Wyndham Hotels: This Strategy Has Worked Well Before

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About: Wyndham Hotels & Resorts, Inc. (WH)
by: Hidden Opportunities
Summary

Wyndham Hotels and Resorts was spun-off as a separate publicly traded pure-play hotel company in May 2018.

One year post-spinoff, the company has successfully completed their largest ever acquisition, demonstrated strong organic growth and international expansion.

Valuation shows WH being slightly undervalued in comparison with close competitors.

Separation of timeshare and hotel businesses has taken place successfully in the recent past and has proven to be very rewarding for investors.

Introduction

Wyndham Hotels and Resorts (WH) is a mid-cap hotel and resort chain based in the United States. They have more than 5,900 franchisees in 80 countries on six continents. On June 1, 2018, Wyndham Worldwide completed the spinoff of Wyndham Destinations (WYND) and Wyndham Hotels and Resorts (WH) as two separate publicly traded companies.

Spinoffs present interesting investment opportunities due to the value the organizations are able to unlock as separate entities. Wyndham Hotels & Resorts presents a strong growth story for long term investors. This article will describe two cases where the the hotel and timeshare businesses were spun-off as separate entities and how it was very rewarding for shareholders. The article further outlines the strategic initiatives WH had planned post-spinoff and how management has delivered strongly on those initiatives thereby supporting my bullish thesis for this company.

The tale of two spinoffs

Spinoffs often represent good investment opportunities because companies get the opportunity to flourish after having been locked inside larger companies.

In 2011, Marriott International (MAR) spun off its timeshare operations and development business - Marriott Vacations Worldwide Corp (VAC). Marriott International shareholders received one share of Marriott Vacations Worldwide common stock for every ten shares of Marriott International Class A common stock.

$1000 in Marriott International stock prior to the spinoff would have resulted in returns as shown below:

Source: Stock Return calculator

For a 10:1 distribution, a shareholder who received Vacations Worldwide stocks would have obtained the returns shown below:

Source: Stock Return calculator

The popular Marriott case study from Joel Greenblatt’s book “You can be a stock market genius” demonstrated how spinoffs can be a huge opportunity for investors (CAGR > 20% in over 7 years).

Following the Marriott spinoff, In January 2017, Hilton Hotels Corporation (HLT) completed the spinoffs of Park Hotels & Resorts (PK) and Hilton Grand Vacations (HGV), resulting in three independent publicly traded companies. Shareholders received a distribution of one share of Park common stock for each five shares of Hilton common stock and one share of HGV common stock for each 10 shares of Hilton common stock.

An investor with $1000 in Hilton Hotels Corporation prior to the spinoff would have received returns as shown below:

Source: Stock Return Calculator

For a 5:1 split, investors would have received approximately $200 worth of PK stock, thereby resulting in returns as shown below:

Source: Stock Return Calculator

For a 10:1 split, Investors would have received approximately $100 worth of HGV stock, thereby resulting in returns as shown below:

Source: Stock Return Calculator

Both spinoffs were geared towards allowing the hotel business to flourish independently from the timeshare business. Wyndham Worldwide spun off Wyndham Hotels & Resorts as its own company a year ago. Often, history repeats itself and rewards investors who have been able to learn from the past.

In the sections below, we will see how Wyndham has been performing on its strategic initiatives post-spinoff.

Strategic Initiatives

In May 2018, when Wyndham Worldwide was planning the spinoff, the leadership team that was gearing up to take over Wyndham Hotels & Resorts listed the following as their strategic initiatives to create value:

Rooms Growth

We see increasing rate of rooms growth since 2014. Post-spinoff, FY2018 saw the highest rate of increase in rooms, mainly due to the acquisition of La Quinta.

Data Source: Wyndham Hotels FY2018 form 10K

RevPAR Growth

Post spinoff, WH has seen a sharp increase in RevPAR, both within the United States and internationally.

Data Source: Wyndham Hotels FY2018 form 10K

International Expansion

Post-spinoff, Wyndham Hotels has been accelerating its international expansion.

  1. The company reacquired exclusive direct franchising rights for its Days Inn brand for the People's Republic of China.

  2. WH is continuing its Caribbean expansion

  3. WH opened its first Wyndham Grand in Tbilisi,Georgia

  4. WH expands its presence in India with 11 more hotels

Over the past five years, WH has been growing their international portfolio at a compound annual rate of 9%, to nearly 2,800 hotels (Source)

By the end of 2018, approximately 70% of WH hotels were located in the United States and approximately 30% are located internationally.

International growth is surely positive for investors, but the next assignment for Wyndham hotels management is to focus on increasing international RevPAR.

Source: Wyndham Hotels and Resorts FY2018 Form 10k

History of successful acquisitions

WH’s parent company Wyndham Worldwide was known for its successful history of acquisitions. The largest hotel franchisor in the world built the Wyndham brand around acquired properties.

Source: Investor Presentation

Wyndham Hotels is a leading brand for midscale / upper midscale and economy hotels. WH has 39% market share in mid-scale / upper midscale and 21% market share in economy class hotels (Source: Company Presentation)

With the La Quinta acquisition in 2018, WH managed to get a boost on total number of rooms as well as improving RevPAR. The acquisition is also strategic in enhancing WH’s midscale presence. This has been the largest acquisition for Wyndham to date. Management has revealed in the Q1 2019 conference call that they are not planning on making a brand acquisition in FY2019, but are on the lookout for potential opportunities both domestic as well as international.

Share Repurchase and Dividends

Post-spinoff, WH Board of Directors authorized a stare repurchase program to buy back up to $300 million of their common stock. Since the spinoff, in FY2018, WH returned $385 million of capital to shareholders in the form of share repurchases and dividends.

Wyndham repurchased $44 million of its common stock during the Q12019 and returned $28 million to shareholders in the form of dividends.

Valuation

At 13x EV/EBITDA, WH trades at a slight discount in comparison with its peers (Choice Hotels, Marriott International and Hilton Hotels Corporation)

Adjusted EBITDA for 2019 is expected to be between $605 - 620 million

Considering an EBITDA estimate of $612 million for FY2019, Wyndham Hotels trades at 11x forward EBITDA, thereby presenting a value opportunity for investors.

High ownership by institutions

93% of WH stocks are owned by institutional investors. Also, during Q1 2019, these large investors purchased a net $127.3 thousand shares. Strong institutional ownership is a good sign for individual investors.

Source: CNN

Strong business model

Wyndham Hotels franchisee agreements are typically 10 to 20 years in length and generally include a royalty fee of approximately 4% to 5% of gross room revenue and a marketing and reservation fee of approximately 3% to 5% of gross room revenue. 90% of WH revenue comes through long term contracts.

Source: Investor Presentation

The WH system is dispersed among approximately 5,900 franchisees, which reduces their exposure to any one franchisee. Also, most franchisees own only one hotel thereby demonstrating no significant concentration. WH is relatively asset light by only owning two hotels themselves.

Conclusion

One year post-spinoff, Wyndham Hotels is delivering on their initial promise to investors. Through a combination of organic growth, international expansion as well as strategic acquisition of La Quinta, WH has demonstrated strong growth in room count and RevPAR in FY2018.

Spinoffs present excellent investment opportunities. We have seen Marriott International and Hilton Hotels Corporation spin off their timeshare businesses in the past and generate strong returns for their shareholders. This history is very relevant here and provides a view of the strong potential in Wyndham Hotels. I recommend Wyndham Hotels and Resorts to investors with a 2-3-year investment horizon.

Disclosure: I am/we are long WH, WYND. 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.