WYNDHAM HOTELS & RESORTS, INC.
Fitch Ratings has affirmed the Issuer Default Rating (IDR) of
Fitch has also affirmed WH's senior secured debt at 'BBB-'/'RR1' and WH's senior unsecured debt at 'BB+'/RR4. The Rating Outlook is Stable.
The affirmation reflects Fitch's expectations that EBITDAR leverage will remain at or below 4.0x through the forecast period. WH has continued to deliver strong room growth and margins while leading in the select-service franchise space with more than 876,000 rooms. Market position is further reinforced with an extensive development pipeline representing 28% of the current portfolio as of 1Q'24. Fitch expects room growth to continue to drive EBITDA growth but a slowdown in year over year RevPAR growth in light of the current economic backdrop and tougher comp periods. Despite this, WH's strong free cash flow positions them to continue to reinvest in their business and return capital to shareholders.
Key Rating Drivers
Strong Net Room Growth and Margins: WH continues to deliver strong margins with its growing portfolio of 876,300 rooms across 25 brands. The company's select-service, franchise focus emphasizes cost efficiencies and higher margins as compared to peers. WH's owner-first approach prioritizes investment in technology to optimize market share and bottom line. This value proposition attracts and retains owners as evidenced by the 1Q24 12-month retention rate of 95.6%. WH targets a retention rate of 96%, meaningfully contributing to ongoing net room growth. For 1Q24, net room growth came in strong at 4%, and Fitch expects this momentum to continue in the near term.
Pipeline Supports Market Position: WH is the largest franchisor by hotels worldwide, supported by an extensive development pipeline of 243,000 rooms, representing 28% of the current portfolio as of 1Q'24. About 58% of the pipeline is composed of international rooms across 60 countries including eight countries without a pre-existing presence. Midscale and above tiers represent 69% of the pipeline, which highlights WH's focus on diversifying across high margin franchise segments.
In an effort to expand WH has increased capital outlay with development advance notes. These notes are made to owners and amortized over the life of the franchise agreement and oftentimes forgiven. Fitch views the notes as a capital commitment to attract owners and grow room count. The notes balance sheet presence has increased considerably at
Near-Term RevPAR Slowdown: Fitch expects a slowdown in year over year RevPAR growth due to a tougher comp period as well as demand pressure in lower price point hotels. During the full year 2023, global RevPAR grew at 3%, driven by international performance whereas US RevPAR was down 1% year over year. This trend followed suit in 1Q 2024 with global RevPAR up 1%, the drag largely from
WH's offerings are primarily budget focused within the select-service segment enabling flexibility for cost fluctuations from an operating standpoint. However, the cost conscious traveler is also more sensitive to cost pressures as it represents a larger share of total spend compared to higher-end travelers. Over the past couple of years, consumers have demonstrated a willingness to pay up for experiences, but in light of various economic factors the rate of increase may not be sustainable. This is in line with Fitch's RevPAR expectations that occupancy levels are not maintained at higher rates as the core customer base faces heighted cost pressures. WH does however have the opportunity to meaningfully increase ancillary revenue sources as demonstrated in 1Q24.
Capital Return Prioritized: Fitch expects WH to prioritize shareholder return through repurchases and dividends during the full year 2024. Given management's sentiment around stock undervaluation, there is high incentive to buy back shares to create value for investors. During 1Q 2024, the company repurchased
Cyclical Cash Flow Profile: The cyclical nature of the hotel industry is a credit concern. Hotels re-price their inventory daily and, therefore, have the shortest lease terms and least stable cash flows within commercial real estate. Economic cycles, as well as exogenous events (i.e. acts of terrorism, pandemics), have historically caused material declines in revenues and profitability for hotels.
Select-service hotels have historically been less volatile during a downturn as compared to full-service hotels. However, customers are oftentimes more sensitive to economic pressures at the lower end of the chainscale as it represents a larger share of total income. From a supply standpoint, there is comparatively low barriers for new supply given low capital cost, real estate availability and strong demand.
Derivation Summary
The rating reflects WH's diversification across brands, geographies and offerings relative to peers. As of 1Q'24, the company's system size of 876,300, development pipeline of 243,000 and loyalty program of 108 million members trails behind industry leaders Hilton (not rated) and Marriott (not rated). These industry leaders have system sizes of over 1 million, development pipelines roughly double that of WH and loyalty rewards programs with 150+ million members. However, WH tracks ahead of Hyatt ('BBB-'/Stable) with nearly double total room count and just under twice the pipeline size. WH is predominately exposed to lower chain scales while Hilton and Marriott offer brands across most chain scales and Hyatt focuses on high end offerings.
WH is smaller in terms of top line revenue as compared to its lodging peers, but it takes the lead in strong Fitch calculated operating EBITDAR margins at 78%. The asset light business structure is 100% franchised as compared to lodging peers Hyatt, Hilton, Marriott which are roughly 96%, 99% and 98% managed and franchised by room count respectively. The focus on franchise revenue streams in the select-service space specifically allows for lower operating costs and lower volatility in future cash flow.
WH's stated financial policy of 3x-4x net leverage is wider in range relative to Marriott (3x-3.5x gross leverage), Hilton (3x-3.5x net leverage) and Hyatt (3x-3.5x net leverage). Similar to peer Hilton, Fitch expects WH to use capital return as a means to manage leverage in lieu of accretive deals.
Key Assumptions
Base interest rates applicable to the company's outstanding variable rate debt obligations reflects current SOFR forward curve;
RevPAR growth of 2% through forecast period;
EBITDA margins at roughly 76% through forecast period (with EBITDA adjustments for cost reimbursements and marketing, reservation and loyalty line items);
Annual net room growth of 4% through forecast period;
Capex at 4-5% of revenues through forecast period;
Dividend Payout of 39% in 2024, 35% in 2025, 33% in 2026, and 30% in 2027;
Annual share repurchases of roughly
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Fitch's expectations of EBITDAR Leverage sustaining below 3.25x;
Sustained EBITDAR margin strength;
Company stated leverage policy tightened and exhibit clear commitment;
Demonstrate lower cash flow volatility through the cycle relative to peers;
Enhanced scale and portfolio diversification in terms of geography as well as segment offerings.
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Fitch's expectations for EBITDAR leverage sustaining above 4.25x, potentially through a change in the company's long-term financial policies;
A deterioration in WH's brand and franchise strength resulting in below average performance, loss of management contracts, and/or system room loss;
Weakening of operating EBITDAR margins due to unsustainable cost structure initiatives;
Material reduction in liquidity challenging refinancing capabilities leading to higher cost of debt or increased reliance on secured borrowings.
Liquidity and Debt Structure
Solid Liquidity, No-Near Term Maturities: As of
Fitch expects WH to use its balance sheet and excess free cash flow to return capital to shareholders through share repurchases and dividends. These cash outlays represent a strong means in managing WH's leverage position unless acquisition opportunities arise.
Issuer Profile
WH is the world's largest hotel franchising company by number of hotels, with approximately 9,200 affiliated hotels across 95 countries. Its network of over 876,000 rooms commands a leading presence in the economy and midscale segments of the lodging industry.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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