US Infrastructure Build a Driver for Wyndham During the Next Several Years

Senior Equity Analyst

Dan Wasiolek

Despite near-term macroeconomic challenges for the consumer—still-elevated inflation, depleted consumer savings, we expect Wyndham Hotels & Resorts to gradually expand room share in the hotel industry and maintain a brand intangible asset and switching cost advantage. This view is supported by the company's roughly 40% share of all US economy and midscale branded hotels (where Wyndham has a handful of the top 10 brands based on guest satisfaction, according to J.D. Power) and the industry’s fourth-largest loyalty program by membership (108 million as of March 31, 2024), which encourages third-party hotel owners to join the platform. Also, Wyndham has around 10% and 5% share of existing US and global hotel rooms, respectively, with a pipeline that represents around 28% of its current unit base. As a result, we see room growth averaging over 3%-4% during the next 10 years (2024-33), above the 1%-2% lift we model for the US hotel industry. Further, we forecast around 3% annual revenue per available room growth through the rest of this decade, aided by further price and occupancy increases, as well as incremental demand from increased US infrastructure build out.

With 99% its 9,200 hotels franchised, Wyndham has an attractive recurring-fee business model with healthy returns on invested capital, as these asset-light relationships have low fixed costs and capital requirements. This asset-light model creates switching costs, given 10- to 20-year contracts that have meaningful cancellation costs for owners.

We see the 2018 acquisition of La Quinta as a strategically strong fit that supports Wyndham’s intangible-asset-driven narrow moat while enhancing long-term growth. In fact, we think La Quinta can approach 2,000 hotels long-term from 918 at the end of 2023.

Cyclicality and overbuilding are the main risks for shareholders. Typically, US lodging recoveries last five to nine years, but the recent upcycle that ended in early 2020 lasted 10 years.

Business Strategy & Outlook

We think Wyndham’s strong position in the economy and midscale scale segments produces a narrow economic moat driven by a lasting brand intangible asset, which in turn also generates a switching cost advantage. We believe Wyndham’s moat is illustrated by its enduring unit growth demand from third-party owners, guest satisfaction ranking of its brands, room and loyalty scale, and contract length of franchisee relationships.

With the company's 9,200 properties being franchise and management contracts, Wyndham depends heavily on its brand to attract unit growth from third-party owners. These owners gravitate to Wyndham’s portfolio of nearly 900,000 rooms (trailing only Marriott, Hilton, and InterContinental) allows owners to team up to spend nearly $600 million yearly toward marketing, reservation, distribution, and loyalty, which far exceeds the amounts any boutique or independent hotel owner can afford. To this point, Wyndham derives about 70% of its reservations from its direct offline and online lower-acquisition-cost channels, which is more than double that of the average hotelier, showing the advantages of its brand awareness and scale. Further to this point, Wyndham’s digital direct booking mix has been outpacing its higher-cost online travel agency channel throughout the covid-19 recovery—although the percent derived from this channel is not quantified. Additionally, we believe Wyndham hoteliers pay just a low-double digit percentage commission to online travel agencies, compared with the 20%-plus paid by some independent hotel owners.

In our view, Wyndham's enduring unit growth offers a clear sign that its brand is resonating with third-party owners. To this point, Wyndham's unit growth even remained positive during the downturn in 2008 and 2009, up 7.7% and 0.8%, respectively. Additionally, prior to the covid-19 pandemic (2007-19), Wyndham saw net unit growth averaging around 3% annually, twice the amount of the US hotel industry during that time. Looking forward, we expect Wyndham to maintain around 3%-4% annual net unit growth during the next 10 years, pacing ahead of estimated US industry growth of 1%-2%, as it benefits from a large and fragmented global hotel market and US infrastructure spending that plays into its off-interstate portfolio. 

Wyndham’s brand is also popular with travelers, supported by high customer satisfaction ratings as measured by J.D. Power, which ranks several of the company's brands in the top five within its core economy and midscale segments. Also, individuals flock to Wyndham’s hotels, illustrated by its solid loyalty program, which offers an immediate demand channel for third-party owners, further validating the company’s brand intangible advantage. As of March 31, 2024, its loyalty program hosted 108 million members, trailing only wide-moats Marriott, InterContinental, and Hilton. Travelers are drawn to Wyndham’s loyalty program, as it provides the ability to use and accumulate points across nearly 900,000 hotel rooms. Wyndham has recently commented that its loyalty guests stay around 65% more often and spend 84% more than nonmembers. Overall, loyalty members account for more than 40% of room nights globally (and nearly half domestically), which is generally in line with its narrow-moat peers, although below the 60% plus of wide-moat peers Marriott and Hilton.

As a result of Wyndham’s solid brand, third-party owners sign contract lengths that are typically for 10 to 20 years, providing a switching cost advantage. Terminating these contracts requires significant expenditures to renovate and rebrand a property to meet the new brand specifications, resulting in disruption and loss of sales to business operations for the owner, as well as cessation fees that must be paid by the owner—typically around 2-3 years of average monthly management fees, plus the previous year’s incentive fee.

Wyndham’s solid relationship with both owners and travelers has translated to its global revenue share keeping at 2% since 2018, good for the fifth-largest globally behind Marriott, Hilton, InterContinental, and Accor. Wyndham has maintained revenue share in the top position within economy hotels and is the seventh-biggest player in the midscale segment. Regionally, it has maintained the number five revenue share position in the US and ranks 14th and 10th in Western Europe and the Asia-Pacific, respectively.

While we have strong conviction in awarding Wyndham a narrow moat, we stop short of awarding the company the wide moat and the network advantage we believe Marriott, Hilton, and InterContinental possess for several reasons. To begin, Wyndham’s room and loyalty scale fall below these wide-moat peers, both from a regional—wide-moat peers have strong revenue share in all major geographies, not just the US, and segment perspective—wide-moat peers offer hotels across more price points, not just lower cost options. In turn, these wide-moat peers are able to spend between $2.5 billion and $17 billion on marketing, distribution, loyalty, and reservation systems annually versus $600 million for Wyndham, leading to stronger unit growth prospects for the former, in our view. Further, unlike Marriott, Hilton, and InterContinental, Wyndham’s portfolio is concentrated in the economy and midscale segments, which see higher termination rates, are characterized by lower service quality and amenities, and are facing increasing competition. We think this may be due to the financial health of Wyndham’s third-party owners, which might have more challenges adhering to the renovation costs necessary to remain competitive over a longtime horizon compared with owners in the upscale and luxury segments. We also believe it is driven in part by the lower service and decor requirements, which could hinder the ability to instill stronger brand loyalty and differentiation. As a result, Wyndham’s termination rate averaged 6.0% of its total room base annually during 2016-23—the company says its retention rate leads all others in the economy segment—versus the roughly low-single-digit percentage for its wide-moat peers. An additional factor in not ascribing Wyndham a wide moat is that Marriott and Hilton have launched brands in its core economy and midscale markets in recent years, presenting increased competition in obtaining third-party owners. These headwinds are exacerbated by the ongoing alternative of individual hosts found on platforms like narrow-moat Airbnb, which taken together dent our confidence in Wyndham’s ability to generate excess economic rents for the next two decades. Finally, Wyndham lacks upscale and luxury exposure, which could lead to its loyalty base graduating out to more complete platform offerings found at wide-moat peers as household incomes grow. Taken together, we think these contribute to Wyndham’s typical third-party owner contract length of 10 to 20 years, which while solid, fall short of at least the 20- to 30-year relationships found at wide-moat competitors.

Narrow

Economic Moat

Wyndham Hotels & Resorts Inc

Wyndham Hotels & Resorts, Inc. engages in the franchise and operation of hotels under the Wyndham brand. It operates through the following segments: Hotel Franchising and Hotel Management. The Hotel Franchising segment offers licenses of brand names and associated trademarks to hotel owners under long-term franchise agreements. The Hotel Management segment provides management services. The company was founded in 1990 and is headquartered in Parsippany, NJ.

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Wyndham Hotels & Resorts, Inc. engages in the franchise and operation of hotels under the Wyndham brand. It operates through the following segments: Hotel Franchising, Hotel Management, and Corporate and Other. The Hotel Franchising segment focuses on licensing the company’s lodging brands and providing related services to third-party hotel owners and others. The Hotel Management segment provides management services. The company was founded in 1990 and is headquartered in Parsippany, NJ.

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