As soon as Wyndham Hotels & Resorts’ fourth-quarter and full-year 2023 earnings call with investors got underway, President and CEO Geoff Ballotti addressed the elephant in the room: “Choice [Hotels International has] nominated directors with the sole purpose of advancing its inadequate, hostile and risk-laden offer—an offer which our Board has unanimously determined is not in the best interest of our shareholders.”
Choice’s offer, Ballotti said, fails to address three principal concerns from Wyndham’s Board: “First, the inadequacy of the value of the offer compared with our future growth prospects. Second, the significant amount of Choice stock included in the consideration mix, which would expose our shareholders to an over-levered pro forma company with slower long-term growth prospects. And third, the asymmetrical risks to Wyndham and our shareholders resulting from a prolonged and uncertain regulatory review.”
The company’s concerns regarding the “unique risks” of the transaction have only increased as the process has unfolded, Ballotti continued, “starting with the Federal Trade Commission's unsolicited outreach to us in subsequent investigation even before Choice launched its exchange offer.” Moreover, he added, state attorneys general from Washington, Colorado, Kansas and Vermont have also now opened their own separate investigations.
The 40-page, 65-topic "second request" from the Federal Trade Commission received by Wyndham on Jan. 11 requires the company to provide “virtually every communication and every piece of data” that relates “in any way” to Wyndham’s competition with Choice, Ballotti said. “To put this into context, second requests are issued for only around 1 percent of deals reviewed by the FTC, and they require additional time-consuming back-and-forth discussions and meetings with the agency.” Ballotti suggested regulatory interest has been piqued due to the “continued opposition” of AAHOA, which represents more than two thirds of both companies' domestic hotel owners.
“In a recent survey of members who own either a Choice or a Wyndham hotel, over two thirds say they’d consider leaving were the merger to occur,” Ballotti said. A recent report, he added, found that more than 90 percent of significant merger investigations in 2023 resulted in a lawsuit by the government to block the deal or the abandonment of the transaction, with the FTC not accepting any pre-lawsuit settlements involving a divestiture or other remedy. “This trend has continued in recent months with the transactions such as JetBlue/Spirit and its merger, the IQVIA/Propel [Media] merger and Amazon's proposed acquisition of iRobot—all of which were either blocked or now face significant delays and challenges.”
Wyndham, Ballotti said, is “positioned to generate shareholder value well in excess of Choices current offer.” As evidence, he highlighted several of the company's achievements in the fourth quarter of 2023 and the full year.
System Size and Development
Wyndham opened an average of two hotels each business day in 2023 and the 500 hotels it opened over the year were 11 percent more than in 2022, Ballotti said. “In the process, we introduced 13 of our brands in 24 new countries around the world, including our first La Quinta in Ecuador, our first Super 8 in the United Kingdom and our first Hawthorn Suites in China.”
The company's global system grew 3.5 percent, marking 12 consecutive quarters of organic growth and reflecting 1 percent growth in the U.S. and 7 percent internationally. These increases included strong growth in the midscale (and above) segments in the U.S. and the direct franchising business in China, which grew 3 percent and 13 percent, respectively. The company also increased its retention rate, which includes all terminations, by another 30 basis points year-over-year, ending the year at a record 95.6 percent.
At the end of Q4, the company's global development pipeline consisted of more than 1,950 hotels and approximately 240,000 rooms, a 10 percent year-over-year increase and a record high. The quarter was Wyndham’s 14th consecutive quarter of sequential pipeline growth.
The company reported 8 percent pipeline growth in the U.S. and 11 percent internationally. Approximately 70 percent of its pipeline is in the midscale and above segments, which grew 6 percent year-over-year. Approximately 58 percent of the pipeline is international and approximately 79 percent of the pipeline is new construction, of which approximately 34 percent has broken ground.
Wyndham awarded 766 new contracts for its legacy brands over the year, an increase of 8 percent compared to full-year 2022. Additionally, the company awarded 98 additional new contracts for its ECHO Suites brand and, as of the end of the year, Wyndham had awarded 268 contracts, or over 33,000 rooms, for the brand. “We have nearly a dozen ECHO Suites now under construction, which we expect to open by year-end, and 75 are expected to be open by the end of 2026,” Ballotti said, noting that the company has shifted its focus from large multi-unit developers to individuals.
Revenue per Available Room
Fourth-quarter global revenue per available room declined 1 percent in constant currency compared to 2022, reflecting a 4 percent decline in the U.S. and growth of 7 percent internationally. For the full year, global RevPAR grew 5 percent in constant currency compared to 2022, reflecting a 1 percent decline in the U.S. and growth of 21 percent internationally.
The company had achieved record-breaking RevPAR in the U.S. during the preceding year due to COVID-impacted travel patterns. Comparing to 2019 (to neutralize for COVID-impacted travel patterns), U.S. RevPAR grew 10 percent in the fourth quarter—a 120 basis point acceleration from third quarter 2023 growth—and 9 percent for the full year. Internationally, year-over-year RevPAR growth for both the fourth quarter and the full-year was primarily driven by higher occupancy levels. Compared to 2019, international RevPAR grew in the fourth quarter and full-year by 44 percent and 36 percent, respectively, on a constant-currency basis.
Operating Results
In the fourth quarter, the company generated net income of $50 million compared to $56 million in fourth quarter 2022. The decrease was reflective of a higher effective tax rate, higher interest expense, foreign currency impact from hyper-inflation in Argentina and transaction-related expenses resulting from the unsolicited offer by Choice Hotels, partially offset by higher adjusted earnings before interest, taxes, depreciation and amortization.
Adjusted EBITDA grew 22 percent to $154 million from $126 million. This increase included a $21 million favorable impact from marketing fund variability, excluding which adjusted EBITDA grew 6 percent primarily reflecting higher fee-related and other revenues.
For the full year, the company generated net income of $289 million compared to $355 million in full-year 2022, which included $37 million from the select-service managed and owned hotels. The decrease was reflective of a higher effective tax rate, higher interest expense, foreign currency impact from hyper-inflation in Argentina and transaction-related expenses resulting from the unsolicited offer by Choice Hotels, partially offset by higher adjusted EBITDA.
Adjusted EBITDA was $659 million compared to $650 million in full-year 2022, which included $18 million from the select-service managed and owned hotels. The growth in adjusted EBITDA was further impacted by $11 million of unfavorable marketing fund variability. On a comparable basis, adjusted EBITDA increased 6 percent reflecting higher fee-related and other revenues.
Full-Year 2024 Outlook
CFO Michele Allen said that Wyndham is “uniquely positioned” to benefit from the increased government spending tied to the federal CHIPS and Science Act. “No hotel company has more select-service hotels located in the states where infrastructure spending will be concentrated,” she said during the call. “Over the estimated eight-year spend period, we expect that capturing just our fair share of this spend will generate $150 million of incremental royalties for Wyndham shareholders.”
Year-over-year growth rates for adjusted EBITDA and adjusted net income are not comparable due to full-year 2023 marketing fund revenues exceeding expenses by $9 million, which substantially completed the recovery of the $49 million support the company provided to its owners during COVID. The company expects marketing revenues to equal expenses during full-year 2024, though seasonality of spend will affect the quarterly comparisons throughout the year.