Wyndham: Navigating The Lodging Industry With An Asset-Light Model (NYSE:WH)

Wyndham Hotels & Resorts Inc. (NYSE:WH) is one of the most storied hoteliers in the world. They have positioned themselves at the top of the industry without taking on the real estate risks associated with owning and operating in the space. Following the Pandemic, the company has recovered strongly and is now flexing its muscles despite recession talk. Today we will take a look at this lodging giant and discuss what investors can expect going into what could be a volatile 2023.

Asset Light Model

Wyndham operates using an asset-light business model, which means that a majority of its revenue comes from signing franchise and management agreements rather than owning and operating properties. This allows the company to provide high returns to shareholders without the risks that come with owning real estate, such as fluctuations in property value and political and economic uncertainty. This model is particularly beneficial for large chains, as it enables them to expand quickly during positive economic cycles without incurring debt, which can be problematic during downturns. Other large hotel chains also employ this strategy, which creates competition for Wyndham and other individual operators. To combat this, large chains are creating multiple brands with different price points to capture market share from smaller operators. The lodging industry is highly cyclical and is affected by economic conditions and seasonality. Historically, hotel stocks have experienced a decline after the summer peak in business before rebounding during the winter holidays. However, the COVID-19 pandemic has disrupted this pattern.

For asset-light hoteliers like Wyndham, the key metrics to focus on are revenue per available room (RevPAR), average daily rates, license fees, management fees, and occupancy. These numbers can be influenced by growing their network through awarding licenses, winning management rights for existing properties, and providing support for franchisees. Wyndham adds value by offering franchisees access to a well-established brand, credit, loyalty programs, and a management team if needed. Their focus on budget accommodations also helps, as budget brands tend to have more steady demand but lower margins compared to luxury brands. Wyndham’s asset-light model allows them to bypass margin issues and focus on overall performance.

Earnings Download

The company reported another strong quarter, delivering $191 million of adjusted EBITDA and generating nearly $100 million of free cash flow.

They also returned over $160 million to shareholders, bringing their year-to-date capital return to $400 million for an impressive 5% of their market cap. Global RevPAR grew 12% compared to last year, and in the United States, RevPAR for Q3 was 250 basis points higher than the previous year’s record third quarter and finished 10% above 2019, the highest quarterly RevPAR ever recorded for their brands. Year-to-date, U.S. RevPAR closed the quarter 15% ahead of 2021 and 8% ahead of 2019. This is a significant milestone when you remember what happened during the pandemic.

Internationally, RevPAR was 46% ahead of last year and 17% above 2019, driven by their EMEA, LATAM and Canada regions. International occupancy improved from down 23 points last quarter to down 16 points this quarter to 2019 levels. This is expected to continue providing a meaningful tailwind for the company in the coming quarters as demand continues to grow overseas.

Their select service franchisees in the United States were among the first in the industry to see their businesses fully recover from COVID last year. They expect 2023 to be an even stronger year than last year from a revenue and margin standpoint despite the broader macroeconomic climate. The seasonal occupancy declines that historically occur heading into the fall have been significantly less pronounced than in years prior to the pandemic. This ties in well with the travel recovery story we have seen across the industry though we are still seeing room for improvement in business travel. This component might be a bit more challenging to bounce back from than the Wyndham team sees, as it is often the first thing to cut in an economic downturn. There is also the fact that Covid has changed the way we work. Large firms are rationalizing real estate expenses following the emergence of remote work, and with this, there will likely be headwinds for business travel.

On the leisure front, they continue to see year-over-year double-digit increases in web traffic, and booking windows continue to increase compared to 2021. And on the business front, their weekday occupancy was the highest on record for the month of September as they continue to capture new infrastructure-related accounts. I do suspect that there is still some backlog or pent-up demand being worked out on the leisure front, as demand seems persistently high following the pandemic.

Infrastructure bookings represent a significant tailwind for their business as more projects commence and construction ramps up on the largest public work bill signed into U.S. law in 70 years. This often gives a lift in some of the biggest, most competitive cities in the country, and with that comes good rates and occupancy, so it is certainly a welcome development for shareholders. We will have a better idea of what that aspect looks like in 2023.

They grew net rooms by over 4%, including 80 basis points due to the acquisition of their 23rd brand, Vienna House by Wyndham, which added over 40 hotels and more than 6,400 rooms under long-term franchise agreements, predominantly in Germany. This high-quality and accretive brand was acquired from an institutional developer and a current owner of other Wyndham-branded hotels. Their team in Europe is looking to expand the size of the Vienna House portfolio over the next few years as they plug the brand into their strong European infrastructure and distribution network. This will likely be a focus for the company over the next few years as they have been working at building out their presence in high-value foreign cities for some time now.

During the third quarter, the company reported fee-related and other revenue of $375 million and an adjusted EBITDA of $191 million. The year-over-year results are not directly comparable due to the sale of two owned hotels and the exit of a select service management business in the first half of the year. The company’s Franchising segment grew revenue by 9% year-over-year, primarily reflecting constant currency global RevPAR growth, up 12% and higher license fees. The adjusted EBITDA for this segment increased by 4% to $201 million as the revenue increases were partially offset, as expected, by the timing of higher marketing spend in the quarter, which unfavorably impacted the margin by 270 basis points.

In the Hotel Management segment, revenue and adjusted EBITDA declines reflected the sale of their select service management and owned hotel businesses, which collectively contributed approximately $34 million in revenue and $10 million in adjusted EBITDA last year. Within the corporate and other segment, there was $2 million of higher expenses due to inflationary cost pressures, as expected and a reflection of the current environment.

Adjusted diluted EPS improved by 4% to $1.21, reflecting the company’s adjusted EBITDA growth in the Hotel Franchising segment as well as a benefit from their share repurchase activity. This was partially offset by the aforementioned sale of their select service management business and owned hotels.

As we mentioned, the company was generous with returning cash to shareholders. When coupled with the $44 million of cash used to acquire the Vienna House brand, the $205 million excess cash deployed this quarter was 20% higher than in the second quarter. This is typical Wyndham. They are well-equipped to survive any downturn, so when there is uncertainty in the travel industry, they start cranking out amazing deals with less well-capitalized parties that deliver value for shareholders over the next business cycle. In my opinion, it is one of the most underrated parts of their business.

The management team called out that they will continue to explore both external and organic growth opportunities actively and are targeting small tuck-in deals that are asset-light, in the higher chain scale and accretive to earnings, with brands that have the ability to grow in existing and adjacent markets. I love this move because the one criticism that some have levelled at Wyndham in the past is that they are aligned with many mid to low-tier brands. I have always taken exception to these accusations as they have an extensive catalog that boasts some of the most desirable destinations one can imagine.

Dividend and Repurchases

Wyndham is not an exciting tech stock. Investors often hold lodgings stock like these for years with the hope of dividend increases brought about by steady growth along with float reductions from repurchases. As you know, this requires the company to produce free cash flow and manage liquidity.

We can see that the repurchases and dividends have put pressure on the cash balance, but these outlays are supported by solid net income. One would argue that this is only fair as investors had to sit through a tough stint due to the pandemic, and it is fair that they are rewarded.

The buybacks and dividends have been somewhat generous lately, all things considered, but these have been supported by strong EPS performances. The company has beaten handily in each of the past five quarters.

We are going into a seasonally slow report, but there are no signs that dividends and repurchases are in any danger yet. Investors should be on the lookout for any travel demand shifts, as things can change quite quickly. The other challenge is the valuation. I love Wyndham but unfortunately, so does everybody. The stock has been on a tear, and it is certainly not cheap going into a possible slowdown.

The Verdict

Right now, Wyndham is firing on all cylinders. The travel industry looks solid, and the company can survive a mild downturn. Travel and hospitality have been stubbornly strong so far, but things can deteriorate in a matter of months. I am a long-term bull on the stock, but this isn’t the best time for a new entry. I rate the stock a hold.