I assign a Neutral rating to hospitality company Wyndham Hotels & Resorts, Inc. (WH).
The company’s 3Q 2020 revenue declined due to COVID-19, but there are signs of recovery suggesting that the worst is over. In addition, Wyndham Hotels & Resorts has outperformed its peers in the current challenging environment, due to its favorable revenue mix with a higher proportion of leisure-focused, franchised select-service hotels. Also, the opportunities for brand conversions, referring to the conversion of independent hotels to hotels under Wyndham Hotels & Resorts’ brands, have increased during the coronavirus pandemic period.
Wyndham Hotels & Resorts trades at consensus forward FY 2021 and FY 2022 EV/EBITDA multiples of 15.3 times and 12.6 times, respectively. The company’s share price has increased by +170% from its trough of $21.59 on March 19, 2020, and its year-to-date share price decline is only -7%. This implies that positives associated with expectations of recovery in the hospitality industry, its favorable revenue mix, and an increase in opportunities for brand conversions have been priced in to a large extent. As such, I think that a Neutral rating for Wyndham Hotels & Resorts is justified, and I will only consider upgrading my rating on the stock if there is either a significant share price correction or the pace of recovery in leisure travel is much faster than expected.
Spun off from its parent Wyndham Worldwide Corporation (WYN) in June 2018 as a separate listed entity, Wyndham Hotels & Resorts refers to itself as “the world’s largest hotel franchisor and leading hotel management services provider” on its corporate website. The company has around 9,048 hotels with a total of 804,000 rooms located in 90 countries globally in its portfolio.
Wyndham Hotels & Resorts’ Hotel Brands
Source: Wyndham Hotels & Resorts’ October 2020 Investor Presentation Slides
The hospitality industry is one of the key victims of the coronavirus pandemic, and it is no surprise that Wyndham Hotels & Resorts’ financial performance has been adversely affected by COVID-19. Wyndham Hotels & Resorts reported the company’s 3Q 2020 financial results on October 28, 2020, and its total revenue and RevPAR (Revenue Per Available Room) decreased by -40% YoY and -38% YoY to $337 million and $29.23, respectively in the third quarter of this year.
But the worst could be over. On a QoQ basis, Wyndham Hotels & Resorts’ top line improved by +31% from $258 million in 2Q 2020 to $337 million in 3Q 2020. Furthermore, the YoY RevPar decline for the company’s US operations has narrowed significantly from -67% in April 2020 to -27% in September 2020. The YoY occupancy rate decline for Wyndham Hotels & Resorts’ US hotels was only -11 percentage points in September 2020, as compared to a -33 percentage points decline in occupancy rate in April 2020.
Wyndham Hotels & Resorts also mentioned at the company’s 3Q 2020 earnings call that it “saw a 20% increase in our guests willing to drive over 400 miles” based on a poll conducted using its customer data platform, and an increase in the average length of stay for its guests. The company emphasized that this is a reflection of “increased consumer demand” and that “people feel safer and are willing to travel.”
More importantly, Wyndham Hotels & Resorts is outperforming its peers in the current challenging environment, as discussed in the next section of this article.
Favorable Revenue Mix
Wyndham Hotels & Resorts’ domestic RevPAR was +16 percentage points higher than the industry average for the 3Q 2020 period, based on data from STR, which refers to itself as a provider of “premium data benchmarking, analytics and marketplace insights for global hospitality sectors.” I attribute the company’s outperformance (relative to peers) to its favorable revenue mix.
Firstly, Wyndham Hotels & Resorts generates substantial amount of its domestic revenue from select-service hotels. Approximately 99% of the company’s US hotels are in the select-service category, with the remaining 1% of its domestic hotels belonging to the full-service category. In contrast, 43% and 72% of Hilton Worldwide Holdings’ (HLT) and Marriott International’s (MAR) U.S. hotels are full-service hotels, respectively. The chart below shows that Wyndham Hotels & Resorts’ hotels in the economy/midscale segment (select-service hotels) have recovered much faster than those in the higher-end segment.
A Comparison Of Occupancy Rates For Wyndham Hotels & Resorts’ Economy/Midscale And Higher-end Segments
Source: Wyndham Hotels & Resorts’ October 2020 Investor Presentation Slides
Secondly, Wyndham Hotels & Resorts derives a substantial proportion of its revenue from domestic leisure travelers. The company estimates that 69% of its hotel business was driven by leisure travelers in 2019, and only 4% of guests for its U.S. hotels were international travelers. This is because approximately 87% of the company’s U.S. hotels are in “drive-in locations” that are easily accessible by domestic leisure travelers. Recent research by McKinsey published in August 2020 suggests that “business travel will return at a slower pace than leisure travel.”
Thirdly, the company earns most of its revenue from franchise fees and loyalty program fees charged to franchisees, which is relatively more stable than hotel operating revenue for owned hotels. Although Wyndham Hotels & Resorts did provide fee deferrals to help its franchisees tide through this difficult period in the early part of the year, the company disclosed at 3Q 2020 earnings call on October 28, 2020 that it “received payment on over 70% of the fee deferrals we provided to our franchisees for the months of March, April and May” and “overall cash collections are tracking within 10% of prior year levels.” Approximately 96% of Wyndham Hotels & Resorts are franchised. In comparison, 71% and 88% of Marriott International and Hilton Worldwide Holdings’ hotels are franchised, respectively.
The opportunities for brand conversions, referring to the conversion of independent hotels to hotels under Wyndham Hotels & Resorts’ brands, have increased during the coronavirus pandemic period. This is not surprising, as independent hotels are typically smaller in scale and have weaker financial positions, which make it difficult for them to survive in the current industry downturn.
Travel media publication Skift quoted Wyndham Hotels & Resorts CEO Geoff Ballotti mentioning that “there are more than 15,000 independent economy and mid-scale hotels in the U.S.” and “the company’s franchise and sales teams have been restructured to increase Wyndham’s conversion coverage by approximately three times” in a May 5, 2020 article. The company saw a +30% QoQ increase in domestic conversion signings and a +60% QoQ growth in international conversion signings in 3Q 2020. As of September 30, 2020, Wyndham Hotels & Resorts has a pipeline of 1,400 new hotels worldwide, of which close to a quarter of the new hotels are expected to be contributed from brand conversions as opposed to new hotel constructions.
Valuation And Risk Factors
Wyndham Hotels & Resorts trades at consensus forward FY 2021 and FY 2022 EV/EBITDA multiples of 15.3 times and 12.6 times, respectively based on its share price of $58.68 as of December 3, 2020. Prior to 2020, Wyndham Hotels & Resorts mean consensus forward next twelve months’ EV/EBITDA multiple since its spin-off in June 2018 was approximately 11.3 times. The stock’s forward EV/EBITDA multiples are reasonable as compared to that of its peers, as per the peer valuation comparison table.
Peer Valuation Comparison For Wyndham Hotels & Resorts
|Stock||Consensus Forward FY 2021 EV/EBITDA Multiple||Consensus Forward FY 2022 EV/EBITDA Multiple|
|Hilton Worldwide Holdings||10.2||7.7|
|InterContinental Hotels Group (IHG)||17.7||12.9|
|Choice Hotels International (CHH)||19.8||16.3|
The key risk factors for Wyndham Hotels & Resorts are a longer-than-expected time taken for the recovery of leisure travel to pre-pandemic levels, and a slower pace of brand conversions going forward.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.