Wyndham Hotels & Resorts, Inc. (WH) Earnings Call Transcript & Summary

Thank you, and good morning, everyone. My name is Simon Yarmak, the senior analyst at Stifel. You're here this morning with the management team of Wyndham Hotels & Resorts for their virtual fireside chat at our Third Annual Cross Sector Insight Conference. From Wyndham, we have CEO and President, Geoff Ballotti; CFO, Michele Allen; and Head of IR, Matt Capuzzi. So Wyndham is the largest franchising hotel company in the world, with a number of hotels to almost 9,300 hotels worldwide across the economy and mid-scale segments. The company's asset-light business model runs with high margins that generate strong free cash flow that's returned to shareholders in the form of dividends and most years, share buybacks. In the current challenging environment, Wyndham has a strong liquidity position with around $750 million of cash as of March 31, or liquidity for about 3 years. With that, I'll turn it over to Geoff for some opening comments.

Well, thanks for having us today, Simon. We're thrilled to be here. And it's certainly been an interesting 3 months. Our focus has really been on the safety, first and foremost, and well-being of our team members and of course, our franchisees, who we continue to provide support and assistance to. We're, I think, one of the first companies out there in terms of providing fee deferral for the months of March and April and May and continue to provide assistance to them going forward. As far as our portfolio, we've remained open through the crisis. At no point did -- more than 6%, 7% of our hotels have to close, our 6,300 hotels in the United States. And we have nearly 100% of those hotels open. And why that is, is we've had a very strong base of that everyday business traveler that has still had to be out there and traveling, occupying our hotels. And as we're coming out of this, we're seeing a pickup in leisure travel. And if you recall, 96% of our travel is domestic. Nearly 100% of our hotels in the United States that are open are located outside of major cities and drive-to destinations and are very well positioned for recovery as travel demand begins to recover. And we're certainly seeing that. There is a lot of pent-up demand from people to begin to travel again. We're seeing that with weekend demand. And it's -- we believe, going forward, it's going to work in our favor, given where our brands sit geographically and then the change scales in which they sit in those suburban interstate drive-to markets. So our focus now is really on capturing that leisure demand as it comes back, and it is great to see weekend demand picking up in so many different markets.

So Geoff, in your opening commentary, you just touched on your leisure exposure is probably close to 70%. Now we've been hearing anecdotally, you touched in your prepared remarks that the weekend demand on the leisure side is picking up. Can you talk about some of the recent trends you've seen, the uptick in world that we can -- we've heard from a number of your peers, that was -- it was fairly strong and healthy?

I think it's surprised the industry, in general, and momentum continues to build. I mean, it has been 7 consecutive weeks of recovery, and recovery has certainly been strongest in the U.S.A., but really all regions of the world that are international, it's showed some signs of improvement. And I'm not talking only in China. In German occupancy, if you look last week, saw a jump from 10% to 17%. So that was encouraging. But to your question here in the United States, Memorial Day those drive-to destinations, absolutely soared with near 90% occupancy in Daytona Beach, 80% occupancy in Gatlinburg, near 80% occupancy in South Carolina in places like Myrtle Beach. Anecdotally, we opened our Wyndham Grand in Clearwater Beach the Monday before Memorial Day, and we ran 97% on Friday night and 99% on Saturday night. There is demand to travel again, and our job is to make sure that our hotels are as safe as they possibly can be. I think leisure drive-to business in the southern states are much further along in terms of recovery. We saw that Memorial Day, states like Texas, like Alabama, any state with more leisure amenities certainly saw more occupancy, not only on Memorial Day weekend, but in the weekend ensuing last weekend.

Thank you for that color there in terms of some of the markets in the south. What is your breakdown? How do you quantify the percentage of your portfolio that you believe in domestically that's drive-to versus fly-to?

96% of our business is domestic. And over 90% of our business is drive-to, specifically, and we track that very closely.

You're about 70% leisure and 30% business transient. Has now -- coming out of the last cycle, as we begin the new cycle, what do you think about that mix, 70-30? Do you want to change that at all as we begin this new cycle here?

No, I think we have such a strong installed base of that 30% negotiated corporate and transient corporate. We'll certainly look to hold on to that and to make sure that, that business is growing. But I think the mix will remain steady. I think in the months ahead, there's going to be an uptick in leisure travel. And that customer base that knows us and is looking for value is going to probably keep that 70-30 mix pretty steady.

Sure. So first, some of your peers over the last couple of months that you've been able to capture higher RevPAR index versus their comps at. Have you had any success over the last couple of months as we've come through this pandemic for your hotels to improve your RevPAR index?

Well, certainly being able with 6,300 hotels, to keep them almost all open, we have been gaining both against chain scale and track scale in our economy and mid-scale brands. But most importantly, as you know, Simon, the most important measure that we track is how these properties are performing against their STR property concepts. And the STR property concepts in the economy and mid-scale select-serve space that we operate in have also, essentially, with our competitors, remained open. We've gained against that STR property concept 150 basis points approximately of domestic RevPAR index since the beginning. So we are seeing our brands picking up share. And with our focus now being on revenue management, the -- what we're trying to educate our franchisees to focus on and what we've had success of late is driving that ADR index. I think our franchisees realized just how important a point of rate indexes over a point of [ WAC ] index, and it's been encouraging to see in the economy and mid-scale space that ADR down. What was 20% actually come down in the last few weeks in the economy space and in the mid-scale space. So our whole focus with our teams is obviously to continue to drive on the revenue management side, rate index to continue to gain share and continue to focus to drive more share on the rebound with more flexible cancellation policies, so guests can plan and cancel without penalty right up until the last minute. We think that's been a winning strategy and driving less price promotion and more promotion via our Wyndham Rewards loyalty program. I think you're going to see from us a lot more points-based promotions versus discounting. And the focus on share, continuing to drive share and continuing to drive rate index is going to be what we're focused on. Our Wyndham Rewards share of occupancy has been holding steady. We've been running and increasing every quarter to a 47% share of occupancy domestically, and our goal is to continue to maintain that and to drive that.

Sure. You touched in your prepared remarks about cleaning. Obviously, in the new world that we're in, there's been a lot of emphasis, a lot of focus on additional cleaning and additional disinfecting the rooms in this environment. Can you touch on some of the different programs that you've implemented at your hotels?

Yes. I think our company and our competitors, I think, the industry is doing a great job. I mean, we're all working alongside the American Hotel and Lodging Association with their Safe Stay initiative and applaud Chip Rogers and the American Hotel and Lodging Association and all the associations, AHO and others that are doing a great job making sure franchisees are focused on it. Until guests feel comfortable, they're not going to be out and about, the leisure ones, that is traveling. But we've been able to show remaining open and now with occupancies in the economy space approaching 50% in mid-scale and at 40% occupancy that our hotels have remained open through this crisis with people feeling comfortable and staying with us without incident. We have an initiative, specifically to your question, our Count on Us safety initiative has issued to all of our franchisees revised cleaning protocols. We're making sure that our guests know that our properties are clean and safe from the moment they check in. They'll see public space social distancing decals on the floor. They'll see public space hand sanitizers at every touch point, they'll see disinfectant wipes. So they'll see hand sanitizer amenities in their room. We did what we thought was the right thing to do at the beginning of this crisis. We partnered with Ecolab. And it sounds trite, it sounds silly, but what franchisees -- any small business owner that you seem to see in the news or talk to or watch says they're having a difficulty into getting that hospital grade sanitation. PPE, the cleaning supply is at 80% plus alcohol. We, with Ecolab, placed a very large order and drop-shipped to all 6,300 of our hotels all of these supplies, and they began arriving in the midst of the crisis, and they'll continue to arrive. We're sourcing them because we're able to because of the size of our supply, and we're getting at a very attractive price, and it's all in compliance with the CDC guidelines. And our franchisees, by and large, have been very appreciative of being able to have that just automatically delivered versus having to go out and chase it themselves.

So I guess your plug is, our hotels are safe to come for the summer, and we're open for business, and we'll love you to come to our hotels.

And they have -- I mean, they've been safe throughout this crisis. We've been housing the frontline workers that have had to go out, the COVID-19 remediation teams in so many of our hotels, emergency care caseworkers and health care caseworkers. We've had a lot of armed force fleet relocation and family stay business. And those folks throughout this crisis have been staying with us again without incident and feeling safe. And yes, our hotels are certainly clean, and our team members are very proud of that.

Great. And you touched on in your comment about the construction workers and people on the -- first responders on the frontline. So how strong is that demand right now? And how long do you think that lasts in your properties?

Well, I think we'll -- we have seen, and we'll certainly continue to see demand from first responders tapering off and consolidating somewhat, specifically in the large cities like New York where we had hotels that remained open. But I think the government business will remain. And I think our base, that 30% is going to remain, and we could build on that with our national sales efforts and our corporate-negotiated rate business. We are much more -- Simon, we refer to this group as more boots and beds versus a suits and sheets. We have a lot more of that type of travel, blue-collar travel, everyday traveler versus white-collar travel in our hotels and our economy and mid-scale select service. So many of whom need to keep traveling versus white-collar travel, which still in so many companies across the nation, I think, throughout this pandemic are going to have certain policy restrictions and policy travel cutbacks in place. It's always been a part of our business demand, and it continues to pick up. In fact, the accounts that had to stop working due to the pandemic are now out, and they're back on the road. And our job, as I said at the beginning, is to continue to hold on to that 30% base, build it. But the real upside for us is that, that 70% leisure travel continues to pick up, and that economy occupancy continues to push up over 40% and that mid-scale up over -- up over 50% now and the mid-scale now up over 40%. We certainly have seen with our mid-scale brands, one of our strongest performing brands now is La Quinta. It's been consistently running in the mid-50s during the weekends. And again, leisure travel will be built on top of that installed base that I think is pretty steady.

So you just mentioned that your occupancy is over 50% in what are your saying...

Weekends.

Weekend?

Yes. Weekend occupancy for so many of our brands is well up over 50%. La Quinta is leading the way. But I'm referring to -- I think Smith last week came in right around 50% for the economy segment for the last 7 days and right around 40% for the mid-scale for the last 40 day -- for the last 7 days, sorry, last week, week ending 5/30, I believe.

Yes. So talking about La Quinta. I mean, I guess, we'll talk about the other piece of your business. So how many hotels are you managing for CorePoint as of now? I know the split happened 2 years ago, and they've sold a bunch of hotels. So can you just give an update as to what's going on in their hotels? How many you're managing?

Sure. Yes. No. We have been very focused with CPLG on managing, I believe, right around 245 hotels, as they reported on their last call. We've been working with them on delivering what is most important for them, which is a dynamic best available rate pricing. We've delivered the billing and direct payment solutions for their corporate accounts, and that's been working very well. And we've been supporting them on their noncore asset sales. And our franchisees are very excited to see some of the more distressed properties begin to trade and begin to see some renovation that's been sorely needed on some of those assets.

So how many are teed up to still leave the system? A bunch have been sold over the last 12, 18 months. Like what's the game plan there?

Yes. I think they've publicly said that long term, and also have said that long-term may change in the immediate future that they'd like to wind up with approximately 150 hotels that would be core in their business.

Sure. Most of your franchisees are generally smaller in nature. Other than CorePoint and then a handful of larger master franchisees, they're small. How are they holding up to this in current environment? And how many of them are, like, eligible from the PPP money that has been given out?

Great questions. They're a very resilient group of small business owners, and they're -- it's been tough. It's been a struggle, but they're open. They're open for business. And as we've seen now with economy occupancy at 50% and mid-scale at 40% this past week, I mean, those are occupancy levels that are essentially a little bit above where they need to be from a breakeven standpoint. And many of them were achieving that breakeven occupancy throughout the crisis. I think we think that over half of those have remained over that sort of breakeven 30%. Certainly, the passage of the Paycheck Protection Program, both the House and the Senate and the President signing it last week was tremendous. The flexibility that the new bill has given in terms of forgiving the expenses from an 8-week period to 24 weeks is just huge for our franchisees. But bigger than that, I think, amending the 75-25 rule, where 75% had to be spent on employee pay to 60%, allowing the franchisees to use 40% of that money for everything, from mortgage payments to utility cost, has been really, really helpful. And most of these are using it in that manner so it becomes, in essence, a free money grant and is really helpful. Extending the June 30 rehiring date to December 31 has been real helpful. And expanding the loan term in the event that they do not want to use it along with the 60-40 rule from 2 years to 5 years has been a big lift. We think to your question that 95% -- and this is an American Hotel and Lodging Association survey of our franchisees applied for either a PPP or an EIDL, the economic injury disaster recovery loan, and that 80% of that 90% that applied received one or the other. So it's been helpful. It remains to be seen how many of our franchisees, I was talking to one last night, will apply for the Main Street Lending loan but that could be additional funds that could be really helpful, albeit at a slightly larger size.

Well, that's great. I mean, we're probably through the worst of it now and hopefully, things are onward and upward here. In terms of your franchisees now building out new hotels, how do you think the recent trends impact that? How about retention in this environment as well?

So Simon, it's Michele. So I think that when we think about net room growth, there are those 2 elements. It's the new development as well as our retention. From a new development perspective, we're expecting to see some delay in new construction, new builds. What's in the ground, we expect will get completed. And we have had some new projects since the crisis go into the ground, but we do think that there will be some slowness to new starts. On the conversion side, we are expecting volume to pick up in the second half of the year. The teams have not been able to travel over the last few months, and most of the deals get done face-to-face through relationships. And so while they've been keeping leads warm and generating new leads, we're expecting a softer Q2 from an opening side. And then from a retention perspective, what we saw through the last downturn was about 1% of our system going into bankruptcy over 3 to 4 years. And so we don't know if it would be those same volumes coming through this crisis because the franchisees are receiving a lot of support from the brand, a lot of support from their banks and a lot of government support, as Geoff just described. So we're hopeful that they'll be able to ride out this storm better than they were able to ride out the great financial crisis. They're also coming into this with significantly lower leverage rates compared to what they came into during the great financial crisis. So from a bankruptcy perspective, we can use that to help kind of guide or predict. However, we could -- we would make adjustments to what we would expect there. And then in addition to that, we do have about 9,000 rooms in China for our Super 8 master franchisee that we are going to remove from the system in the second quarter. They have been out of compliance with multiple aspects of their franchise agreement, and this is a compliance process that has been in process for many quarters and is culminating in the second quarter. We'll also take this opportunity to review our portfolio. And for franchisees that were struggling pre-COVID and that continue, obviously, to struggle because the market demand generators may have changed or there's not enough ROI to make any further investments in the properties, we could look to remove some of those from the system and open up those markets to create more profitable franchise relationships in the future. So I am expecting a little bit of an uptick in the attrition rate in the second quarter, both domestically and internationally. From a domestic perspective, I feel pretty good that, that will reverse in the back half of the year. And by the end of the year, we would be right back to kind of where we would expect to be pre-COVID. Internationally, it would remain elevated throughout the year.

Sure. You touched on -- in your first quarter release, there was about $40 million of net permanent costs that you're taking out of the business going forward. Can you sort of touch on that and address what some of those costs are?

Yes, sure. We had -- we eliminated 440 positions from the organization. We consolidated certain of our facilities. So those are the 2 big elements of the ongoing cost reductions. In terms of what we were able to eliminate, we looked at certain functions and said, where does it make sense to maybe outsource these efforts. So for instance, some of our creative marketing or our digital campaigning, it didn't necessarily make sense to keep those in-house. We also reorganized our international operations and had quite a few -- we were to review from -- remove quite a few redundancies from that effort. So if you just think about the administrative functions of running China region separate from a Southeast Asia region, we were able to remove those redundancies by combining those 2 regions.

You rightsized the dividend with your first quarter release, and you're actually paying a dividend unlike most of your peers, but you did pause the share buyback program. What would you need to see, or really, what are you waiting for to reinstate that program?

Yes. Our long-term philosophy with respect to capital allocation has not changed. We expect to be a dividend payer going forward. We expect to increase our dividend in the future. And we do expect at some point to get back in the market and repurchase our shares. In the short term, we'll be managing our leverage ratio and investing in the business with returning capital to shareholders. But with a business that's as highly cash-generative as ours and truly asset-light, there's no reason why we can't do all 3 at the same time. The amendment we have to our credit agreement, which expires middle of next year, restricts share repurchases. There's an opportunity to elect out of that early if the macro environment is improving more rapidly. So that's always an option for us. But otherwise, it would look to be potentially back half of next year, 2021.

Sure. I think you put up in one of your presentations recently that your cash burn in April was about $16 million. How is that trending over the last a couple of weeks here as operations have improved? And when do you think you can be cash flow neutral as a company?

Yes. At a 40% breakeven -- 40% occupancy level across our portfolio was about cash flow neutral for us. So when we start to approach that, we should expect to be generating cash. There is one caveat to that, which is we have deferred payments from our franchisees for March, April and May until September 1. So even if we are "cash flow positive", from an occupancy perspective, we wouldn't expect to receive the payments in from the franchisees until September 1. And then in terms of how it's trending, that's probably not something we could talk about at this moment.

Sure. That's fair there. But I assume once the franchisees start paying you back in September, that will remove a lot of the cash burn. So even though near term, it's going to delay you reaching cash flow neutral, but as they start paying back that's cash that comes through the door...

And many have been paying all along, Simon, and that's been really encouraging to see. Our franchisees generally don't, if they don't have to, want to carry a large account receivable base. And it was in consultation with our franchise brand councils that -- who thought with March, April and May being deferred for those in need. And it's probably that half that weren't at that occupancy level we just touched upon that it made sense for us to start billing in June, which we've begun billing. And those that have been paying all along have just continue to pay.

Thank you, Geoff. I think we're coming up on time here. I appreciate Geoff, Michele for presenting this morning and for all those questions and going through your business model. We think you guys are cheap relative to your peers. The business is improving as we come through the depths of the pandemic here. And we look forward to hearing good news and improving fundamentals as this summer continues. If anybody has any other questions to follow-up, you can feel free to e-mail me or reach out to management. Have a great day, everyone, and stay safe.

Well, Thanks, Simon. On behalf of Michele and Matt and I, we appreciate those of you that dialed in and look forward to talking to, I'm sure, many of you throughout the day in our one-on-ones. Have a great day, everybody.