Wyndham delivered despite Choice “noise:” Ballotti

Wyndham Hotels & Resorts grew its development pipeline for the 14th consecutive quarter at the end of last year to a record 240,000 rooms. President and CEO Geoff Ballotti said during the company’s 4Q23 earnings call on Wednesday that if not for the “noise” surrounding the attempted hostile takeover by Choice Hotels, that pipeline number would have been more robust.

“We’ve seen both deals and ground breaks pause as many of these small business owners have experience with Choice and they want to see this resolved certainly before moving forward,” he said.

Ballotti pointed to some 268 deals signed last year for their newly launched Echo Suites Extended Stay by Wyndham brand, which amounted to 90% to what the company committed to. “We certainly had progress, but we could have executed more,” Ballotti added. “But more deal noise creates a more challenging sales environment, which really comes in two forms – owners are moving more slowly on committing to deals with us and an increased competitive deal landscape… But yes, we know our record Q4 could have been better both domestically and internationally without the noise.”

But more deal noise creates a more challenging sales environment, which really comes in two forms – owners are moving more slowly on committing to deals with us and an increased competitive deal landscape… But yes, we know our record Q4 could have been better both domestically and internationally without the noise.

Geoff Ballotti

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There was plenty of conversation about the state of the potential Choice-Wyndham deal and what stood out was the amount of time, money and effort Wyndham has had to make, including with the second request for information from the Federal Trade Commission (FTC).

“The potential value destruction that could arise from this ongoing and elongated process remains significant,” Ballotti said. “Choice continues to try to take advantage of the uncertain timeline and outcome to exploit franchisee uncertainty for its own competitive advantage. Choice’s unsolicited offer also has significant real dollar costs for our shareholders, currently estimated at approximately $75 million, which includes approximately $15 million related solely to the FTC review.”

More specifically, Ballotti said Wyndham continues to comply expeditiously with the FTC’s second request, which he said happen in less than 1% or reviews. He added that Wyndham is also working with four state attorney generals who are now investigating the deal. “It is a tremendous effort. It has over 300 different work streams and data requests generated by a 44-page letter that we received from the FTC.”

Wyndham CFO Michele Allen cited an example of an FTC request, which included listing every bid Wyndham ever provided for any franchise service over a past five years, whether there was a prior brand affiliation, details of each stage of the negotiation, interim and final bids for each deal and the factors considered in establishing the pricing for those bids, as well as Wyndham’s costs around those negotiation activities, who they were competing against, and more. “That’s one of the 300 workstreams with multiple parts in that one request,” she added. “So, no doubt that it’s a tremendous effort.”

Ballotti added that Choice is still not addressing Wyndham's main concerns and that the risk-laden offer continues to be rejected by shareholders.

In talking with their largest shareholders, Ballotti said the feedback is consistently in support of Wyndham’s position. “They’re generally supportive of the asymmetrical risks that are out there and that we’ve been talking about that our board has objected to, and certainly would want to see addressed before continuing discussions.”

In closing his statement about the Choice deal, Ballotti said 2023 results and longer-term progress demonstrate the Wyndham is positioned to generate shareholder value well in excess of Choice’s current offer. “Over the last three years, we’ve consistently grown our system, our market share and our earnings, while also expanding our pipeline to support future growth,” he said. “Our strategy, which is well underway, is expected to generate an organic adjusted EBITDA CAGR of 7% to 10% over the next three years. We also expect to produce over $700 million of excess cash over the next two years. This resilient cashflow along with our incremental leverage capacity, assuming only a 3.5x net leverage ratio can generate $1.4 billion of excess liquidity, which can be deployed strategically for both organic and inorganic growth opportunities, further supporting additional value creation for Wyndham shareholders beyond our 7% to 10% EBITA growth expectation.”

Strong Q4, outlook

Turning to earnings results, Wyndham opened 66,000 rooms last year, the largest year of organic room additions in its history, and even at a moment in time when hotel transaction volumes was off some 50%.

Wyndham’s global franchisee retention rate, which includes all terminations reached 95.6%, a 30-basis point improvement year over a year.

Wyndham delivered 3.5% of net room growth with Q4 marking the 12th consecutive quarter of organic net room growth. They grew the development pipeline for the 14th consecutive quarter to a record 240,000 rooms.

Global RevPAR growth was 5% in constant currency and the Wyndham Rewards membership grew 7% to a record 106 million.  While U.S. RevPAR was down 4% year over year, it still increased 10% versus 2019 and saw a 120-basis point acceleration from Q3 performance.

Echo Suites Extended Stay by Wyndham rendering

Full year adjusted EBITDA reached an all-time high of $659 million and Wyndham generated $339 million of free cash flow in 2023. It also returned over $500 million to shareholders, representing over 8% of its market cap from the beginning of the year.

Wyndham opened 500 in 2023, 11% more than 2022, and introduced 13 of its brands in 24 new countries.

The Wyndham franchise sales team awarded 864 contracts globally for approximately 104,000 room additions, which was 30% more than what they signed in 2019. In 4Q23 alone, Wyndham executed 33% more contracts domestically than it did in 2019, when transaction volume was over 30% higher than it is now. Fourth quarter international signings increased by 35% year over year, and by over 30% compared to 2019 with the largest increase coming from EMEA.

Overall, Wyndham’s development pipeline increased 10% year over year to a record 240,000 rooms with midscale and above brands increasing 6% to a record 170,000 rooms, or nearly 70% of its pipeline.

Echo Suites Extended Stay by Wyndham grew by nearly 60% in 2023 with over 33,000 rooms now in the development pipeline. Nearly a dozen Echo Suites are now under construction and expected to open this year. Fully, 75 are expected to be open by the end of 2026.

The group’s newly announced partnership with sbe entertainment plans to have 50 Project HQ properties in its Registry Collection by 2030, delivering another 7,500 rooms.

Turning to the 2024 outlook, Wyndham expects its direct franchising business to grow global net room growth 3% to 4%. It is also projecting global RevPAR growth of 2% to 3%.

Development advance spend is expected to increase to $90 million from $72 million in 2023, primarily reflecting the ramping of development efforts for the Echo Suites brand. “Given the challenging macro backdrop this past year, we had an opportunity to attract more owners in higher chains scales and accretive RevPAR market by using key money as a tool to alleviate some of their debt burden,” Allen said. “This is a trend we expect to continue throughout 2024. We also use more key money to navigate the uncertainty and disruptions created by Choice.”