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

All right. Good morning, everyone. We're happy to have with us today at JPMorgan's 2021 Gaming, Lodging, Restaurant and Leisure Management Access Forum the team from Wyndham Hotels & Resorts. We have Geoff Ballotti, Chief Executive Officer; Michele Allen, Chief Financial Officer; and Matt Capuzzi, who quarterbacks Finance and Investor Relations. Thank you very much for joining us. Nice to see your faces. I would much prefer to see your faces in person and live, but that will be the next conference. Soon enough.

That will happen in September, will it not?

It will, September. You all and everybody else on this call and in this conference will be getting a save the date and invite, I think, tomorrow after the last presentation. So good news on the horizon. And it will be, I think, the first JPMorgan conference in person or the second one. So good news all around.

Speaking of good news and positive trend changes, maybe you can talk a little bit about the demand recovery that you're seeing in your Chain Scale segment foci, the building back of occupancy and maybe how you see your portfolio perform versus competitor portfolios from here, particularly since you've done so much better than others. But we would love to hear what you're seeing on the demand side. It does feel very legitimate that we're seeing some green shoots across travel. So if you could expand on that, that would be great.

Sure. Yes. And no better green shoots than yesterday's STR numbers, which I know were preliminary still, but it was just great to see and especially certainly continually in our segments. Economy last week was, from a green shoot standpoint, up significantly from the week before. I know it was an easy comp. But we -- I like to look at the 2 weeks, Joe, and just to see how well economy and mid-scale continues to get better. And we're certainly seeing that throughout not only the Smith Travel weeklies, but we're seeing it, as we've reported publicly, throughout 2020. For the full year 2020, our RevPAR performance was 13% ahead of the industry. In January, we're 24% ahead of STR. And it is the economy and the mid-scale segments that can continue to pick up and improve. And it is great. I mean the green shoots that we're seeing by state that STR is reporting, certainly, business coming back in states like Texas, which has just opened up. Florida, with occupancies. Weekly occupancy is now running sometimes in the 70s. Our franchisees are very optimistic, having made it through what everybody viewed as 2 of the most difficult months from a seasonally adjusted occupancy level, January and February, to be now in March and seeing as many green shoots as Smith has been reporting over the last several weeks.

Great. Maybe can you just talk about your bookings window today and how does that compare relative to pandemic lows or pandemic worst, however, you want to phrase it versus different times during history for Wyndham?

Sure. Yes. I -- we talked a bit about it on the call. But what we've talked about consistently throughout this pandemic, we hit really the trough in April and we've -- of 2020. And we've continued to see it improve versus where we were in any month a year ago. In Q4, our bookings were made an average of 8 days prior to arrival. And in Q1 to date, that average booking window has increased to 12 days prior to arrival. And so the booking window continues to steadily improve. And notably, Joe, bookings that were made over a week in advance continue to grow. Again, strength in that leisure traveler coming back and wanting to get in the family car and head to all of these spots that are opening up right now. When we look at states like Florida, our booking window has moved from 10 days in advance to now over 2 weeks. So consumers are feeling confident. Consumers are planning. Consumers are wanting to take their family, get in the car. It's spring break. And -- what I'm hearing anecdotally of our hotels up and down the Texas coast right now is really, really encouraging. And it's certainly reflected not only in our booking windows, but also in our average length of stay, which, throughout this pandemic and throughout the first quarter, have continued to improve and increase.

It's sort of easy to understand or sort of get the drivers of an occupancy build back. Maybe less straightforward is sort of the pricing associated with the recovery that's ongoing and the furtherance of this recovery. Obviously, Wyndham Hotels doesn't sort of have a direct role in the pricing of its franchise hotels. But what tools do you have to provide your franchisees to optimize pricing? And the reason I ask it is that I think we could all envision sort of this almost pricing-elastic leisure recovery, at least for the near term when people can resume their vacations. So what are your thoughts here on that topic?

Yes. I -- we've talked about it, you and I, before quite a bit. I think there's a lot of people in the industry that thought that there would be this compression in leisure pricing in the economy and mid-scale space, and that certainly hasn't happened. I mean if you look at just last week's Smith Travel, economy rate down 5% to where it was this time last year. Now this is all going to flip. But we're now looking to 2 years ago. And if you look back to -- on a 2-year stack basis, it's still that same 5%. It's getting -- it's really getting very, very close and very tight. If we look back over the last 2 months, economy ADR is less than down 5% to where it was a year ago. And again, looking on a 2-year stack basis, that has been holding steady. I think our franchisees have been really educated through the last 2 down cycles after 9/11 and after '08 and '09 to realize the value of that dollar of average daily rate over a point of occupancy. We have -- and you're right, we don't manage our franchisees, small business owners' pricing, but we do provide them the tools and the technology with what we believe to be one of the best reservation systems in the industry. We outsourced it all to a state-of-the-art, best-in-class, cloud-based property management system, which has resident in it an automated revenue management system, which is scraping competitive rates and recommending to that small business owner what he or she should be doing with his pricing. Our job is to train them to accept those pricing recommendations. And that's what our revenue management teams have been working throughout this crisis. So just -- so focused on getting into our small business owner's mind the importance of that average daily rate. We have a really unique built-in business base that is not quite collared, that did not go away, that kept traveling, that allowed that 30% of the business that was coming before the pandemic to continue to come and begin to actually increase as so much of the business travelers that we appeal to, that blue-collar worker, that business continues to pick up. And we're very optimistic about that business traveler. For us, that blue-collar worker, that everyday traveler coming back, while we're training our franchisees on the leisure side not to discount coming into the spring and summer. I mean think about making it through January and February, 2 really tough months. Here we are in March, with spring right around the corner. From a marketing standpoint, one of the things we're not going to be doing as we've done in past seasons is going out and offering price discounts to try to create demand. We're focused on that marketing that is driving business direct through our Wyndham Rewards channel, which is on any given night, about 50% of the guests showing up at any one of our hotels are Wyndham Reward members. So we're very focused not on price discounting but on holding the rate and driving the business directly to those hotels.

Great. When we look at your operating or RevPAR results relative to other companies we follow that maybe have a higher price point or urban or more group focused, you're closer to 2019 RevPAR levels on an absolute basis than they are. Would you expect to reach 2019 RevPAR faster than maybe some of your full-service urban peers?

Yes. I mean again, just look at Smith Travel in the economy and the mid-scale space right now in terms of what we're down versus 2019 versus what the industry is down. And we're a lot closer than certainly they are. Occupancy has been consistently improving in our segments. ADR, again, has been just remarkably stable. And with ADR declines now in the single digits and the economy in mid-teens in the mid-scale, I think your thesis is right that if that trend continues, there's no reason we would not.

Got it. Would you think by the end of this year as you're exiting 2021 -- and Michele's smiling, that you're sort of at 2000 -- or you're run rating at 2019 RevPAR levels?

We are not providing guidance on this call, which is why my CFO is smiling.

I think there is -- Joe, I think we're optimistic about the potential to get close to 2019 levels, but obviously, it's going to depend on the speed of the recovery.

Right. Okay. Maybe we could switch over to your development pipeline and that room growth and RevPAR index gains. Maybe actually, we could start with the latter with RevPAR, and it's gaining pretty consistently this past year despite this travel impact from the pandemic. You've seen some nice improvement in RevPAR index, which is helping you with signing new deals and hopefully seeing a nice acceleration in net footprint growth. Can you talk about the drivers of your RevPAR index? And obviously, it's not something that happens in 1 year. It's the result of brand innovation and investment in brands in the past. But can you talk about the drivers of the RevPAR index gains and then the sustainability of those index gains?

Sure. I think the #1 driver is what I was just talking about, Joe. We have the largest loyalty program in our space with nearly 90 million Wyndham Reward members that are laser-focused to who are traveling that we're marketing to. We also have that everyday traveler base that did not go away. Our workers, again, do not have offices. They're not on Zoom. And so that was just right there. I mean there are so many anecdotal stories of owners saying, they wish and they tell us all the time, they had more Wyndham product because of just the uniqueness of that built-in base. Obviously, everything that we've talked about that we're doing on the marketing front with our mobile app and our Wyndham Business direct app and the technology investments that we've made, outsourcing of buying versus trying to build it ourselves with best-in-class providers. That's all helped. But we have...

And then the ADR, holding the ADR has been a big part of it as well.

And those have been really -- between being able to drive so much business, again, roughly half of the check-ins to all 6,000 of our franchisees tonight are going to be asking for their Wyndham Reward points. In certain brands like La Quinta, which has been our fastest-growing RevPAR index story consistently all year long, that share of occupancy, combining the La Quinta loyalty program and the Wyndham Rewards program has really helped those hotels grow their market share.

Great. Longer term, you've guided to 2% to 4% net rooms growth. Part of it is retention resulting in lower churn. Can you just talk about the components of sort of the gross room adds and the deletions and where there could be upside or downside for that matter to either one of those 2 components of net rooms growth?

Sure. And for 2021, we have put out a guidance of 1% to 2% as we still expect, especially in the first half of the year, to face some headwinds. But when we get back to pre-pandemic conditions, which we can't tell you exactly when that will be, but we hope it's soon, we expect to return to that 2% to 4% net room growth range with additions returning to 2019 levels. We are opening on any given year gross 8%. And we are running best-in-class retention rates in the economy and mid-scale space, which are certainly higher than they've ever been and we had them there in 2019. And we expect that global retention rate, which is so important for us, to get to that 95% level. And we believe we had it last year after taking out those rooms that were very [indiscernible]

The termination was right.

So I think the upside will most likely come with improved retention. I mean what investors talk about and ask us a lot is compare your retention rates to the industry segments you're in, and they are best-in-class. And when you look at our retention rates in the economy segment, they are running 200, 300 basis points, 400 basis points higher in 2019 than the Smith Travel retention rates. And so to have been able to move those economy retention rates from 92% to 93% to 94% to 95% to almost 96% in 2019, the biggest upside in terms of our ability to move that 2% to 4% to 3% to 5%, to your question, will be in our ability to move that 95% back to where it was in 2019, which we're confident our teams are going to be able to do after we get through what we're going through right now.

Where does the retention rate longer-term settle out? Is it 96%, 97%? Obviously, you can't go above 100%. Where do you see that settling out longer-term?

Yes. As you go up the chain scale, I mean, brands like La Quinta are running retention rates at 98%, 99% and have since we acquired the brand. And that's 1,000 units that we mixed into 6,000 -- to 5,000 hotel units in North America. But then again, if you look at STR -- Matt, keep me honest here, I believe STR's 2019 retention rate for economy hotels -- Matt, the number?

Right around 91%.

91%. So we've already moved that 91% to 95%. I'd like to tell you, Joe, I'm going to be at 99% in the economy business, but it is a different business. These small business owners, where we do not have investments, operating guarantees, performance tests, it is a much different business. And we're really proud of having moved our economy retention rates from that 91-point whatever to nearly 96% in 2019. We want to get back there as quick as we can.

Right. Geoff, you mentioned about the, I guess, strategic deletions that you undertook in 2020. Are they largely behind us at this point? Or do you see any kind of laggards? And what I mean by strategic deletions is they're not really generating much in the way of fees. And so taking them out of the pipeline doesn't really do much profit. But is there much beyond 2020?

No. No, we believe the strategic deletions are behind us. We expect to be returning to a much more normalized retention rate. And the big question we get asked a lot about is, are there any surprises out there? Is there a big wave of terminations because of the financial distress that's in the industry coming our way? And Joe, today, we have not seen it. But still, less than half of 1% of our 6,000 franchisees in North America are in foreclosure. I think it's less than 35 hotels. And we have entered into franchise agreements with all of the -- nearly all but 3 or 4 of those hotels servicers because the last thing that the servicer wants is to lose that reservation fee.

Great. Maybe we can switch over to conversions, which should be an opportunity for you coming out of COVID. I think you indicated that 25% of your existing pipeline is conversions. Can you talk about how that compares to historical levels, maybe how it compares coming out of the global financial crisis and then how you see conversions in that 1% to 2% net rooms growth rate for this year and that 2% to 4% longer term, 3% to 5% longer term?

Sure. Yes, to your question, post-2008, coming out of the great financial crisis, our pipeline was about 50% conversion. And since 2011, that pipeline is round about 1/3, 35%, 33% conversion, somewhere in there. And as we've added new construction brands like La Quinta, like Hawthorn Suites, like Microtel, they dramatically expanded our international pipeline around the world where there continues to be consistent demand for new construction-branded hotels. The ability for us to grow that conversion pipeline is significant. We averaged roughly, I believe, 70% of our openings were conversion hotels in 2019. We believe that, that number has the ability to increase as it did after the great financial crisis. And as we saw consistently throughout 2020, that conversion volume pick up on both on openings and on signings, which was added to the pipeline standpoint.

Great. Can you talk about just the differences in attitude and maybe mood between developers in the U.S. versus China versus other geographies? I mean China obviously has been a relatively strong geography for you for footprint growth.

Yes. Well, I think the mood in the U.S., as I mentioned a moment ago, among developers, it's -- they're far more optimistic today than they were heading into the fall and winter months. In 2020, on average, we talked about 80% of our U.S. franchisees we're at that 30% breakeven occupancy or higher that we believe most of them can breakeven at, particularly those that are better capitalized, which so many are. That said, there are still many franchisees out there that might need and are looking for further government relief. And we are working with every single owner we can to provide extended payment terms beyond the initial extension that went a long way in terms of engaging our franchisees in terms of our desire to work with them. But I think our -- the mindset, our owners' liquidity concerns have really transitioned from short term to longer term. Initially, they were very focused on cutting expenses and working to meet capital needs. But the support that we provided went a long, long way, along with the government assistance. And we've continued to suspend certain fees, such as the Wyndham Rewards enrollments fee and the retraining fees. But we're constantly assessing the situation in terms of what they need. Specific to China, the overall occupancy in Q4 was almost 50%. And over 80% of our franchisees in China were above 40% occupancy in Q4. And occupancies, as we've seen, you talk about green shoots, there are no greener shoots in our system than what we're seeing in China today.

Great. And how much of the next couple of years of footprint growth is China related?

From a direct franchising basis, I mean, which has really been our focus, our goal in terms of net footprint growth is to get -- we had net unit growth in 2020 on a direct franchising basis. Put aside the strategic deletions of not unprofitable master license agreements. But to get back to that high single digit is the team's goal. And that's what we performed in 2018 and 2019 on a direct China franchising basis, which is now over 1/3 of our system in China.

Switching topics. Wyndham has grown its footprint over the course of time through tuck-in acquisitions. I don't want to say La Quinta was a tuck-in acquisition because it was relatively sizable and that could give you some needle-moving growth. Is there anything out there with regards to a single brand or a portfolio of brands that would, one, is available for purchase? And two is -- how do you just generally look at M&A right now? Are you surprised there hasn't been anything that has traded or been offered given sort of the distress that COVID brought on hotels?

Yes. Are we surprised? I'd say the landscape of a purely asset-light hotel brands or brand companies has definitely shrunk over the last decade. But there are still some out there. What we are -- what we do continue to see is this disparity between the bid and the ask. And that really has -- that's not at all improved in this COVID time, right? And it's probably grown quite a bit. So there's -- while there are deals out there to be done, they're not being done, they're not getting done at a -- they're just not -- they're not coming to terms right now that are agreeable on both sides between a buyer and a seller. Having said that, I think there are going to be opportunities that do present themselves as we get past COVID and owners start to kind of take longer-term decision-making actions and start to really think about, okay, where do I want to -- how do I want to position my business for long-term growth? And they get a better idea of how they think they're going to be returning to 2019 operating levels and get a little bit more religion around that bid/ask. And honestly, buyers stop thinking that they're going to get 20%, 40% discounts. And so they get a little bit more realistic about what they're looking for. So we do think there's going to be some opportunities. But at this point, we're looking -- we would only be looking at things that would be accretive, right, and have strong ROIs for our shareholders and for the hotel owners of any brands that we would be looking to acquire.

And the things that are out there that are realistic opportunities for Wyndham, would they be sort of a higher price point, chain scale focus? Or would it be maybe consistent but more nichey relative to your existing footprint?

I would say, certainly more nichey relative to our existing footprint. But I don't -- I wouldn't say anything is necessarily off the table with the rewards program. Aspirational properties are important to the strength of the program. And so there's a possibility at the right price and the right ROI, that type of deal could work for us as well. I would say, Joe, I'll just reiterate that obviously, anything we do is going to be a strategic fit from an asset-light perspective. We're not going to be a real estate buyer.

Great. Maybe we can talk about sort of free cash flow generation, capital return, balance sheet management since they're always intertwined. It's worth noting, yes, you're paying a cash dividend. So despite the pandemic, you have been distributing some capital back to shareholders. What's, I guess, maybe what would be more important to you as we get further into recovery and your leverage ratios sort of modulate back to normalized levels? Would it be increasing the dividend? Or would it be initiating some level of buyback activity?

Yes. So we actually paid a dividend all throughout 2020. So we never stopped. We never suspended the dividend. We did decrease it. And then we were able to increase it again in Q1. And so right now, we think it's actually at a level that's pretty commensurate with how our earnings were reduced with RevPAR declines. But I would say, as we look forward, our capital allocation policy hasn't changed. Our first preference has always been to invest in the business for long-term growth. We expect to always be a meaningful dividend payer. Our long-term leverage target range is 3 to 4x with a strong preference to be in the lower half of that range. And we think it's prudent to hold about $100 million to $150 million of cash on the balance sheet. So anything we generate in excess of that is going to be returned to shareholders. Whether it's in the form of a dividend or a buyback is really going to depend on the dividend policy that we set at the beginning of the year probably or whether or not we have decided to increase the dividend throughout the year. And I think that's going to be mostly informed by how confident we are with the outlook and so this -- again, the speed of the recovery and then obviously, of course, what opportunities we have to invest in the business. But I will say we will get back to share repurchase. The question is how fast. Will it happen in 2021 or will it happen in 2022? We just don't know the answer to that question, but we do continue to place a high level of emphasis on shareholder return that I think we've demonstrated that through the actions that we've taken on the dividend side. So share repurchase will follow at the appropriate time.

Great. Michele and Matt and Geoff, on the last earnings call, you gave a lot of RevPAR sensitivities and relationships maybe in relation to history in terms of certain operating metrics. And then you did a commendable job in clarifying sensitivities in a post-earnings investor slide deck. So my question kind of relates to those things and maybe ask somewhat differently than how you've presented them. If you were to go back to 2000 or generate 2019 absolute RevPAR levels, how much above 2019 EBITDA would you be? Or put another way, if you do get back to 2019 EBITDA in year x, what would that imply in terms of percentage of 2019 RevPAR on an absolute basis?

I think -- trying to understand the question better, I think what you're asking is if we were at 2019 RevPAR levels...

With the changes you've made during COVID...

Yes. Our 2019 EBITDA of $613 million with our restructuring actions would look like $653 million with $40 million of cost savings that we consider more permanent in nature that we're going to stick. And so at 2019, there's a 300 basis point improvement, I think, in the margin. So it's just $613 million to $653 million is the way I would think about it.

Okay. So the $50 million divided with that RevPAR sensitivity, whatever that spits out, take away to that from absolute RevPAR levels, that's how you would think about that RevPAR as a percentage of 2019? Okay.

Yes.

Okay. Great. The one question we're getting from the audience through an e-mail is can you just talk about royalty rates? I mean obviously, that's an input that helps you generate fees and EBITDA. But how much leverage do you have in increasing same-store royalty rates? And how much improvement, maybe, I guess, in '21 royalty rates do you have just based on mix from the removals of, say, rooms that were dilutive to that absolute royalty rate?

Yes. We'll see some improvement due to mix. But we -- I think the longer -- the bigger opportunity, which is really a multiyear opportunity for us, is on the international side as we move to -- as we move further into this direct franchising model and further away from the master franchising model that Geoff discussed. And that's -- when you bring in a direct franchising deal, those deals are generally carrying royalty rates that are nearly 4x higher than a master franchise deal. And so that's where we see the biggest opportunity to improve our international rates. And I would say because we do have such a vast international footprint, there's a lot of mix impact that happens in our royalty rate. So when we look at it, we're looking at it really at the regional level. And what's important for us is we want to see improvement every year at the regional level.

Great. Another question here from the audience relates to the extended-stay segment. Very recently, one of your peers, guess who it is, Extended Stay America, talked about having a higher price point, extended-stay product offering, and you obviously have exposure here with the Hawthorn brand. Can you talk about that as maybe an opportunity in a segment that obviously had a pretty good resilient operating performance in 2023?

Sure. Yes. Hawthorn Suites, we think, is a tremendous opportunity for our teams, both on a stand-alone basis, Joe, and with La Quinta side by side. We have 60 Hawthorn Suites right now in our pipeline. It is one of our fastest-growing new construction brands. We will do -- with the right hotel conversions, we have said goodbye to many Hawthorns. Some of the guarantee hotels that left the system were Hawthorn Suites, but both the Hawthorn Suite stand-alone and next to La Quinta is a segment and a new construction product that we're very, very interested in growing.

Great.

Yes. And you may have seen our press release last week where we announced our first ground break for a new prototype where we're combining the La Quinta and Hawthorn dual brand in Texas. So that's pretty exciting. It's a new product.

Excellent. Great. Well, on that note, we are at the end of our allotted time. Thank you, Geoff, Michele and Matt, as always, for your time. Always great to catch up and get the latest from you guys.

We'll see you in September at the venue. And let us know if...

Well, we'll definitely see you there. Hopefully, we'll see each other in person sooner than that. But appreciate your time, as always.

Thanks, Joe.

Thanks, Joe.

Appreciate it, Joe.