OUR EXISTING 27% for the year to $1.68 and BRANDS AND ACHIEVE GROWTH IN operating income increasing NEW MARKET SEGMENTS 16% to $166.6 million. Our eight established brands – Comfort Inn, Comfort On the revenue side, total Suites, Sleep Inn, Quality, Clarion, MainStay Suites, revenues increased 14% to Econo Lodge, and Rodeway Inn – which include CHARLES A. LEDSINGER, JR. $544.7 million. Vice Chairman and Chief Executive Officer some of the most recognized brands in the industry, We had a phenomenal year in offer travelers and hotel owners options at a variety franchise development, executing 720 new domestic of price points. We are committed to managing these hotel franchise contracts, a 13% increase over a very brands in a way that maximizes their appeal to guests strong 2005 number. We saw growth in domestic and their value to current and prospective franchisees. franchise contracts for both new construction and Our two newest brands, Cambria Suites and Suburban conversion hotels. Due to our record franchise Extended Stay Hotel, represent significant future development efforts, we entered 2007 with our largest growth opportunities. Cambria Suites is poised to be domestic pipeline ever, with 860 hotels, representing a leader in the select-service, upscale segment, and as more than 65,000 rooms, under construction, of year-end, we had 43 properties under contract in 20 awaiting conversion, or approved for development. states. The brand has been embraced by developers for Our domestic units online grew 4%, and we ended a variety of settings, including mixed-use developments, 2006 with more than 4,200 hotels open, representing urban and suburban settings and airport locations. nearly 340,000 rooms. With this growth in volume of We will shortly open our first hotel in Boise, Idaho. new domestic hotel franchises, greater focus will be We anticipate five more properties opening by the placed on bringing these properties online quickly. end of 2007. 3 The Suburban Extended Stay Hotel brand, which IMPROVING OUR BRANDS AND OUR had been concentrated in the Southeast, is showing PROPERTY-LEVEL PERFORMANCE tremendous appeal to developers nationwide, and the To drive property-level performance, we will future of our extended stay products, Suburban and concentrate on improving brand consistency and MainStay Suites, remains very promising. implementing brand initiatives that best meet the needs of hotel guests. We will enhance our system-wide Another core focus area for Choice is in the performance by improving the hotel opening process international arena, which we continue to see as a and augmenting our rate and revenue management source of long-term growth. Having acquired the functions. We will also drive brand consistency and franchising operation for continental Europe in 2006, improve brand standards by strategically leveraging we see the potential for accelerating the growth of the non-renewal process to eliminate, or reposition, the business in that market. We are also concentrating outdated product, thereby opening markets to new our energies on improving the value proposition to development that has the potential to boost revenue franchisees through increased reservations delivery, with higher-performing product in place. which will be driven in part by expanding our Choice Privileges loyalty program. IMPROVING BRAND RECOGNITION To enhance our growth prospects, we are exploring AND BUSINESS DELIVERY innovative ways to strengthen existing opportunities, We are improving our reservations delivery, a key value to expand our product offerings, and to meet current proposition to franchisees, by driving more guests to unmet customer needs – while evaluating sound central distribution channels, increasing conversion investment opportunities in adjacent businesses. and enhancing the systems architecture that supports these efforts. We will leverage our business intelligence FACILITATE AND DRIVE GREATER capabilities to create more automated, targeted BRAND DIFFERENTIATION marketing messages. We are becoming a more guest- Our adoption of a brand-centric organizational centric organization and will leverage our robust structure enables us to leverage our brand equity database of customer information to provide more focus more directly on meeting the needs of our key information about our best guests at key customer customers. Our brand strategies and the growth of our touch points in order to better serve them. brands are integrally linked. With our new structure in We are exploring ways to better manage rate and place, we will focus on improving brand consistency, revenue at the property level by dedicating resources delivering more differentiation among our brands, and and tools to assist our hotels – both centrally and in the enhancing brand quality.