Wyndham Hotels & Resorts Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 13 speakers on the call.

Operator

Good morning, everyone, and welcome to the Wyndham Hotels and Resorts Second Quarter 2024 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise and later the floor will be open for your questions. And now at this time, I would like turn the call over to Mr. Matt Capuzzi, Senior Vice President of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning and thank you for joining us. With me today are Jeff Bellotti, our CEO and Michelle Allen, our CFO and Head of Strategy. Before we get started, I want to remind you that our remarks today will contain forward looking statements. These statements are subject to risk factors that may cause our actual results to differ materially from those expressed or implied.

Speaker 1

These risk factors are discussed in detail in our most recent Annual Report on Form 10 ks filed with the Securities and Exchange Commission and any subsequent reports filed with the SEC. We'll also be referring to a number of non GAAP measures. Corresponding GAAP measures and a reconciliation of non GAAP measures to GAAP metrics are provided in our earnings release, which is available on our Investor Relations website at investor. Wyndhamhotels.com. We are providing certain measures discussing future impact on a non GAAP basis only because without unreasonable efforts, we are unable to provide the comparable GAAP metric.

Speaker 1

In addition, last evening, we posted an investor presentation containing supplemental information on our Investor Relations website. We may continue to provide supplemental information on our website and on our social media channels in the future. Accordingly, we encourage investors to monitor our website and our social media channels. In addition to our press releases, filings submitted with the SEC and any public conference calls or webcast. With that, I will turn the call over to Jeff.

Speaker 2

Thanks, Matt. Good morning, everyone, and thank you for joining us today. As you saw with our release last night, we reported strong earnings this quarter with comparable adjusted EBITDA and EPS growth of 6% and 12% respectively. We grew our system 4%, saw strong increases in both our U. S.

Speaker 2

And international royalty rates and meaningful growth in our ancillary fee streams. Year to date, we've generated over $170,000,000 of adjusted free cash flow and we've returned over $250,000,000 to our shareholders. On the development front, we opened over 18,000 rooms in the quarter, 16% more room openings domestically than last year and continued to improve our franchisee retention rate. Importantly, our franchise sales team here in the United States signed an impressive 33% more development deals in the quarter than they did last year, which helped grow our global development pipeline for the 16th consecutive quarter by 7 40 basis points year over year a record 245,000 rooms. Domestically, net rooms grew sequentially and versus prior year, driven by a 3% net room growth in our mid scale and above brands, with new additions like the award winning Oceanfront Semiahmoo Golf and Spa Resort in the Pacific Northwest, which joins our trademark by Wyndham collection.

Speaker 2

And we opened our first Echo Suites in Spartanburg, South Carolina, currently the 12th fastest growing county in America that has recruited 80 economic development projects over the past 3 years, totaling more than $5,000,000,000 in capital investment and creating nearly 6,000 new jobs. Our sales teams have been attracting and welcoming local infrastructure workers who've been checking into the hotel with up to 7 month lengths of stay. Internationally, we increased net rooms sequentially and by 8% versus prior year. Our EMEA team, which opened over 20% more rooms than they did in the in the United Arab Emirates and in Turkey, along with several stunning new destinations that our Wyndham reward members will want to vacation at, like the luxurious Dolce by Wyndham Hotel and Spa in Versailles, France and the Dolce by Wyndham Chesme Turkey on the shores of the Aegean Sea. Our EMEA development pipeline also grew year over year by over 6% and now represents an average RevPAR that is 10% higher than our current portfolio.

Speaker 2

Our Latin America team grew net room 6% sequentially and by 11% versus prior year, adding 9 resorts to our trademark and Ramada brands across Mexico, Panama and the Caribbean, hotels which represent an 85% VPAR premium to the region. Our development pipeline increased by 16% across Latin America and the Caribbean representing an average RevPAR that is 7% higher than our current portfolio. Our Southeast Asia and Pacific Rim region, which increased net rooms by 3% sequentially and by 11% versus last year, entered several new markets with hotels like the luxurious 850 Room Wyndham Majestic Genting Highlands in Malaysia. And in China, our team grew net rooms by 3% sequentially and by 12% versus prior year on a direct franchising basis with some beautiful new openings, including our 20th, 21st and 22nd Microtel Hotels, which developers are choosing for both new build and conversion opportunities. New signing activity was strong across the country with the team awarding another 34 new direct franchise development agreements, growing our pipeline to nearly 400 hotels, a 9% increase over prior year and importantly representing a pipeline with nearly double the fee par

Speaker 3

of our current China system.

Speaker 2

U. S. RevPAR grew 30 basis points to prior year, which was an improvement of over 500 basis points That said, many of you have inquired about U. S. That said, many of you have inquired about U.

Speaker 2

S. RevPAR performance in our lower chain scale brands. We believe along with many in the industry that the current RevPAR environment is transitory in nature. Historically since 2000 and through 4 lodging cycles, U. S.

Speaker 2

RevPAR for the select service segments, which makes up the majority of our domestic system, has grown at a CAGR of 2.6% despite the occasional downturn. Last month Smith Travel reaffirmed this perspective in their latest outlook projecting 2.7% U. S. RevPAR growth in 2025 for the select service segments. We've been through similar situations before and we're confident that the select service RevPAR will bounce back as it always has historically.

Speaker 2

International RevPAR increased 7% to prior year in constant currency and accelerated 2 50 basis points from Q1 to Q2 when compared to 19. Occupancy internationally remains a tailwind for the remainder of the year and is now 13% behind where it was in 2019. EMEA and Latin America RevPAR were both especially strong this quarter, increasing year over year by 15% and by 37% respectively, driven by strength in Greece, Spain, Turkey, the Middle East and across the Caribbean. And the start of what looks to be a very strong summer across the European continent. Our franchisees are the foundation that enable Wyndham to deliver elevated experiences and service to our everyday travelers.

Speaker 2

To further enhance the value our brands provide, we're making travel to our hotels more seamless and more connected than ever. Earlier this month, we announced the rollout of our new Wyndham Connect guest engagement platform to help our franchisees curate personalized experiences for guests and drive increased ancillary revenue for our hotels. Nearly 2,000 hotels across North America are already embracing these best in class mobile centric tools that leverage one of the most substantial AI driven large language models in the industry to support franchisees' bottom lines while increasing guest satisfaction. Smart mobile check-in is speeding up the check-in process for both our guests and front desk agents, helping to verify guest information in advance and protecting owners from expensive charge backs and reducing overall labor needs. Franchisees are driving additional ancillary revenues by effortlessly upselling early check ins and late checkouts to guests, by upselling personalized room upgrades to higher floors to corner rooms into better views and pre selling various snacks, food, beverage and other amenities to be placed in room before guests arrive.

Speaker 2

Our hotels are seeing upwards of $1400 monthly in monetization opportunity on early check-in and late checkout alone. And our new AI generated messaging that matters is allowing franchisees to communicate with and respond to guests via text message with ease and speed before, during, and after their stays. We're bringing technology typically offered in luxury and upscale segments to select service hotels, helping franchisees manage their businesses more efficiently and creating guest experiences that make stays more meaningful resulting in happier guests, increased repeat business and more ancillary revenue for our franchisees and consequently Wyndham. In closing, we're extremely proud of the results we generated this quarter and our ability to deliver on the key pillars of our long term growth strategy, including strong system and development pipeline growth, royalty rate expansion, increased ancillary fees and the beginning of infrastructure capture including the opening of our first of many Echo Suites extended stay hotels this year. As we enter our 6th year as a public company that franchises more hotels than any other, we're in a stronger position than ever before.

Speaker 2

Our ability to open more hotels than anyone else in the world for the past 2 years highlights the strength of Wyndham's differentiated brands and the strength of our franchise sales, marketing, technology and operating leadership across the 95 countries in which we operate. We're confident in our growth strategy and in our ability to create substantial value both in the short term and the long term. As always, we want to thank our dedicated team members around the world who continue to make Wyndham Hotels and Resorts such a great place to work. And with that, I'll now turn the call over to Michelle for more details on our financial performance. Michelle?

Speaker 4

Thanks, Jeff, and good morning, everyone. I'll begin my remarks today with a detailed review of our Q2 results. I'll then review our cash flows and balance sheet followed by our outlook. Before we get started, let me briefly remind everyone that the comparability of our financial results is impacted by the timing of our marketing fund spend. In the Q2 of this year, marketing fund expenses exceeded revenues by $5,000,000 as expected, compared to expenses exceeding revenues by $15,000,000 in the Q2 of last year.

Speaker 4

To enhance transparency and provide a better understanding of the results of our ongoing operations, I will be highlighting our results on a comparable basis, which neutralizes the marketing front impact. In the Q2, we generated $366,000,000 of fee related and other revenues and $178,000,000 of adjusted EBITDA. Fee related and other revenues increased $8,000,000 year over year, reflecting increases in royalties and franchise fees, marketing revenues and ancillary fee streams. Royalties and franchise fees as well as marketing revenues reflect our global system growth along with increases in our domestic, international and global royalty rates. These gains were partially offset by the 1% decline in global RevPAR.

Speaker 4

The increase in ancillary revenues was driven by higher credit card and partnership fees as well as increased license fees as we harness the power of our Wyndham Rewards loyalty base. This growth continues to trend from the Q1 where we saw these fee streams meaningfully outperform industry RevPAR level. Adjusted EBITDA grew 6% on a comparable basis, primarily reflecting higher fee related and other revenues, disciplined cost management given the recent RevPAR environment and an insurance recovery. As a result, our adjusted EBITDA margin improved 3 50 basis points to 85% this quarter. 2nd quarter adjusted diluted EPS was $1.13 up 12% on a comparable basis reflecting our adjusted EBITDA growth as well as benefits from our share repurchase activity and a lower effective tax rate which were partially offset by higher interest expense.

Speaker 4

Adjusted free cash flow was $69,000,000 in 2nd quarter and $171,000,000 year to date with a conversion rate from adjusted EBITDA of 54%. At our current trading levels, our free cash flow yield of over 6% is the highest in the lodging sector. Development advance spend was $33,000,000 in the 2nd quarter, bringing our year to date spend to $64,000,000 We continue to see increased demand for our brands with global openings up 11% so far this year and we're thrilled to be able to deploy some of our excess cash to secure these long term agreements, the majority of which as Jeff highlighted are in the higher fee par markets and or segments. We returned $162,000,000 to our shareholders during the Q2 through $131,000,000 of share repurchases and $31,000,000 of common stock dividends. At a stock price that we continue to deem well below our intrinsic value, we see the option to repurchase our shares to be even more compelling and as a result, we capitalize on this opportunity and repurchased nearly 2.5 times the amount we bought back in the Q1.

Speaker 4

Year to date, we have repurchased 2,600,000 shares of our stock for $188,000,000 And from 2019 through the end of the second quarter, we returned nearly 45% of our market cap to shareholders, which is best in class among lodging C Corps and significantly above our closest competitor. We closed the quarter with approximately $820,000,000 in total liquidity and our net leverage ratio of 3.5 times was at the midpoint of our target range. At this leverage level, which is where we expect to end the year, we have approximately $500,000,000 of capital available for investment in the business or share repurchases this year, only roughly half of which has been allocated through the end of the second quarter. This quarter we successfully repriced our existing term loan B while also upsizing the facility by $400,000,000 The new term loan B of $1,500,000,000 matures in May 2030 and carries an interest rate of SOFR plus 175, which is 60 basis points lower than the prior facility. The refinancing generated annual interest savings of approximately $6,000,000 which will be offset by incremental interest on the upsizing.

Speaker 4

At the end of the second quarter, approximately 2 thirds of our total debt was fixed and 1 third was variable. Now turning to outlook. While global RevPAR improved sequentially, the 2nd quarter trends, as Jeff represented a more gradual return to year over year growth than previously anticipated. As a result, we're updating our full year 2024 growth outlook for RevPAR to be essentially flat year over year. Consequently, our outlook for fee related and other revenues is now $1,410,000,000 to 1 $430,000,000 down from our prior outlook of 1.43 dollars This decline is roughly split evenly between royalties and franchise fees and marketing reservation and loyalty revenues, the latter of which has no impact on adjusted EBITDA.

Speaker 4

There are no changes to our outlook for net room growth, which remains at 3% to 4% or adjusted EBITDA, which remains at $690,000,000 to $700,000,000 and implies a year over year improvement in our EBITDA margin of approximately 130 basis points at the midpoint of our outlook. We're revising our adjusted net income outlook to $338,000,000 to $348,000,000 to reflect an increase in interest expense due to the upsizing of our Term Loan B, net of the savings from the spread reduction. We are however increasing our adjusted diluted EPS projection by $0.02 to a range of $4.20 to $4.32 to account for our 2nd quarter share repurchase activity, partially offset by the slight decline in our adjusted net income outlook. This outlook is based on a lower diluted share count of 80,600,000 shares and as usual assumes no additional share repurchases or incremental interest expense associated with any potential borrowing activity to maintain our leverage at 3.5 times. There are no changes to our expectation for adjusted free cash flow conversion, which is still expected to be approximately 60%.

Speaker 4

However, we are increasing our expectation for development advance spend by approximately $20,000,000 to $110,000,000 to account for our continued success in attracting high value deals to the system, particularly in higher fee par markets and segments. There are also no changes to our expectations for the marketing fund. Despite the RevPAR reduction, we still expect fund revenues will outpace fund expenses by approximately $18,000,000 in the back half of the year with about $10,000,000 per quarter, which as planned will offset the first half overspend. In closing, the resilience and highly cash generative nature of our business model continues to shine. Despite a softer RevPAR environment this year, we remain squarely on track to deliver our adjusted EBITDA target.

Speaker 4

Grow our net room count, our ancillary revenue streams and our royalty rates propel our business to adjusted EBITDA growth of 6 percent to 8% even in a softer domestic RevPAR environment than we initially expected. In the presentation we posted last evening, you will see that we also reaffirmed our multi year outlook through 2026 including an adjusted EBITDA CAGR of 7% to 10% and a potential adjusted EPS CAGR in the mid teens after capital deployment. We view these levels of organic performance as best in class for our industry and we are committed to continuing to operate our business in a manner that significantly enhances shareholder value. With that, Jeff and I would be happy to take your questions. Operator?

Operator

Thank you, Ms. Allen. We'll go first today to Joe Greff with JPMorgan.

Speaker 5

Good morning, guys. First question is on rooms growth. 2nd quarter in a row of about 4% year over year net rooms growth and given the continued growth in the pipeline, is this the floor for rooms growth? I mean and if the answer is no, why isn't it? And then with respect to the increase in development advancement notes and just increasing developer capital support, is that for new deals or is that for existing pipeline and trying to get them out of the pipeline into openings?

Speaker 5

Thank you.

Speaker 2

Thanks, Joe. I'll let Michelle talk about developer advance notes and no, it's not the floor. We are seeing lots of deals out there on the horizon, which is what has us excited and which is why Michelle has taken the guidance up by $20,000,000 on the key money. We saw a phenomenal openings, execution and pipeline growth in the quarter. I think owners to your last two calls, first questions are much more receptive in sitting down with us now that the uncertainty is behind us.

Speaker 2

And next week, our 2 Senior Vice Presidents, Jared Meavitt and David Willner and our Chief Development Officer, Amit Tripathi and I have several development meetings with prospects across the country, deals that are not yet signed that I'm not sure they'd be sitting down with us a quarter or 2 ago. But let's start with openings. Our 2nd quarter 18,000 rooms was the best Q2 openings that we've had on record and 75% of those openings, as we said in the script, were in the mid scale and above segments, which we're really pleased by. It was really driven by strong domestic openings. We had 7,000 rooms open up.

Speaker 2

It was up 16 percent to last year, solid, solid conversion openings with good growth across the board, new conversions coming into the system. And international openings came in around 11,000 rooms and are running 8% year over year. I think why 4% is not the floor, we've always said longer term we're 3% to 5%, is what's happening on the execution front. We are so incredibly proud of our franchise sales teams and our leadership teams around the world. We've talked a lot about year to date transaction volumes being down and those are a big driver, Joe, in terms of conversions for us.

Speaker 2

They're still 25% below where they were last year and they're still below where they were about the same amount back in 2019. But despite all of that, we executed 96 deals domestically, which was 30% more than last year. And our new construction prototype brands are continuing to sell well. And we have 84 deals internationally that year to date are up about 11%. So this was the 16th consecutive quarter of sequential pipeline growth.

Speaker 2

We're up to a record 245,000 rooms across 60 countries, and we are very optimistic about what net room growth looks like going forward. But Michelle, maybe you'll touch upon the Dan question.

Speaker 4

Sure, happy to. I think Joe you mentioned is it for deals that came into the system or is it for an increase in the pipeline and the increase of $20,000,000 really represents pipeline deals. There are a number of investment opportunities that have recently presented themselves in higher RevPAR markets that we are really excited about and we look forward to sharing specifics as these hotels come into the system. We have always said our first priority for free cash flow is to invest in the business and the fact that we are seeing incremental demand for our brands, especially in top markets is something we view very positively.

Speaker 5

Great. And then my follow-up question relates, Michelle, to your updated RevPAR outlook. Specifically, in the second half, what's now assumed for the U. S, specifically the economy to mid scale and then China? And then maybe again more specifically, can you bridge the reduction in RevPAR growth versus the prior outlook, yet you're keeping maintaining the EBITDA range?

Speaker 5

How much of this is incremental ancillary fees? How much of it is a prior cushion, prior conservatism between RevPAR growth and EBITDA generation a quarter ago? And that's all for me. Thanks.

Speaker 4

Yes, sure. So a lot in that question to unpack. I'll take the RevPAR section first. In the U. S, we are expecting similar trends to what we're seeing now in July with maybe another point coming from the infrastructure ramp up.

Speaker 4

That is inclusive of economy getting to flat and mid scale would be up about 1 to 2 points. In China, we are also expecting some modest improvement, which is consistent with the last 5 weeks of performance. 2nd quarter was the toughest comp. So we see a couple of 100 basis points improvement there in the second half and then the rest of international, I would say is pretty similar to what we saw in Q2. With respect to maintaining our EBITDA guide on the RevPAR reduction, there are really 3 drivers here, Joe, all of which add up to a meaningful amount.

Speaker 4

First, our business is just getting more efficient, particularly on the technology side. We've integrated our commercial organization. We're leveraging third party partners and new next gen type solutions. So this is showing up really in 2 places. It's boosting our non RevPAR revenue, so that's contributing more to our EBITDA and then we're also seeing some benefits in the G and A line item.

Speaker 4

So there's real margin expansion here. Next, we've been disciplined with our costs initially in our budget. We match discretionary investment spend with expected RevPAR growth and we were able to reprioritize those investments when we saw the RevPAR growth not materialize as we had expected and so that helped a few million. And then on top of that we're getting an extra boost from the insurance recovery.

Speaker 3

So when you put it all together?

Speaker 6

And keep it all together. So when you put it all together.

Speaker 4

So when you put it all together. Yes.

Speaker 5

Insurance recovery in the second half?

Speaker 4

Sure. Yes, it's about $4,000,000

Speaker 5

Great. Awesome. Thanks guys.

Speaker 2

Thanks, Joe.

Operator

We'll go next now to David Katz with Jefferies.

Speaker 7

Good morning. Thanks for taking my question. Just looking through and frankly appreciating some of the pages in the deck this morning with respect to the long term algorithm. And thinking about it in the context of sort of fees per room, right? And the degree to which your sort of business drivers as you have them labeled are growing your fees per room and then adding in the ancillary growth.

Speaker 7

Can you just help us understand or fully digest the degree to which fees per room in the core business are growing? And I think the ancillary growth is pretty clear that it's an 8% CAGR. But help us look at those two drivers of the business for a minute if you would.

Speaker 4

Sure. With respect to ancillary fees, we are our long term growth model is projecting fee growth in about 8% and we are currently tracking at 6% in 2024 and expecting to get up to about 7% on a full year basis and that includes a number of different initiatives. On the royalty rate, we've seen a 5 basis point improvement in the U. S. And international on average.

Speaker 4

And so we are expecting to see continued improvement on that side of the business over the long term, it should accumulate to about 15 basis points and in 2026, we think that would generate an incremental $15,000,000 in EBITDA.

Speaker 7

Right. So part of what I'm getting at is, as we progress through this, these next few years to 2026, it seems as though the ancillary fees, that growth rate is actually accelerating, right? And so when we get to that 2026, it will be higher than 8% of just averages because of the CAGR, right? Is the acceleration similar, right, when you think about sort of the core business, right, obviously it's going to depend on RevPAR, but is your assumption, right, that the core business fees are going to accelerate also at the same rate or is one growing faster than the other?

Speaker 4

Well, the ancillary fees are definitely growing faster and they do compound as we get through the plan because different initiatives start to ramp and have a larger impact. We also see that kind of same dynamic with royalty fees, right? They compound every year. So as we increase in 1 year, then we're just building increases on top of that. So that's compounding.

Speaker 4

And then we are also expecting some net room growth acceleration. So there will be increased growth over the plan in the core business as well as in the ancillary fees and then.

Speaker 7

Got it. Helpful. Thank you very much.

Speaker 4

Thank you.

Operator

Thank you. We go next now to Patrick Scholes of Truist.

Speaker 8

Thank you. Good morning, Jeff and Michelle. A little bit more questions on that Slide 10 talking about the increases in royalty rate. I think it's very interesting. Historically, royalty rates was not something you really ever discussed and now it seems to be much more front and center.

Speaker 8

A little bit more color please on what's driving that. Is that going to be driven primarily by new brands entering such as Echo that have an above average royalty rate? Or do you see yourselves on contract or combination of contract renewals raising royalty rates on legacy brands? A little bit more color there. Thank you.

Speaker 4

Sure. The royalty rate improvement we're seeing today and that we're seeing in the pipeline and so expect to see over the planned period really reflects the great work our franchise sales and development team, bringing in higher fee deals for our brands both here domestically and around the world as well. As we said for the last few quarters, our goal is to make sure that we're signing deals that are accretive to the region or to the brand average royalty rate. And the growth we've seen this quarter and really the growth we've seen since 2019 on that slide is a testament to that effort. So you should expect to continue to see improvement in new deals being signed.

Speaker 8

Okay. Thank you.

Operator

We'll go next now to Steve Pizzella with Deutsche Bank.

Speaker 9

Hey, good morning everybody and thanks for taking our questions. You've noted the value you see in the stock and potential returns from the incremental key money. What do you need to see to go towards the high end of the target leverage?

Speaker 4

That is really a Board decision, I would say, and at this point we are targeting 3.5x leverage for the end of the year, which does give us amount of capital to either repurchase shares or to invest further in the business. If we were looking at a sizable M and A, then that is something we've always said we are comfortable going above the 3 point 5 times as long as we had a plan to get back within range within 12 to 18 months. Certainly, we see the stock as a compelling investment opportunity given where it's been trading, But against this macro backdrop 3.5x is a good leverage target absent any really compelling investment opportunity.

Speaker 9

Okay, thanks. And then you continue to note the improvement in the retention rates, which has been pretty nice as we look compared to historicals. What's driving that right now and how high do you think that can get?

Speaker 2

Yes. Steve, we've always said that our longer term goal is to get to 90 6%, and we're moving that way. We were at 93% ish when we spun. We moved it to 95%, 95.5%. And I think as we grow our system and we manage our quality and portfolio, that number can certainly continue to go up.

Speaker 2

On a last 12 month basis, which is the way we look at it, retention has improved 50 basis points globally. We had some good movement internationally. I think we can continue to make progress both domestically and internationally. And what's really exciting about the international growth is the ability to successfully swap out those lower valuation master license rooms in countries with lower royalties and replace them with direct franchise rooms that are coming in at 3x the license fee. So we're happy with our progress.

Speaker 2

We're going to continue to focus on that and we think it could continue to go higher.

Speaker 9

Okay, great. Thank you.

Speaker 2

Thanks, Steve.

Operator

We'll go next now to Brett Montour of Barclays.

Speaker 10

Good morning, everybody. Thanks for taking my question. So I just want to circle back on the second half guidance and outlook. Michelle or Jeff, maybe if you could just put a finer point on, Michelle, your comments on what you're implying for U. S.

Speaker 10

RevPAR growth, I thought it was really helpful. The comments you gave, I think it's really tough for us with the looking at this year on a 1 year basis because comps get much easier. We can kind of make our own assumptions there, but if you could just maybe put a qualitative point on there, do you are you baking in any sort of rebound at all or is there some conservatism in terms of the U. S. Consumer behavior implied there?

Speaker 4

Consistent with what consistent with what we're now seeing in July and then we are expecting another point on top of that to reflect the continued ramping of infrastructure spend. So in the second half, the U. S. I think is is expected to be in our guide is expected to be up 1% and that improvement from the first half is really driven by occupancy expectations.

Speaker 10

That's really helpful. Thank you for that. And then just a follow-up on the Echo pipeline. It's been a few quarters now since some of your larger peers rolled out extended stay brands and it's not necessarily maybe you'll tell me they're not directly competing with which is an answer. But I'm just curious if you're seeing any incremental hesitation at the sort of franchisee signing table with developers that might be looking at those brands or the owners just different and you're not seeing any competitive pressure there?

Speaker 2

We are not in that this is an extended stay economy new construction product, which there's not much competition for out there today in terms of what these developers are looking for. We have executed this quarter significant signings and progress for our new Echo Suites in markets like Louisville, both at the airport and downtown, Clarksville, Indiana, Lexington, airport and downtown, Clarksville, Indiana, Lexington, Kentucky, Frankfort, Kentucky. So we are beginning to see that signing pick back up. And as we reported from the first page of our IP, we opened the 1st Spartanburg in South Carolina. And we had not only the entire Echo Development Council with us, we had prospective new developers in attendance, and they were very, very happy with the finished product.

Speaker 2

Most of those in attendance were developers who have either broken ground or soon will be breaking ground. They're developers who've built 100 of competitive economy mid scale, upper mid scale extended stay products and they were absolutely brand thrilled with the finished product. The commentary that was coming back from this new build that not only looks like the prototype, but looks better than the prototype is something that they feel rarely happens. So there was a renewed sense of confidence and optimism and commitment among the development community and with over 33,000 rooms now in our pipeline, it remains our fastest growing brand and growth is picking up.

Speaker 10

Perfect. Thanks so much.

Speaker 2

Thanks, Brent.

Operator

We'll go next now to Danny Assad with Bank of America.

Speaker 3

Hi. Good morning, Jeff and Michelle. Just want to start super high level, if you've seen like you've quantified a lot on the domestic side, on RevPAR, how we're moderating, but is there any insight as to what's actually going on, on the ground behaviorally domestically? Is that we still have some points of occupancy? Why are people not showing up?

Speaker 3

Is there pockets of the country that are behaving differently, there's outsized performance in one way, one direction or another? Or kind of what just any qualitative insight that you can give us on that front?

Speaker 2

Thanks, Danny. Our teams are seeing demand improving. We are seeing positive trends. RevPAR growth, as we noted, improved 500 basis points from the Q1 to up 30 basis points in the second. Our teams on the ground continue to see gains in our domestic brands and market share with strong share gain mid week pointing to that increased infrastructure pickup that we know can accelerate with continued strength in our booking pace.

Speaker 2

Look, we're confident in the continued recovery of our segments here in the United States. Pricing power is still strong. 2nd quarter was up 17% to 19%. As Michel just noted, domestic occupancy was up 1%, but it was up for the first time since the Q2 of 2022 versus prior year, which is important. Domestic occupancy also improved 3% versus 'nineteen from where it was in the Q1.

Speaker 2

So if you think about it, it was down 10% in the Q1. It was down only 7% in occupancy in the Q2. And I think we all need to remember that 'nineteen was the peak of the longest running industry cycle that the industry has ever seen and that our brands were the very first to recover from COVID and that demand will continue to come back over the next few years with continued growth, as Michel noted in the back half. We saw last week demand being up 30 basis points in the economy and 60 in the mid scale. And we know that the industry is projecting growth next year.

Speaker 2

I think it's 100 to 200 basis points of economy or mid scale, RevPAR growth in 25. And we think back to the last four lodging cycles, select service domestic RevPAR has grown as we noted in the script 3% on a CAGR basis and that will eventually materialize. In terms of all of our important consumer leading indicators that we continue to look at, leisure travel sentiment continues to improve. It's up now 400 basis points from where it was at the end of last June. We're not seeing any difference in who's checking into our hotels.

Speaker 2

Our middle income guests are still both more employed and higher wages and savings than they had back in 2019. Our booking windows are up. They're up now 6% to last year, and we're seeing longer lengths of stay. To your back part of the question in terms of across the country, we did see some normalization in those first to recover beach and mountain destination markets like Florida or California or Colorado, which were all down a little bit, but we saw demand continue to increase in oil and gas markets like Texas, New Mexico and Ohio, which were up mid single digits to where they were last year, and other markets like Louisiana, West Virginia, North Dakota, important states for us saw double digit growth in RevPAR. And we would expect that growth to continue in the second half.

Speaker 2

We're seeing crews continue to come back into these markets and natural gas continues to recover with production in many of those states back to where it was back at peak. So we're feeling good about the second half.

Speaker 3

That's great. Thank you for that. And then for my follow-up, just thinking about how nicely your rooms growth and the pipeline has accelerated. Can you help us think about how long it typically takes for a property to stabilize? We're just trying to think about how long does it take for that 3% to 4% rooms growth that we're seeing today to translate to a full freight 3% to 4% fee growth in kind of what you're putting up on this scoreboard?

Speaker 4

Yes. Once the property opens in our system, it's typically ramping during the 1st full year and really during the 1st full the 1st 9 months. So when they come into the system, I think you can expect to see within a year they would be at full royalty production for us.

Speaker 3

Great. Thank you very much.

Operator

We'll go next now to Stephen Grambling of Morgan Stanley.

Speaker 6

Hey, thanks. Maybe as a follow-up to Danny's question on RevPAR trends. You mentioned share gains. Are there any brands specifically that are leading these RevPAR index premium gains? And is there any way to quantify maybe the ones that are taking the most share?

Speaker 6

Are you seeing development actions typically meaning like is there more development going on within those brands?

Speaker 2

There is, Stephen. Our domestic large brands that are very important to us like Days Inn, Super 8, La Quinta, they're all over indexing. And we publish every April as our competitors do in the April franchise disclosure documents. La Quinta is now well over its fair share. Hawthorne Suites is Microtel is Days Inn is one of our stronger performing brands.

Speaker 2

To your point, that brand performed very well during the downturn and developers are looking for conversion opportunities, which is why it's important that that transaction market continue to pick up. But what's driving it is the Wyndham rewards program in our developers' mind. The share of occupancy in the quarter was up 2 50 basis points globally and it's up a good nearly 800 basis points from where it was in 2019. And these are brands that perform very well in those infrastructure markets where those 1,800,000 companies who are contracting for their workers are looking for recognizable brands that are clean and well maintained. And we believe that we could continue to drive that share gain especially midweek.

Speaker 6

And then maybe one clarification on operating expenses. Michelle, I think you mentioned taking out some costs and some projects that maybe were put off as RevPAR slowed. Are those things that we should anticipate if RevPAR reaccelerates relative to the expectations, those will come back quickly or is there a little bit of a longer lead time there?

Speaker 4

I think it really is at our discretion and what we have with respect to the cost of discipline, we have really reprioritized the investment spend. So at this point in time, what we would do is just look at it again and determine whether or not it fits the strategic pillars of our long term growth and if that's something that we need to invest in. So it's hard to say. We would go line by line item. There's no silver bullet in there.

Speaker 4

There's just a bunch of small type of exploratory projects you can call them that we are eliminating at this point in time.

Speaker 6

Got it. I guess the takeaway there is there's flexibility. Thank you.

Speaker 2

Thank you. Thanks, Steven.

Operator

We'll next now to Michael Bellisario with Baird.

Speaker 11

First for Michelle, I just want to clarify one thing on the key money. How much of the $110,000,000 is for Echo this year? And then when you're spending the key money, are those hotels opening up right away and you'd be seeing an immediate cash on cash return? Or are you funding some of those dollars pre or during development?

Speaker 4

Yes, about $10,000,000 for Echo this year and key money is generally funded at openings, so we would see immediate royalty improvements to the P and L.

Speaker 11

Got it. Thank you for clarifying that. And then, Jeff, for you, kind of a bigger picture question, just broadly on the economy segment. Over the long run, not a ton of rooms growth domestically. Your U.

Speaker 11

S. Economy room count has trended downward. Maybe your thoughts there, how much of that is due to new brand introductions, yours included? How much of that is economy product is becoming older, more obsolete? Just kind of would appreciate your thoughts there and sort of just on the longer term trajectory of the economy J and field more broadly?

Speaker 11

Thanks.

Speaker 2

Thanks, Mike. I think it's more of the latter of that statement that you have older legacy economy hotels being repurposed for other uses that really began coming out of COVID. And if you look at the economy supply over the last few years, I think it's down between 1% 2% as those older legacy hotels move out of the system and many of them are in urban downtown areas. But look in 2023 to the point that Stephen was just asking about, we experienced the highest economy add rate. A lot of those were Days Ins and Super Eights since before we went public, again, because of how well those brands performed in the downturn of COVID in terms of the cash on cash returns.

Speaker 2

Our gross additions for the Q2 were up about 3%. And we are running right now in terms of if you look at the industry retention rates that are really best in class of over 95%, pushing 96% the economy space. So we're very pleased that our economy retention rate continues to improve. It's up 90 basis points on the last 12 month basis. We're pleased that we're experiencing a higher economy add rate.

Speaker 2

We know that as transaction volumes return, there are going to be economy opportunities for us to grow and that those will present themselves.

Speaker 4

And I would just add to that. This isn't a surprise or a new trend. Jeff mentioned the segment has had limited supply, new supply for many years, but the portion that is growing is extended stay projected to grow 6% per year over the next several years and that's where our growth strategy has been focused for the economy segment with more than 33,000 rooms in our pipeline. And then of course we're focused on the mid scale and above segment with and that portfolio has grown 3% year over year.

Speaker 2

Thank you. Thanks, Mike.

Operator

We go next now to Meredith Jensen at HSBC.

Speaker 12

Good morning. I was hoping you might speak a little bit more about the Wyndham for business portal. I know a lot of the companies in the sector have added sort of managed travel programs and to attract SMEs. And I was wondering what might distinguish Wyndham for business and how Wyndham Connect might fit in with that. I know the presentation also flagged some alternative payment solutions.

Speaker 12

So if you could just help me sort of put the pieces together and where we might see this go in the near and longer term? Thanks.

Speaker 2

Sure. Thanks. Thanks for your interest in wind of business, Meredith. I know you asked about it last time and we're very excited about it. I mean, our new wind of business, which was launched right before we reported it on our last call in April, has seen a weekly pace of applications, which has doubled since then.

Speaker 2

We said on last quarter's call, it's now running 60% ahead of where it was with the previous program we had out there. And when combined with the Wyndham Rewards credit card, it's a big driver for what our global sales, our field sales sellers are selling. It's important to have those tools, especially as we increase our field sales teams to go after those SMEs that you referenced. Wyndham Business was a big tool in their hands to help when they're talking to an account manage their that accounts company's travel needs, allowing those planners to have that sort of one stop solution, allowing them to instantly book without needing to RFP or contact the hotel and allowing them to really as they go out leverage those tools with third parties who are contracting really across America for that business. So our teams are excited about it.

Speaker 2

You mentioned Wyndham Connect.

Speaker 6

I'll tell you all of us that

Speaker 2

checked into the Echo Suites opening in Spartanburg were served up. Do we want that early check-in? And given that just about all the developers that were coming into town were coming in before that 3 o'clock check-in, they bought that extra $20 $30 $40 I think in that case it was $20 upsell fee. It was a no brainer to anybody checking in early to the hotel and it was money in that developer's pocket. So we're going to continue to be rolling out tools like that as we as our teams go after those.

Speaker 2

Now 4,000 of the 40,000 projects across the country that are getting allocated, the infrastructure spending that are around markets where we have multiple hotels in those markets.

Speaker 12

Super. Thanks. One quick follow-up on the all inclusive sector. I was wondering if you could provide a little bit more color in terms of sort of the brand strategy as you continue to roll out and the Wyndham Rewards members can burn some of those points between trademark and registry and ultra and sort of as you continue to grow there, what the focus might be?

Speaker 2

Sure. I think one of the things that make Wyndham Rewards now for 6 years in a row, USA Today's number one loyalty program, top loyalty program with U. S. News and World Reports. It is that what you refer to earn and burn opportunity.

Speaker 2

I mean we are heralded as the best program and the fastest track to earn a free night at over not only our 9,200 hotels, but 60,000 hotels and resorts and vacation rental opportunities through partnerships we have with really aspirational check-in redemption opportunities like Vacasa. Members are looking for that vacation opportunity right now. You referenced Ultra by Wyndham, which is an organic brand that we launched a few years ago with Playa, and we continue to grow that brand. We recently opened a resort in the Dominican Republic with Playa, which will later this year be available for earn burn along with another hotel of the Wyndham Altra Punta Cana, which will be managed by Playa, which will join Altra Resorts in Cancun, Freeport, Bridgetown, Montego Bay. We've had new executions with over a dozen hotels on the all inclusive space in various stages of discussion and are working with Playa across the Caribbean, Mexico and Central America.

Speaker 2

And that ability to it's a great value to your question for our Wyndham Rewards members, which is what keeps Wyndham Rewards top of mind for those 110,000,000 members, which are up 7% year on year and 42% since 2019.

Operator

And Mr. Belotti, it appears we have no further questions this morning. Sir, I'll turn things back to you for any closing comments.

Speaker 2

Okay. Thanks, Bo, and thank you all for your questions and your interest in Wyndham Hotels and Resorts. Michelle, Matt and I look forward to talking to and hopefully seeing many of you in the weeks months ahead. And in the meantime, we'd like to remind all of you golf fans to tune into the Wyndham Championship, the final tournament of the PGA Tour's regular season before the playoffs, where coverage begins on August 8 over on the Golf Channel and continues over the weekend on CBS. Have a great summer, everyone, and thanks again for joining us today.

Operator

Thank you, Mr. Pilate. Ladies and gentlemen, this does conclude today's Wyndham Hotels and Resorts 2nd quarter earnings conference. Please disconnect your line at this time and again have a wonderful day. Goodbye.

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Earnings Conference Call
Wyndham Hotels & Resorts Q2 2024
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