Sector

Real EstateHotelsLeisure

Background

Lauren Taylor Wolfe is the co-founder and Managing Partner of Impactive Capital. We cover Wyndham’s growth algorithm, its loyalty program, and the ways in which green programs are helping to drive higher cash-on-cash returns for franchisees.

Cover

Date

September 1, 2021

Episode Number

24

Wyndham Hotels Business Breakdown

Background / Overview

Wyndham Hotels is the world’s largest hotel franchisor by number of properties, operating over 9,000 hotels across 20 brands in more than 80 countries. The company dominates the economy and mid-scale hotel segments, with a growing presence in the upper mid-scale segment. Its portfolio includes well-known brands such as Super 8, Days Inn, Microtel, Travelodge, Howard Johnson, La Quinta, Ramada, and Wyndham Garden Inn. Founded through a series of acquisitions starting in the 1990s under Henry Silverman’s Hospitality Franchise System (HFS), Wyndham evolved from acquiring brands like Ramada and Howard Johnson to becoming Cendant, and later spinning off its hotel and timeshare businesses in 2018. The 2018 spin-off, combined with the acquisition of La Quinta, solidified Wyndham Hotels as a focused, asset-light franchisor led by CEO Geoff Ballotti and CFO Michele Allen.

The company’s history is deeply tied to the U.S. interstate highway system, spurred by the Federal-Aid Highway Act of 1956, which fueled demand for affordable, reliable lodging along highways. This led to the rise of branded economy and mid-scale hotels, with Howard Johnson pioneering hotel franchising in 1954. Today, 80% of the U.S. population lives within a 10-mile radius of a Wyndham hotel, underscoring its ubiquitous presence. Wyndham employs a predominantly franchise-based model, with 97% of its properties franchised and only two hotels owned directly. Approximately 300 hotels are managed under long-term contracts, representing a smaller but distinct segment of the business.

Ownership / Fundraising / Recent Valuation

Wyndham Hotels is publicly traded, and specific details on recent valuation multiples or enterprise value (EV) transactions are not provided in the transcript. However, the company was noted to be trading at 10x EBITDA in 2019, reflecting market perceptions of complexity around the La Quinta merger and unfamiliarity with its economy-focused brands. Since the onset of the pandemic, Wyndham has outperformed peers, with its stock rising 22% from January 1, 2020, more than doubling the performance of competitors like Hilton and Marriott. Ownership includes institutional investors like Impactive Capital, with no specific private equity or sponsor ownership details provided. The company’s ability to maintain dividends through the pandemic highlights its financial resilience and shareholder-friendly policies.

Key Products / Services / Value Proposition

Wyndham’s core service is hotel franchising, providing franchisees with brand recognition, a robust reservation system, marketing support, and access to its 89-million-member Wyndham Rewards loyalty program. The value proposition for franchisees includes:

• Brand Recognition: Decades of investment in brands like Super 8 and La Quinta ensure customer trust and repeat business, critical in the economy and mid-scale segments.
• Reservation System: Wyndham’s IT and pricing systems drive traffic to franchisee hotels, reducing customer acquisition costs compared to independent operators.
• Loyalty Program: Members stay twice as long and spend twice as much, enhancing franchisee revenue and profitability.
• Operational Support: Training, environmental tools, and flexible fee structures during crises strengthen franchisee partnerships.

Wyndham specializes in select-service hotels, which offer basic amenities like breakfast and clean rooms but lack complex services such as gyms, spas, or extensive food and beverage (F&B) operations. This focus reduces operating complexity and capital intensity for franchisees, enabling breakeven at lower occupancy rates (30-40%) compared to luxury hotels (50%+).

Key Products/Services Table

Segments and Revenue Model

Wyndham operates two primary segments:

1. Franchise Business (97% of properties, ~90% of EBITDA):
• Generates revenue through royalty fees (4-5.5% of room revenue), marketing/reservation fees (3-4% pass-through), and loyalty program access fees.
• Highly profitable, with 80% margins in 2019 and 2020, and 95% incremental margins on royalty streams.
• Asset-light, with minimal operating expenses, as franchisees bear property-level costs.
2. Managed Hotels (3% of properties, ~10% of EBITDA):
• Wyndham manages 300 hotels for owners (e.g., REITs), charging a 3% fee on total revenue plus occasional incentive fees tied to operating profit.
• Margins are lower (40-50%) due to support costs and regional general manager expenses, which are not fully reimbursed.
• Represents 30-40% of revenue but is less strategic, with management contracts inherited from acquisitions like La Quinta.

Revenue Model

Wyndham’s revenue model is straightforward:

• Franchise Fees: Charged as a percentage of room revenue, ensuring stable, high-margin cash flows regardless of franchisee profitability.
• Marketing/Reservation Fees: Cover costs of brand promotion and IT systems, with no profit retained by Wyndham.
• Loyalty Program Fees: Enhance profitability by driving higher-spending guests to franchisees.
• Management Fees: Tied to total revenue of managed hotels, with lower margins due to operational involvement.

The franchise model’s stickiness is reinforced by 10-20 year contracts and a 94-95% retention rate, with higher retention for brands like Microtel (97%) and La Quinta (98%).

Splits and Mix

Revenue Mix

• Franchise Segment: ~60-70% of revenue, ~90% of EBITDA.
• Managed Hotels: 30-40% of revenue, ~10% of EBITDA.
• Geographic Mix: Predominantly U.S.-focused, with international growth in regions like China and Argentina via master franchisees.
• Customer Mix: Economy and mid-scale travelers, including transient workers and same-day bookers (40% of bookings).
• Channel Mix: Significant traffic from Wyndham’s reservation system and loyalty program, reducing reliance on online travel agencies (OTAs) compared to independents (60-70% OTA reliance).

EBITDA Mix

• Franchise segment dominates due to high margins (80%).
• Managed hotels contribute minimally due to lower margins (40-50%).

Historical/Forecasted Mix Shifts

• Segment Shift: Increasing focus on mid-scale and upper mid-scale brands (e.g., La Quinta, Microtel) to drive higher RevPAR growth.
• Geographic Shift: Expansion into international markets through master franchisees, reducing risk while capturing upside.
• Organic Growth: 8% annual room additions, offset by 4-6% churn, yielding 3-4% net room growth.

KPIs

• Net Room Growth: 3-4% annually, driven by 8% organic additions and 94-95% retention.
• RevPAR Growth: Low to mid-single digits domestically, higher internationally.
• Loyalty Program Growth: 10% pre-COVID, rebounding to mid-high single digits, with 50% of guests requesting rewards points.
• Occupancy Breakeven: 30-40% for economy/mid-scale, significantly lower than luxury (50%+).
• Franchisee Retention: 94-95% overall, 97-98% for premium brands.
• RevPAR Recovery: Economy and mid-scale segments exceeded 2019 levels by double digits in May 2021, outperforming luxury/upscale (30-40% below 2019).

These KPIs indicate acceleration in recovery and resilience, particularly in the economy segment, with no signs of deceleration in core metrics.

Headline Financials

Group-Level Financials

• Revenue: Not explicitly stated, but franchise fees dominate, with total revenue driven by 9,000 hotels at ~$60,000 royalty per hotel ($540M from royalties alone).
• EBITDA Margin: Franchise segment at 80%, blended margin lower due to managed hotels (40-50%).
• Free Cash Flow (FCF): ~$100M in 2020, with 55-60% EBITDA-to-FCF conversion and a 6-7% FCF yield.
• RevPAR: Economy ($65 ADR), mid-scale ($85 ADR), upper mid-scale ($110 ADR), growing low to mid-single digits.

Franchisee-Level Financials (Per Hotel)

• New Construction:
• Investment: $5M ($3.5M financed, $1.5M equity).
• Revenue: $1.3-1.5M.
• EBITDA Margin: 40% (~$520-600K).
• Cash-on-Cash Return: 20-30% after financing.
• Conversion:
• Investment: $25-40K.
• Revenue: Similar to new builds.
• Cash-on-Cash Return: Higher due to lower upfront costs.

Financial Table

Long-Term Financial Trends

• Revenue CAGR: Driven by 3-4% room growth plus RevPAR growth, targeting mid-single digits.
• EBITDA Margin: Stable at 80% for franchise segment, with potential expansion via cost efficiencies (e.g., green programs).
• FCF: High conversion (55-60%) supports dividend maintenance and capital allocation flexibility.

Value Chain Position

Wyndham operates as a franchisor in the hospitality value chain, positioned between hotel owners (franchisees) and end customers. Its primary activities include:

• Brand Management: Maintaining brand standards and customer trust across 20 brands.
• Marketing and Reservations: Operating a centralized reservation system and loyalty program to drive traffic.
• Franchisee Support: Providing IT, training, and environmental tools to enhance franchisee economics.
• Management Services: Operating 300 hotels for third-party owners, though less strategic.

Value Chain Dynamics

• Upstream: Relies on franchisees for property development and operations. Franchisees bear capital and operating risks, making Wyndham asset-light.
• Downstream: Serves economy and mid-scale travelers, with 40% same-day bookings reflecting transient demand.
• Go-to-Market (GTM) Strategy: Leverages brand recognition, loyalty program, and reservation system to drive bookings, reducing OTA dependence (unlike independents, who pay 20-30% to OTAs).
• Competitive Advantage: High-margin royalty stream, low breakeven occupancy, and sticky franchisee contracts create defensible economics.

Wyndham’s value-add lies in its ability to deliver customer traffic and operational efficiency to franchisees, enabling higher returns than independent hotels.

Customers and Suppliers

• Customers:
• End Customers: Economy and mid-scale travelers, including transient workers, families, and same-day bookers. Loyalty members (89M) drive higher spend and stays.
• Franchisees: Entrepreneurial families and small business owners, often immigrants, operating 5-10 hotels. Attracted by high cash-on-cash returns (20-30%) and operational simplicity.
• Suppliers:
• Banks: Provide financing for franchisee investments ($3.5M for new builds). Wyndham recommends banking partners but does not participate in lending.
• Technology Providers: Support reservation and pricing systems, critical for driving traffic.
• Energy Vendors: Relevant for green programs (e.g., LED lighting, smart HVAC), reducing franchisee costs by ~10%.

Pricing

• Franchise Fees: 4-5.5% of room revenue, varying by brand and chain scale. Stable and predictable due to long-term contracts (10-20 years).
• Marketing/Reservation Fees: 3-4%, pass-through to cover brand promotion and IT systems.
• Management Fees: 3% of total revenue for managed hotels, with occasional incentive fees tied to operating profit.
• Contract Structure: Long-term (10-20 years), sticky, with 94-95% retention. Flexible fee relief during crises (e.g., COVID) strengthens franchisee loyalty.
• Pricing Drivers:
• Industry Fundamentals: Economy segment pricing ($65 ADR) is resilient, with low price elasticity due to mission-critical lodging needs.
• Brand Reputation: Customer trust in Wyndham brands supports premium pricing over independents.
• Loyalty Program: Drives higher ADRs, as members pay top rates.
• Market Dynamics: RevPAR growth (low-mid single digits) tied to occupancy and ADR increases, with international markets showing higher growth.

Bottoms-Up Drivers

Revenue Model & Drivers

Wyndham generates $1 of revenue through:

• Franchise Fees: ~$0.60-0.70 from royalty (4-5.5%) and marketing/reservation fees (3-4%) per $100 of franchisee room revenue.
• Loyalty Fees: Incremental fees from 89M members, boosting franchisee revenue and Wyndham’s profitability.
• Management Fees: ~$0.30 per $100 of managed hotel revenue, less significant due to lower margins.

Revenue Drivers

• Volume:
• Net room growth (3-4%) driven by 8% organic additions and 4-6% churn.
• High retention (94-95%) ensures stable base.
• Loyalty program growth (10% pre-COVID) drives repeat bookings.
• Price:
• RevPAR growth (low-mid single digits) from ADR increases and occupancy gains.
• Economy segment ($65 ADR) less sensitive to price competition than luxury ($120+ ADR).
• Mix:
• Shift to mid-scale/upper mid-scale (e.g., La Quinta) boosts RevPAR.
• International expansion via master franchisees increases high-margin royalty streams.
• Organic Growth: 8% room additions primarily through conversions ($25-40K cost) rather than new builds ($5M).
• Stickiness: Long-term contracts and loyalty program create high switching costs for franchisees and customers.

Absolute Revenue

• Estimated $540M from royalties (~9,000 hotels x $60,000), with additional revenue from marketing fees and managed hotels.
• Total revenue scales with room growth and RevPAR, targeting mid-single-digit growth.

Cost Structure & Drivers

Variable Costs

• Franchise Segment: Minimal, as franchisees bear property-level costs (labor, maintenance, utilities).
• Managed Hotels: Support costs (e.g., regional GMs) and operational expenses, partially reimbursed by owners.
• Marketing/Reservation Fees: 100% pass-through, no impact on Wyndham’s profitability.

Fixed Costs

• Corporate Overhead: Administrative, IT, and marketing functions, leveraged across 9,000 hotels.
• Green Programs: Investments in energy-efficient tools (e.g., LED lighting) reduce franchisee costs by 10%, indirectly boosting Wyndham’s appeal.
• Operating Leverage: High fixed-cost base yields 80% margins on franchise fees, with 95% incremental margins.

Cost Analysis

• % of Revenue:
• Franchise segment: ~20% (corporate overhead, IT).
• Managed hotels: 50-60% (support costs, labor).
• % of Total Costs:
• Franchise segment: Minimal variable costs, high fixed-cost leverage.
• Managed hotels: Higher variable costs due to operational involvement.

EBITDA Margin

• Franchise Segment: 80%, resilient through COVID (80% in 2020).
• Managed Hotels: 40-50%, less attractive.
• Blended: Lower due to managed hotels, but franchise dominance ensures high profitability.
• Incremental Margin: 95% on franchise royalty streams, reflecting strong operating leverage.

FCF Drivers

• Net Income: Driven by high-margin franchise fees, offset by lower-margin managed hotels.
• Capex: Minimal, as franchisees fund property development. Maintenance capex is negligible due to asset-light model.
• Net Working Capital (NWC): Stable, with no significant inventory or receivables cycles.
• Cash Conversion Cycle: Short, as royalty fees are collected promptly.
• FCF Conversion: 55-60% of EBITDA, yielding ~$100M in 2020 and a 6-7% FCF yield.

Capital Deployment

• M&A: Acquiring master franchisees (e.g., in China, Argentina) to capture 95% incremental EBITDA.
• Share Buybacks: Opportunistic, prioritized when stock is undervalued.
• Organic Growth: Investments in loyalty program, green initiatives, and IT systems to drive room growth and RevPAR.
• Dividends: Maintained through COVID, reflecting resilient cash flows.
• Synergies: La Quinta acquisition enhanced upper mid-scale presence, with no negative mix shift.

Market, Competitive Landscape, Strategy

Market Size and Growth

• Global Hotel Market: ~180,000 hotels, 16.5M rooms (1/3 U.S., 1/3 Europe, 20% Asia, rest LatAm/Middle East).
• Economy/Mid-Scale Segment: Dominant in U.S., growing low-single digits domestically, higher internationally.
• Growth Drivers:
• Volume: 3-4% net room growth from conversions and new builds.
• Price: Low-mid single-digit RevPAR growth.
• Absolute Growth: Mid-single digits, enhanced by loyalty program and international expansion.

Market Structure

• Competitors: Wyndham (leader in economy), Choice (second in economy), Hilton/Marriott (upscale/luxury), Motel 6 (Blackstone’s G6).
• Consolidation: Economy segment is consolidated, with Wyndham and Choice dominating due to high minimum efficient scale (MES).
• MES: Large, driven by brand investment and loyalty programs, limiting new entrants.
• Penetration: High in U.S. (80% population within 10 miles), with international growth potential.
• Industry Cycle: Post-COVID recovery,