Q1 2023 Wyndham Hotels & Resorts Inc Earnings Call
Speaker 1: Good day and welcome to the Wyndham Hotels and Resorts first quarter 2023 earnings conference call.
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Speaker 1: I would now like to turn the call over to Matt Capuzzi, Senior Vice President of Investor Relations.
Speaker 2: Thank you, operator. Good morning and thank you for joining us. With me today are Jeff Bellati, our CEO , and Michelle Allen, our CFO . 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.
Speaker 2: from those expressed or implied. These risk factors are discussed in detail in our most recent annual report on Form 10K filed with the Securities and Exchange Commission and any subsequent reports filed with the SEC.
Speaker 2: We'll also be referring to a number of non- GAAP measures . Of course finding GAAP measures and a reconciliation of non- GAAP measures to GAP metrics are provided in our earnings release, which is available on our InvestreReleases website at investor.windomhotels.com.
Speaker 2: In addition, last evening we posted an investor presentation containing supplemental information on our investor relations website.
Speaker 2: to monitor our website in addition to our press releases, filings submitted with the ESCC and any public conference calls or webcasts.
Speaker 2: With that, I will turn the call over to Jeff.
Speaker 3: Thanks Matt and thanks everyone for joining us this morning. As expected our brands delivered record levels of domestic revpar for our owners in the first quarter with 4% growth versus prior year and our international regions continue their recovery growing revpar by 37%.
Speaker 3: Globally, net rooms increased 4% and we grew our development pipeline by 11% and by another 3% sequentially. Adjusted EBITDA, which increased 10% on a comparable basis, was ahead of our expectations. This overperformance is reflected in our new outlook that Michelle will walk you through in a moment.
Speaker 3: We generated $84 million of free cash flow, and we returned another $87 million to our shareholders.
Speaker 3: By all accounts, it was a great start to 2023.
<unk> find expenses to arrive at our estimate it vulgar underspent of $10 million, which will complete our recovery of the 49 million dollar investment that we made back in 2020.
Finally, given the managed transition costs me first of all revenues are expected to trend towards zero as we approach the end of the year.
In closing our first quarter results underscore the attractiveness of our brands to guess developers and owners highlighted by continued growth and <unk> system size and pipeline, while maintaining a disciplined approach to capital allocation. We remain confident that are resilient business model and strong balance sheet possession has to deliver another successful year in any environment.
With that Jeff and I would be happy to take your questions operator.
The floor is now open for questions.
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Our first question comes from joke riff with J P. Morgan.
Good morning, everybody.
Jeff Michelle Michelle Thanks for the comments on developer.
Sensing topic that probably is front and center for most of US on this call here, maybe you could even give us a little bit more detail in terms of what percentage of your new construction typically has financing associated I I know not all of it does.
Particularly as maybe you go down chain scale orientation.
And what percentage of of conversions typically.
Need or has been dancing and then when you think about stuff in China and or internationally. Overall can you talk about that a little bit as well.
Good morning, Joe I, if you think about our if you think about our 2000 twenty-three new construction additions all that financing is already in the house from a conversion from a conversion standpoint, I would say in our pipeline.
And the charity of what's in our pipeline Alrighty has financing.
So we feel really strong about about the 20 twenty-three financing situation and if we look at new construction starts that could impact our future. Your addition side developer interest remains strong Jeff mentioned that in his prepared remarks, and and new construction projects continue to progress with one.
A dozen deals beginning site work in the first quarter and I'm asking you know after after that kind of March 10th headline. So first season developer. Some those relationships are really long and really deep and financing is is is very much available. In fact, we saw a term sheet came.
That came through after that March 10th date for an 8 million dollar alone on a 10 million dollar newbuild La Quinta property with with a small regional bank in the south with some of the best lending terms, we've seen and I am in a while so so we're not concerned about about financing largely for new construction project.
That that that don't currently have a pet skunk currently have financing in place, there's certainly seems to be.
[noise] amount of capital are still available there and then and then on the conversion side you know the only other point I would make is that we have we've got 40 D. L 40, new deals that are executed since that March 10th date, that's actually up versus the same time last year.
And and then we're also seeing buy sell buy them to cross our portfolio increase a year over year. So we continue to believe that the current environment is a healthy and supportive of conversion activity.
Great helpful.
And then.
And a lot of questions last night this morning.
On the buyback in the <unk> in that level was down.
Down sequentially and down versus the average of the last three quarters.
How you were thinking about.
Returning capital in the form of buyback absence any.
The assets.
Assets producing incoming cash is that it's the excess cash after if this cash flow free cash flow. After the dividend is kind of the maximum buyback activity.
And if that's sort of how you're thinking about by back up now that would imply.
Yeah, something just three times net leveraging why is that the right leverage ratio, particularly when your peers are yeah.
At least a half a turn above that.
Sure. So if you if you look at quarter over quarter mm year over year, I think our buyback was up about 40%, but actually mentioned on our February February call. The twenty-three buyback volume will certainly be lower than twenty-two due to the absence of those one time proceeds received in 2022 from the owned assets thousand C. P. L.
C. P. L. G exit with just about $260 million. So you know we always say our first preference is to invest in the business, but absent any compelling investment opportunities just from a free cash flow generation perspective. After we pay our dividend and then required that payment well have over $200 million to deploy it this year.
And and so I think that's the minimum amount you can see go into the share buyback program. There is potential to do relever and and I'd say, our stock is trading at a significant unwarranted discount relative to the purest that today and of course compared to our own estimates of intrinsic value for that does present a compelling.
Opportunity you can expect us to lean more heavily when the stock was trading like this but we do generate a significant amount of cash flow. So we don't necessarily need to lever up to to do that its product predominantly I'd say, a map exercise, especially in today's interest rate environment the value gap versus the interest that that.
That we would be paying and I think it's it's fair to say, we could potentially use leverage to borrow free cash flow capacity pulling forward future share repurchase volume when the stock was trading like this but that leverage increase would likely be more temporary in nature, rather than rather than a permanent increase we are our state a target range.
Is three to four times, we are at the very low end up at three Dot zero times, we do not expect to be lower than three dot zero times and that also means obviously that there is but there is some room there as well. So so I think we have ultimate flexibility when it comes to share buybacks. This year.
Great. Thank you very much.
Thank you.
Thank you. Our next question comes from Stephen Grambling with Morgan Stanley .
Hi, Thanks, there's there's lots of talk I think from some competitors moving into various areas that at least on the surface may have overlap with some of your brands either in the extended stay or economy mid scale segments. How would you characterize the competitive environment. When you are looking at potential development opportunities and and are you seeing any change.
<unk> either requests or even your willingness to put an additional key money to to make these deals going over the line.
No changes Steven really in terms of and we've been out on the road quite a bit over the last few weeks and we're not seeing any impact to our economy or our mid scale brands.
Given that our our proposed pip requirements far exceed in terms of value to our our owners, what's being put on the table the competitive pip requirements far exceed our average pip conversion costs, which don't necessarily get measured in millions of dollars.
Renovation and Pip costs generally run three to five times less than many of our larger brand peers and you know when you look at the across the economy segment, we have the most.
Recognize brands and the economy space that are performing right now at a historic repertoire index and we know these owners and we know what's important to them and what's most important to them as their cash outlay and what what's also important is a very flexible relationship with their brand.
And their cash on cash return, we have plenty of owners that are building new construction.
Microtel for example, right now with us along with competitive.
Economy, and competitive Midscale in upper Midscale brands and they tell you that they're microtel is deliver best in class cash on cash returns right now and certainly we have thousands of owners will tell you that there's no better cash on cash return right. Now then they're super eights in their days in so we we will continue to provide the most flexible and the most competitively priced brands in the space not only in.
Our pets, but also on our operating and technology staff costs, which are running significantly less than than I think what they're they're being offered.
And I think most importantly in terms of not seeing any any impact we executed more economy rooms in Q1 than we did last year, so again not seeing any impact.
That that's all Super helpful. Maybe one unrelated follow up by that I recognize that you referenced accelerating trends in April but I think it was always this broader concern about the macro when you look back at your portfolio of assets and how they perform through various.
<unk> I guess <unk>, what does the so called recession playbook look like for the business do you typically see trade down or the things that you would do different things.
Things that you're even looking out for to try to assess that kind of environment. Thank you.
Always looking out and trying to assess the environment you know.
Matt did a good job on slide 30, putting out in our Investor presentation last night, how our brands.
Would continue to perform in the event of any macros slowdown, which were certainly not saying.
We would continue to grow net rooms within our guide in range and we would we would continue to provide the best value proposition out there in the economy in the mid scale segments to our guests and outperform the broader lodging market as our branch did and really all of the last three downturns are brands outperformed.
I think it was by 300 basis points post 911 by by more than that after the JFC and.
If you look at how our brands perform throughout Covid 25 per cent better than the overall industry from Redcar standpoint.
The.
The value proposition in terms of two tiers suggestion trade down as compelling that that 50 dollar gap right now between the economy and the upper mid scale segment is continues to widen its now over $55 and if you look at the gap between the upper mid scale in the upper upscale.
[noise] gap, which was 80 a couple of quarters ago, I think is pushing $100. So we remain a very compelling trade down opportunities should things slow, but you know again in terms of what we're seeing out there as we said in our prepared remarks were not seeing any signs of any slowdown.
That's great. Thanks, so much.
Thank you. Our next question comes from Michael Bellisario with Bird.
Thanks, Good morning, everyone.
Just wanted to go back to the development topic and dig into a little bit more of those those 41, new deals you mentioned any particular brand or locations.
Where you saw strength and then maybe also on the flip side, where if any of conversation stalled or deals that you're expected to get signed didn't get signed.
Yeah, I work from an opening standpoint, and an execution standpoint, we're not seeing.
Any signs of a slowdown either you know for your posts is Michelle said in our in.
<unk> remarks are our conversion signings increased over.
Over the first COVID-19, which we always look back to you and and think that that was that was a high water year or new construction signings picked up and and we're seeing great interest and certainly as I mentioned, our economy brands, we signed more microtel has more when gates more hawthorne's.
And we continue to see that that pick up really across the country.
Got it and then just one follow up on the on the web or performance you mentioned I think plus eight in the U S and the first order plus 10.
In April .
Tried any color on international trends, what you saw throughout the first quarter and then into April as well.
Sure. It is Michelle noted the first quarter International Rep par improved sequentially and will continue to present, a significant tailwind for us for for 2000 twenty-three overall, it was up 20% versus 19 and up 37% to to prior yearly with strong growth Mike across all the regions in constant currency, which.
<unk> was in line with our expectations, Canada was up 30%, which was good to see southeast Asia, which is now back to 2019 levels was up 40% and in Europe .
Has come back strong Germany has been.
Strong with us with with Red part now running over 20 points ahead of where it was back in in 2019, and I think the stand out for us internationally with Latin America.
Which was up 60% in the quarter with Mexico, continuing to lead the way into their high fees and I was down there with the team last week and they're having a very strong April .
And then of course, China, we're we're very.
Happy to see what we expected come in a 15% a year over year is both both inbound and outbound travel in China ramps back up.
Okay.
Thank you.
Thanks, Mike.
Thank you. Our next question comes from Danny Assad with Bank of America.
Hi, Good morning, Jeff Michelle.
I I just want to touch back on development, one more time, sorry, but you know yesterday, a competitor said that they expected the development environment, you know to to slow and that was sort of their experience as conditions tightened around the the global financial crisis. So like what is your ex.
Spectation as displays out from here I know, you're not seeing any cracks yet but from here.
And then and then how do you get projects to still pen sold with higher prevailing rates lower credit availability and then maybe what are some of the offsets to those higher project cost for developers.
Hi, Honey I I'll start <unk> and Jeff if you want to add anything. Please please feel free so I would say from from an <unk> perspective, you can see we actually presented in the Investor presentation, we posted to the website that.
Even at a seven per cent cost of that these the B R. O eyes are still in in the high teens. So really strong really strong returns and as you know interest rates are impacting all off that process not not just hotels, but hotels are unique in that they have the ability to continuously.
Change roommates and and then off that some of the cost side of that equation, whether it be inflation or or interests with that with that higher pricing and so sophisticated investors hershey logging to be a highly desirable real estate class you know during that during an inflationary environment for sure and and and.
Developers are underwriting fees increases in and to their face cases, so so.
We and and well Capitalised developers believe this is still a great great time to belt, although the interest rates are higher than the historic lows everyone is expecting they will decrease Ah bet. Once you know once that is done and and so select service hotel, specifically with a minimal staffing.
<unk> are are delivering very high R. A y for owners even in even in this environment and so that's why they are still very much in internet.
Yeah, and I I would say that you know as as we mentioned.
We're seeing you know we we saw it last year a record number of openings and signs were not seeing any slowdown Danny in the in the first quarter and it's it's really spread across across the world. I mean, our pipeline has 63 countries and it I mentioned last week I was down at the Latin American conference and demand for our new construction prototypes occur.
Ross, Mexico, and Latin America Latin America. For example, just continues to grow there is no better example of that than the eight look look into that are now under development in the Dominican Republic.
Along with with with new Super Eights, the new Super eight Manzanillo, Mexico with with 19 more to come so we're confident that what what we what we needed to do in the first quarter, where we've done we're on track and we open what we expected to.
Then we're not seeing any signs of anything slowing down.
Great. Thank you so much for that.
And you did give a lot of color on you know your unwrap far in the acceleration on the four week average.
Super helpful. Can you, maybe give us a little bit of insight into with the data that you have in front of you kind of what is your expectation or underwriting for you know how April plays out and then, especially as we head into the the summer travel period. This coming you know coming up what is your expectation for a day.
Mastic travel.
Sure.
You Wanna go into.
Yes, Sir I would I'll start off and Michelle could jump in I mean, we're both we're both excited as Michelle noted with what we're seeing her April domestic revpar. As she noted was point ahead of our prior four weeks, but for the last four weeks Danny through April 22nd or Red part is up two per cent to last year and up 10% to 19 versus.
As you mentioned it being up where I think Mike mentioned up 8% for the first quarter and we're seeing we're seeing economy. Revpar also accelerate it's up now 12% last four weeks to to 2019, and certainly Midscale, which has a further opportunity to to drive or read part is accelerated a 4% versus last year.
Up 8% to 19 versus the last four weeks of.
Of of 2019 so.
We've got to remember that our segment is is when you look at our segmentation it's different.
And again with Matt put out on on the I P. On slide 25, I think demonstrates why were.
We're so bullish I mean 70 per cent of our businesses leisure.
And then 20% of it is that blue collar infrastructure worker that is really picking up right now we have less than 2% of our business being white collar business travel in less than 1% of our business being.
Being group, so we're very optimistic with our guests more employed than they've ever been.
With the savings balance is that they haven't with both real 80 or an occupancy in our mid scale and above segments still below 2019.
Our guests are telling us there'll be allocating more than ever to travel to your question. This summer 93 per cent of our guests have told us that they are planning a trip in the next six months in our survey and that that that 93 per cent is at an all time high. So we do believe that leisure travel will defy any economic gravity that that.
That might be out there.
And you know the.
The other important point I think on on slide 26 of our Investor presentation highlights that not only are our guests not low income earners. Their household incomes at over $90000 are growing and they are increasingly significantly younger and so all of that plays out in terms of of what we're seeing.
With the metrics that give us confidence our booking windows being up 15% as we mentioned to last year, a web traffic now running 40 per cent ahead of 2019 levels.
You just have to look at April month date, Google search volumes to get.
I'm excited about the summer ahead running 13% ahead of last year.
And then we've got from a leisure perspective are average length of stay running significantly ahead of 19. So we're we're we're looking forward to the summer we know that our guests are driving further than ever and and they're staying more often.
Thank you for all that and then that's perfect. That's perfect stuff I think the only thing I would add to that with with respect to the rest of the year, we're expecting the U S to perform pretty similar to to have it performed and and the second or in the first quarter and our outlook is providing a range.
Outcomes and then you know Jeff mentioned, yeah. He thinks we're pretty well insulated from any economic gravity I think where the words that he that he used so within that range I think we would see any potential impacts muted by again that strong consumer preference for experiences.
Hurting travel that continued international recovery and benefits from me and incremental infrastructure spend coming into market and I. Just remember we had very little exposure to corporate transient business travel. So we really won't feel the impact of any potential tenney productions and in that quarter and I do want to remind you while we're on the.
Topic on the economy segment is the only segment. We can say is running double digits ahead of 2019 at this point in time.
Mmk [laughter] very very helpful. Thank you so much.
Next thing.
Thank you our next question from Steve <unk> with Deutsche Bank.
Good morning, everyone and thanks for taking my questions.
Just wanted to go back to the new construction pipeline.
And for the rooms in the construction pipeline that have not broken ground yet.
Can you talk about what percentage of those you believe have committed financing and those you expect to be completed.
Sure every everything entering into the system in 2023 has financing in place and then and then beyond that I would say probably a third to a half has has current financing in place.
Okay. Thank you.
Then just following up on the conversions can you remind us of where your conversions are typically sourced from from independent owners change of control or other brands and does that profile change I need during a downturn.
You know during a downturn, Steve it does change a bad excuse a bit more independent and they're certainly you know if you look at the United States of America.
1.3 million economy rooms over half of which are not branded that's that that in a downturn, which we're not seeing that that could skew, but it's it's usually a third a third a third a third from.
Competitors of third from independence, and and then a third from.
Picking up what.
What what might be being built up there in terms of additions to supply.
Okay. Thank you I appreciate it.
[noise]. Thank you. Our next question comes from David Cats with Jeffries.
Hi, Good morning, everyone. Thanks for taking my questions covered quite a bit already in the questions ahead of me, but I wanted to just go back to Asia and drill a bit cheaper I know you indicated it's a bit of a tailwind think historically you know it's been out.
From the outside it's gross can you describe.
What you're seeing in terms of on the ground what stage where at.
Just remind us what the sort of revenue intensity is relative to the the whole you know as that recovers.
Thanks, David and turns to the stage where at is Michelle noted, we're not yet back to where.
Where 2019 was nor nor did we expect to be I I think that the gradual improvement in the first quarter came in exactly as we expected. It's certainly been encouraging over the last few weeks to see the continued positive trends that that's that's being reported out there and it's great to see the significant uptick in occupancy, but we improved from 60.
Ish per cent of 2019 levels in the fourth quarter to about 75 per cent I think it was in the first quarter.
And year over year, where we're seeing acceleration and in terms of what we're hearing from our teams on the ground.
It's both domestic travel and inbound travel that's that's so encouragingly bounce back China's resumed visa applications flirt flight capacity, which isn't yet back too.
Where it was in 2019 is picking up I think the.
The flight that most of our team takes between Singapore and Shanghai, given that we have offices in both cities.
Which was running three times a week back in Covid has picked up to 40 flights a week and we're hearing that could increase to 50 flights a week by June so.
That that that's encouraging our partners our marketing partners over there see trip, they're reporting April search volume for mainland China up 126% versus 2019 as we come in to the.
The busy vacation period, and and we're we're hearing from our team of some very aggressive government actions to stimulate torn travel and cities like <unk> [laughter], providing credits to to meeting planners mice planners on on costs for events.
And then on the development side finally, where we're just very pleased with what the team has been doing we saw 1% sequential growth and a five per cent overall net room growth for our entire China system, including our master license agreements.
And our our team open more direct rooms in the first quarter than they did last year. I think this was the third consecutive quarter of double digit net room growth for our domestic China direct franchising business.
So we're really pleased and I think importantly.
What Michelle and I were most pleased about with the team was to see our conversion pipeline in China growing sequentially and year over year, moving that China pipeline up to.
On an overall basis.
Okay. Thank you I appreciate it thanks David.
As a reminder, if you would like to ask a question. Please press star one at this time.
Next question comes from Brent <unk> with bark Barclay.
Hey, good morning, everybody. Thanks for taking my my question I, just wanted to circle back.
Those question to ask you a slightly different way.
Her conversions.
Some of your friends like for days and you can converted.
Very low cash outlay, but.
But maybe you could tell us for the conversion activity overall with the average cash outlay is and then what percentage of deals.
Would need financing.
Yeah, it's a low percentage of deals Brant that would need financing very rarely on on days and conversions as they are financing involved.
And when we look at you know, bringing in a competitive or an independent hotel.
In terms of the cost of that property improvement plan.
We're looking at something three to five times less what we're seeing in the marketplace that are larger brand competitors are.
Are offering and and we we believe that's been a big piece of of how our conversion rooms.
Increased in terms of both both openings and signings are converging rooms increased 7% domestically and three per cent globally.
In the quarter versus what we did back in pre Covid.
And and we open more domestic economy, and we open more midscale converging rooms than we did last year.
So we're we're pleased with the progress and we're not seeing any signs of a slowdown there.
Yeah I'm great. Thanks, it's typical economy.
Yeah branches for a typical economy property in in decent condition, it's gotta be less than a million outlay on the on our side.
Perfect. Thanks for that and then it's great to hear that April trends bounce back I think you guys were supposed to be talking about economy, but.
I don't know if you wanted to destroy myself and I took a stab at what we what we saw in March it looked like no S. T. R. A showed a little bit of dip in occupancy. If you think it was no tax return timing or if it was whether or you know if you want to take a shot at what <unk>. What you think might've happened in March Yeah, you know.
We said.
A quarter came in just as we expected, but March as well came in as expected. Brent you know if you think about our domestic business.
It was fully recovered and 2021, unlike many of our peers, we did not feel the impact from omicron last year that the higher chain scales felt.
And if you look back at March of 2022 at its growth was 30% over March of 2021. So again it came in as expected and enter your point.
I I did mention the economy rep are accelerating but but overall for the last last four weeks of April through the 22nd.
A rep par as is up two per cent to last year, and a 10% to where it was in 19, which is ahead of where it was for the quarter.
Alright, Thanks, a lot.
Thanks Brent.
Thank you our final question will come from Dan <unk> with Morningstar.
Good morning, guys. Thanks for squeezing in my questions. So maybe you just want an echo kind of interested in the potential of the contribution that brand might have to nug over the coming years. How are you guys thinking about the longterm unit in room potential for that brand what percent of the current contract pipeline as conversion versus.
New build and how long does it take for a new construction Echo brand hotel to open next yeah. All great questions. We're looking anywhere depending on the developer between 12 and 24 months I think averaging you know 18. These are very sophisticated real estate developers with.
Strong.
Construction backgrounds behind him in third party management companies behind them and and.
They're they're off and running and and and and as excited as they could be we were expecting another two dozen ground breaks. This year. We said we'd have 100 open in the first five years. They will all be to your question. Good question, New construction, we will not be doing conversions with this brand.
And and we're expecting 300 in the first the first 10 years and we feel very good about both of those numbers based on where we are.
And there's no reason, we can't do more giving it a manned out there that's building, especially in states like Texas, or Georgia, or Arizona that are receiving so much of the infrastructure building. That's that's driving a lot of this.
We.
We are expecting an increase of $10 million to $12 million of royalty fees for every 100 hotels that we we open.
And expecting that to drop about 85% of it to EBITDA.
Okay. That's great information. Thank you so much.
Thanks, Dan.
Thank you at this time I will turn the floor back over to Jeff Bilotti for any additional are closing remarks well.
Well, thank God and thanks, everyone for your questions and your interest in Windham hotels and resorts. We were very pleased with our first quarter, where we delivered adjusted EBITDA growth it outperformed expectations and allowed us to raise our full year outlook. Our team members are very enthusiastic about the opportunities that lie ahead and confident in our ability to deliver outstanding value to our shareholders are guessing.
Our franchisees, Michelle Matt and I look forward to talking to and seeing many of you in the weeks and months ahead and at many of the upcoming investor conferences that will be attending have a great day everyone.
Thank you. This does conclude today's Wyndham hotels and resorts first quarter 2000 twenty-three earnings conference call.
Police disconnect. Your line at this time and have a wonderful day.
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