Wyndham Hotels Predicts U.S. Franchising Growth Supercycle

With market turbulence in the short term, it’s easy to overlook factors that signal long-term optimism. Wyndham Hotels & Resorts executives on Wednesday touted a surge in hotel investors who believe the United States is entering a growth “supercycle” that could last a decade.

“Our franchisees feel they are starting a cycle that will hopefully last another 10 years,” Chairman and CEO Geoffrey Ballotti said on a conference call with analysts. “Their leverage is down. Their balance sheets are in much better shape.

The term “supercycle” refers to above-average growth that defies the severity of a typical economic boom and bust cycle. Historically easy to obtain financing at low interest rates, a surge in public spending on infrastructure and an expected relative weakness in alternative real estate assets could push the franchising of the roadside economy and midscale hotels towards multi-year expansion.

War, supply chain bottlenecks, labor pressures and interest rates are all factors that have some short-term travel executives worried.

But Wyndham, the largest hotel franchisor in the United States and the world, is focused on long-term causes for optimism for its brands, which include Ramada and Super 8.

“Most of our franchisees believe there has never been a better time to build a select service hotel than today,” Ballotti said. The term “selected service” refers to branded hotels that do not offer full-service amenities, but are also not stripped down.

A Few Factors Fuel Franchise Growth

Certain hotel types look more promising than alternative investments, such as commercial real estate and retail construction – both under pressure from uncertainty over long-term trends in workplace demand and malls due to an increase in online alternatives.

KING [return on investment forecasts] in the hotel space are still very attractive compared to other real estate asset classes,” said Michele Allen, Chief Financial Officer.

Government spending is another factor likely to support long-term customer demand for roadside hotels, which is attracting interest from franchisees. The recent passage by Congress of a US infrastructure bill provides for approximately $550 billion in new spending on “core infrastructure projects” over the next five years. Companies that commit to building roads, bridges, levees, dams, ports and waterways will need housing in the years to come, presenting an opportunity for hoteliers.

So-called infrastructure accounts accounted for more than half of newly negotiated commercial contracts Wyndham’s sales team signed in the first quarter.

Interest in new construction

Investors interested in hotel franchising can obviously choose to buy properties or build new ones, and current market conditions often favor new construction.

“The rule of buy versus build is to buy hotels when they’re trading below replacement cost, then build when they’re trading above replacement costs,” Allen said. . “Today, hotels are trading at 2019 levels or above in many markets, especially in the chain scales to which we have the most exposure, which would steer owners toward construction.”

Construction costs are rising and loan interest rates may also rise soon. The calculation therefore depends on the investor. If a potential franchisee has capital they want to deploy immediately, they will look to buying an existing property. If they are opportunistic and willing to wait, they will build.

A bullish sign cited by Wyndham executives was that its new construction activity had increased for its brands, including Microtel and its new extended-stay concept.

Wyndham said 79% of its pipeline of 204,000 rooms in signed projects are new construction. Digging has begun for a third of these new properties. Microtel Moda is its most popular brand for investors looking to build new properties. Wyndham’s pipeline of projects contains nearly 10,000 rooms from its new Altra brands, Registry Collection Hotels and an as-yet-unknown extended-stay brand.

The figures supporting the new construction

For a typical new construction project for a 70-room budget hotel this year, Wyndham estimated the franchise’s average initial investment, based on average land costs, at $1.575 million. He projected that annual revenue would be $1,354 million in the first year.

Wyndham’s hypothetical scenario implies that it may take an owner as little as five years to recoup their investment, assuming resilience and overall stability of the factors at play.

In the first year, Wyndham incurs operating expenses of $745,000 on average. Assuming an interest rate of 5%, the cost of borrowing would be $184,000. Wyndham charges franchisees a fee as a percentage of revenue, which in this example would be 20%, or $115,000. Thus, the hotel would end up with a cash return of $310,000, or about 20% of the initial investment.

A risk over the next five years is a possible recession. Inflation in operating costs could outpace the decline in travel demand and revenue, thus delaying the recovery of invested capital.

Profitable quarter

Windham reported that it had a particularly profitable first quarter. It generated $106 million in net revenue on $371 million in revenue.

Net profit was five times higher than the first quarter of 2019 before the pandemic and four times higher than the first quarter of 2021. Adjusted profit before interest, taxes, depreciation and amortization was $159 million, 64% higher than the first quarter. quarter of 2021 and 41% more than in the first quarter of 2019.

Wyndham generated nearly all of the royalty profits from stays at franchise hotels. Franchisees pay royalties and marketing and booking fees to the brand. Fees are based on a percentage of gross room revenue.

Total revenue was up 22% year-over-year, reflecting an increase in travel as pandemic-related restrictions eased.

At least in the short term, several factors could support strong revenue and profitability for at least the coming months.

“The trend is that our franchisees feel that summer 22 could replace summer 2021 as the best ever,” Ballotti said.

Its sales teams rely on enthusiasm to arouse the interest of franchisees.

“We had the biggest team we’ve ever had at the Asian American Hotel Owners Association meeting in Baltimore, where we had the busiest booth we’ve ever had,” Ballotti said.