Wyndham Hotels & Resorts Inc

NYSE:WH

Earnings Call Analysis

Strong earnings and strategic growth initiatives bolster long-term outlook

In the second quarter, the company reported a 12% rise in adjusted EPS and a 6% increase in adjusted EBITDA. The firm achieved a 4% growth in its hotel system, including significant gains in the U.S. and international markets, such as a 16% rise in domestic room openings. While global RevPAR only showed a modest improvement, the outlook for 2024 has been adjusted to flat year-over-year growth. However, fee-related and other revenues are projected to be between $1.41 billion and $1.43 billion. Despite a challenging RevPAR environment, the company remains on track to achieve EBITDA targets, showcasing the resilience of its business model.

Strong Financial Performance

In the second quarter, the company demonstrated solid financial performance, with fee-related and other revenues reaching $366 million and adjusted EBITDA at $178 million. This represented a 6% year-over-year growth in adjusted EBITDA and a 12% increase in adjusted diluted EPS to $1.13. Adjusted free cash flow stood at $69 million for Q2 and $171 million year-to-date, with a free cash flow conversion rate from adjusted EBITDA of 54%【6:0†source】【6:1†source】.

Revenue and Margins

Fee-related and other revenues grew by $8 million year-over-year, fueled by increases in royalties, franchise fees, marketing revenues, and ancillary fee streams. Adjusted EBITDA margin improved by 350 basis points to 85% this quarter due to higher fee-related revenues, disciplined cost management, and an insurance recovery【6:0†source】【6:1†source】.

Shareholder Returns

The company returned $162 million to shareholders through $131 million in share repurchases and $31 million in common stock dividends. Year-to-date, $188 million was repurchased for 2.6 million shares. These activities underscore the company's commitment to rewarding its shareholders, with nearly 45% of its market cap returned since 2019【6:0†source】【6:1†source】【6:7†source】.

Global Expansion

The second quarter saw the opening of 18,000 rooms, a 16% increase in domestic openings compared to last year and a sequential increase in net rooms. The global development pipeline reached a record 245,000 rooms, reflecting the company's successful expansion strategies. International growth was driven by a 12% year-over-year increase in net rooms in the EMEA region and an 11% increase in Latin America【6:3†source】【6:6†source】【6:8†source】.

Outlook and Future Projections

The company updated its full-year 2024 growth outlook for RevPAR to be flat year-over-year. Consequently, the outlook for fee-related and other revenues was adjusted to $1.41 billion to $1.43 billion. Despite this, the outlook for net room growth remains at 3% to 4%, and adjusted EBITDA is projected to be between $690 million to $700 million. The adjusted diluted EPS projection increased slightly to a range of $4.20 to $4.32, considering the share repurchase activity【6:1†source】【6:9†source】.

Technological Advancements

The company continues to enhance its technological offerings. The rollout of the Wyndham Connect guest engagement platform is designed to drive increased ancillary revenue for hotels by enhancing guest experiences through AI-driven large language models. Tools like smart mobile check-in and AI-generated guest messaging are helping franchisees operate more efficiently and increase guest satisfaction【6:8†source】【6:14†source】.

Operational Efficiency

The company has been disciplined with cost management, reprioritizing discretionary investment spend to align with the expected RevPAR growth. This includes leveraging technology to boost non-RevPAR revenue and realizing benefits in the G&A line item. Together, these efforts have contributed to margin expansion and operational efficiency, ensuring a robust EBITDA performance despite RevPAR challenges【6:10†source】【6:13†source】.

Market Dynamics

Domestically, the company saw positive trends in RevPAR growth, with a 500 basis point sequential improvement from the first to the second quarter. Certain markets such as Texas and New Mexico showed mid-single-digit growth in oil and gas sector demand, while states important for natural gas production, like Louisiana and North Dakota, experienced double-digit growth in RevPAR. This highlights the company’s ability to capitalize on diverse market dynamics【6:16†source】【6:17†source】.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, everyone, and welcome to the Wyndham Hotels & Resorts Second Quarter 2024 Earnings Conference Call.

[Operator Instructions]

Now at this time, I would like to turn the call over to Mr. Matt Capuzzi, Senior Vice President of Investor Relations. Please go ahead, sir.

[Matt Capuzzi, executive]

Thank you, operator. Good morning, and thank you for joining us. With me today are Geoff Ballotti, our CEO; and Michele Allen, our CFO and Head of Strategy.

Before we get started, I want to remind you that our remarks today will contain forward-looking statements. These statements are subject to risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission and any subsequent reports filed with the SEC.

We'll also be referring to a number of non-GAAP measures. Corresponding GAAP measures and a reconciliation of non-GAAP measures to GAAP metrics are provided in our earnings release, which is available on our Investor Relations website at investor.wyndhamhotels.com. We are providing certain measures discussing future impacts on a non-GAAP basis only because without unreasonable efforts, we are unable to provide the comparable GAAP metric.

In addition, last evening, we posted an investor presentation containing supplemental information on our Investor Relations website. We may continue to provide supplemental information on our website and on our social media channels in the future.

Accordingly, we encourage investors to monitor our website and our social media channels in addition to our press releases, filings submitted with the SEC and any public conference calls or webcast.

With that, I will turn the call over to Geoff.

[Geoffrey Ballotti, executive]

Thanks, Matt. Good morning, everyone, and thank you for joining us today.

As you saw with our release last night, we reported strong earnings this quarter with comparable adjusted EBITDA and EPS growth of 6% and 12%, respectively. We grew our system 4%, saw strong increases in both our U.S. and international royalty rates and meaningful growth in our ancillary fee streams. Year-to-date, we've generated over $170 million of adjusted free cash flow and we've returned over $250 million to our shareholders.

On the development front, we opened over 18,000 rooms in the quarter, 16% more room openings domestically than last year and continued to improve our franchisee retention rate. Importantly, our franchise sales team here in the United States signed an impressive 33% more development deals in the quarter than they did last year, which helped grow our global development pipeline for the 16th consecutive quarter by 740 basis points year-over-year to a record 245,000 rooms.

Domestically, net rooms grew sequentially and versus prior year driven by a 3% net room growth in our midscale and above brands, with new additions like the award-winning Oceanfront Semiahmoo Golf & Spa resort in the Pacific Northwest, which joins our trademark by Wyndham Collection. And we opened our first ECHO Suites in Spartanburg, South Carolina, currently the 12th fastest-growing county in America that has recruited 80 economic development projects over the past 3 years, totaling more than $5 billion in capital investment and creating nearly 6,000 new jobs.

Our sales teams have been attracting and welcoming local infrastructure workers who have been checking into the hotel, with up to 7-month lengths of stay. Internationally, we increased net room sequentially and by 8% versus prior year. Our EMEA team, which opened over 20% more rooms than they did in the second quarter of '23, once again, grew net room sequentially and by 12% versus prior year, adding important new La Quinta in the United Arab Emirates and in Turkey, along with several stunning new destinations that our Wyndham Reward members will want to vacation at like the luxurious Dolce by Wyndham Hotel & Spa and Versailles France; and the Dolce by Wyndham Cesme Turkey on the shores of the Aegean Sea.

Our EMEA development pipeline also grew year-over-year by over 6% and now represents an average RevPAR that is 10% higher than our current portfolio. Our Latin America team grew net rooms 6% sequentially and by 11% versus prior year, adding 9 resorts to our trademark and Ramada brands across Mexico, Panama and the Caribbean, hotels which represent an 85% fee PAR premium to the region.

Our development pipeline increased by 16% across Latin America and the Caribbean, representing an average RevPAR that is 7% higher than our current portfolio. Our Southeast Asia and Pacific Rim region, which increased net rooms by 3% sequentially and by 11% versus last year, entered several new markets with hotels like the luxurious 850-room Wyndham Majestic Genting Highlands in Malaysia.

And in China, our team grew net rooms by 3% sequentially and by 12% versus prior year on a direct franchising basis with some beautiful new openings, including our 20th, 21st and 22nd Microtel hotels, which developers are choosing for both newbuild and conversion opportunities.

New signing activity was strong across the country, with a team awarding another 34 new direct franchise development agreements, growing our pipeline to nearly 400 hotels, a 9% increase over prior year and importantly, representing a pipeline with nearly double the fee PAR of our current China system. U.S. RevPAR grew 30 basis points to prior year, which was an improvement of over 500 basis points sequentially from Q1 to Q2. Domestic occupancy finished a point ahead of prior year, indicating improving demand trends for the peak vacation season.

That said, many of you have inquired about U.S. RevPAR performance in our lower chain scale brands. We believe, along with many in the industry, that the current RevPAR environment is transitory in nature. Historically, since 2000 and through 4 lodging cycles, U.S. RevPAR for the select service segments, which makes up the majority of our domestic system has grown at a CAGR of 2.6%, despite the occasional downturn.

Last month, Smith Travel reaffirmed this perspective in their latest outlook, projecting 2.7% U.S. RevPAR growth in 2025 for the select service segments. We've been through similar situations before, and we're confident that the select service RevPAR will bounce back as it always has, historically.

International RevPAR increased 7% to prior year in constant currency and accelerated 250 basis points from Q1 to Q2 when compared to 2019. Occupancy internationally remains a tailwind for the remainder of the year and is now 13% behind where it was in 2019. EMEA and Latin America RevPAR were both especially strong this quarter, increasing year-over-year by 15% and by 37%, respectively, driven by strength in Greece, Spain, Turkey, the Middle East, and across the Caribbean and the start of what looks to be a very strong summer across the European continent. Our franchisees are the foundation that enable Wyndham to deliver elevated experiences and service to our everyday travelers.

To further enhance the value our brands provide, we're making travel to our hotels more seamless and more connected than ever. Earlier this month, we announced the rollout of our new Wyndham Connect, guest engagement platform, to help our franchisees curate personalized experiences for guests and drive increased ancillary revenue for our hotels.

Nearly 2,000 hotels across North America are already embracing these best-in-class mobile-centric tools that leverage one of the most substantial AI-driven large language models in the industry to support franchisees bottom lines while increasing guest satisfaction.

Smart mobile check-in is speeding up the check-in process for both our guests and front desk agents, helping to verify guest information in advance and protecting owners from expensive chargebacks and reducing overall labor needs. Franchisees are driving additional ancillary revenues by effortlessly upselling early check-ins and late checkouts to guests, by upselling personalized room upgrades to higher floors to corner rooms into better views and preselling various snacks, food, beverage and other amenities to be placed in room before guests arrive.

Our hotels are seeing upwards of $1,400 monthly in monetization opportunity on early check-in and late checkout alone. And our new AI-generated messaging that matters is allowing franchisees to communicate with and respond to guests via text message with ease and speed before, during and after their stays.

We're bringing technology typically offered in luxury and upscale segments to select service hotels, helping franchisees manage their businesses more efficiently and creating guest experiences that make stays more meaningful, resulting in happier guests, increased repeat business and more ancillary revenue for our franchisees and consequently, Wyndham.

In closing, we're extremely proud of the results we generated this quarter and our ability to deliver on the key pillars of our long-term growth strategy, including strong system and development pipeline growth, royalty rate expansion, increased ancillary fees in the beginning of infrastructure capture, including the opening of our first of many ECHO Suites extended stay hotels this year.

As we enter our sixth year as a public company that franchises more hotels than any other, we're in a stronger position than ever before. Our ability to open more hotels than anyone else in the world for the past 2 years, highlights the strength of Wyndham's differentiated brands and the strength of our franchise sales, marketing, technology and operating leadership across the 95 countries in which we operate.

We're confident in our growth strategy and in our ability to create substantial value both in the short term and the long term. As always, we want to thank our dedicated team members around the world who continue to make Wyndham Hotels & Resorts such a great place to work.

And with that, I'll now turn the call over to Michele for more details on our financial performance. Michele?

[Michele Allen, executive]

Thanks, Geoff, and good morning, everyone. I'll begin my remarks today with a detailed review of our second quarter results. I'll then review our cash flows and balance sheet, followed by our outlook. Before we get started, let me briefly remind everyone that the comparability of our financial results is impacted by the timing of our marketing front spend.

In the second quarter of this year, marketing fund expenses exceeded revenues by $5 million as expected compared to expenses exceeding revenues by $15 million in the second quarter of last year. To enhance transparency and provide a better understanding of the results of our ongoing operations, I will be highlighting our results on a comparable basis, which neutralizes the marketing fund impact.

In the second quarter, we generated $366 million of fee-related and other revenues and $178 million of adjusted EBITDA. Fee related and other revenues increased $8 million year-over-year, reflecting increases in royalties and franchise fees, marketing revenues and ancillary fee streams.

Royalties and franchise fees as well as marketing revenues reflect our global system growth along with increases in our domestic, international and global royalty rates. These gains were partially offset by the 1% decline in global RevPAR. The increase in ancillary revenues was driven by higher credit card and partnership fees as well as increased license fees as we harness the power of our Wyndham Rewards loyalty base.

This growth continues to trend from the first quarter where we saw these fee streams meaningfully outperform industry RevPAR level. Adjusted EBITDA grew 6% on a comparable basis, primarily reflecting higher fee-related and other revenues, disciplined cost management given the recent RevPAR environment and an insurance recovery.

As a result, our adjusted EBITDA margin improved 350 basis points to 85% this quarter. Second quarter adjusted diluted EPS was $1.13, up 12% on a comparable basis, reflecting our adjusted EBITDA growth as well as benefits from our share repurchase activity and a lower effective tax rate, which were partially offset by higher interest expense.

Adjusted free cash flow was $69 million from second quarter and $171 million year-to-date with a conversion rate from adjusted EBITDA of 54%. At our current trading levels, our free cash flow yield of over 6% is the highest in the lodging sector. Development advanced spend was $33 million in the second quarter, bringing our year-to-date spend to $64 million.

We continue to see increased demand for our brands with global openings up 11% so far this year, and we're thrilled to be able to deploy some of our excess cash to secure these long-term agreements, the majority of which as Geoff highlighted, are in the higher fee PAR markets and/or segment. We returned $162 million to our shareholders during the second quarter through $131 million of share repurchases and $31 million of common stock dividends.

At a stock price that we continue to be deem well below our intrinsic value, we see the option to repurchase our shares to be even more compelling. And as a result, we capitalize on this opportunity and repurchase nearly 2.5x the amount we bought back in the first quarter.

Year-to-date, we have repurchased 2.6 million shares of our stock for $188 million. And from 2019 through the end of the second quarter, we returned nearly 45% of our market cap to shareholders, which is best-in-class among lodging C-Corps and significantly above our closest competitor.

We closed the quarter with approximately $820 million in total liquidity and our net leverage ratio of 3.5x was at the midpoint of our target range. At this leverage level, which is where we expect to end the year, we have approximately $500 million of capital available for investment in the business or share repurchases this year, only roughly half of which has been allocated through the end of the second quarter.

This quarter, we successfully repriced our existing Term Loan B while also upsizing the facility by $400 million. The new term loan B of $1.5 billion matures in May 2030 and carries an interest rate of SOFR plus 1.75%, which is 60 basis points lower than the prior facility. The refinancing generated annual interest savings of approximately $6 million, which will be offset by incremental interest on the upsizing. At the end of the second quarter, approximately 2/3 of our total debt was fixed and 1/3 was variable.

Now turning to outlook. While global RevPAR improved sequentially, the second quarter trends, as Geoff mentioned, represented a more gradual return to year-over-year growth than previously anticipated. As a result, we're updating our full year 2024 growth outlook for RevPAR to be essentially flat year-over-year.

Consequently, our outlook for fee-related and other revenues is now $1.41 billion to $1.43 billion, down from our prior outlook of $1.43 billion to $1.46 billion. This decline is roughly split evenly between royalties and franchise fees and marketing reservation and loyalty revenues, the latter of which has no impact on adjusted EBITDA.

There are no changes to our outlook for net room growth, which remains at 3% to 4% or adjusted EBITDA, which remains at $690 million to $700 million and implies a year-over-year improvement in our EBITDA margin of approximately 130 basis points at the midpoint of our outlook.

We're revising our adjusted net income outlook to $338 million to $348 million to reflect an increase in interest expense due to the upsizing of our Term Loan B net of the savings from the spread reduction. We are, however, increasing our adjusted diluted EPS projection by $0.02 to a range of $4.20 to $4.32 to account for our second quarter share repurchase activity, partially offset by the slight decline in our adjusted net income outlook.

This outlook is based on a lower diluted share count of 80.6 million shares, and as usual, assumes no additional share repurchases or incremental interest expense associated with any potential borrowing activity to maintain our leverage at 3.5x.

There are no changes to our expectations for adjusted free cash flow conversion, which is still expected to be approximately 60%. However, we are increasing our expectation for development advance spend by approximately $20 million to $110 million to account for our continued success in attracting high-value deals to the system, particularly in higher fee PAR markets and segments.

There are also no changes to our expectations for the marketing fund. Despite the RevPAR reduction, we still expect fund revenues will outpace fund expenses by approximately $18 million in the back half of the year with about $10 million per quarter, which as planned, will offset the first half overspend.

In closing, the resilience and highly cash-generative nature of our business model continues to shine. Despite a softer RevPAR environment this year, we remain squarely on track to deliver our adjusted EBITDA target. Our ability to grow our net room count, our ancillary revenue streams and our royalty rates propel our business to adjusted EBITDA growth of 6% to 8%, even in a softer domestic RevPAR environment than we initially expected.

In the presentation we posted last evening, you will see that we also reaffirmed our multiyear outlook through 2026, including an adjusted EBITDA CAGR of 7% to 10% and a potential adjusted EPS CAGR in the mid-teens after capital deployment. We view these levels of organic performance as best-in-class for our industry, and we are committed to continuing to operate our business in a manner that significantly enhances shareholder value.

With that, Geoff and I would be happy to take your questions. Operator?

[Operator]

[Operator Instructions]

We'll go first today to Joe Greff with JPMorgan.

[Joseph Greff, analyst]

First question is on rooms growth. Second quarter in a row of about 4% year-over-year net rooms growth and given the continued growth in the pipeline, is this the floor for rooms growth? I mean -- and if the answer is no, why isn't it? And then with respect to the increase in development advancement notes and just increasing developer capital support, is that for new deals? Or is that for existing pipelines and trying to get them out of the pipeline into openings?

[Geoffrey Ballotti, executive]

Thanks, Joe. I'll let Michele talk about developer advanced notes. And no, it's not the floor. We are seeing lots of deals out there on the horizon, which is what has us excited and which is why Michele has taken the guidance up by $20 million on the key money. We saw a phenomenal openings, execution and pipeline growth in the quarter. I think owners to your last 2 calls, first questions are much more receptive and sitting down with us now that the uncertainty is behind us.

Next week, our 2 Senior Vice Presidents, Jared Meabon and David Wilner and our Chief Development Officer, Amit Tripathi, and I have several development meetings with prospects across the country, deals that are not yet signed that I'm not sure they'd be sitting down with us a quarter or 2 ago.

But let's start with openings. Our second quarter 18,000 rooms was the best Q2 openings that we've had on record and 75% of those openings, as we said in the script, were in the midscale and above segments, which we're really pleased by. It was really driven by strong domestic openings. We had 7,000 rooms open up. It was up 16% to last year, solid, solid conversion openings with good growth across the board, new conversions coming into the system. And international openings came in around 11,000 rooms and are running 8% year-over-year. I think why 4% is not the floor. We've always said, longer term, we're 3% to 5% is what's happening on the execution front.

We are so incredibly proud of our franchise sales teams and our leadership teams around the world. We've talked a lot about year-to-date transaction volumes being down, and those are a big driver, Joe. In terms of conversions for us, they're still 25% below where they were last year. They're still below where they were by about the same amount back in 2019.

But despite all of that, we executed 96 deals domestically, which was 30% more than last year. And our new construction prototype brands are continuing to sell well. And we have 84 deals internationally that year-to-date are up about 11%. So this was the 16th consecutive quarter of sequential pipeline growth. We're up to a record 245,000 rooms across 60 countries, and we are very optimistic about what net room growth looks like going forward. But Michele, maybe you'll touch upon the [ deal ] question.

[Michele Allen, executive]

Sure. Happy to. I think, Joe, you mentioned is it for deals that came into the system? Or is it for an increase in the pipeline and the increase of $20 million really represents pipeline deals? There are a number of investment opportunities that have recently presented themselves in higher RevPAR markets that we're really excited about, and we look forward to sharing specifics as these hotels come into the system. We've always said our first priority for free cash flow is to invest in the business and the fact that we're seeing incremental demand for our brands, especially in top markets is something we view very positively.

[Joseph Greff, analyst]

Great. And then my follow-up question relates, Michele, to your updated RevPAR outlook. Specifically, in the second half, what's now assumed for the U.S., specifically the economy to mid-scale and then China? And then maybe, again, more specifically, can you bridge the reduction in RevPAR growth versus the prior outlook, yet you're keeping, maintaining the EBITDA range. How much of this is incremental ancillary fees? How much of it is a prior cushion, prior conservatism between RevPAR growth and EBITDA generation a quarter ago? And that's all for me.

[Michele Allen, executive]

Yes, sure. So a lot in that question to unpack. I'll take the RevPAR section first. In the U.S., we are expecting similar trends to what we're seeing now in July with maybe another point coming from the infrastructure ramp up. That is inclusive of economy getting to flat and mid-scale would be up about 1 to 2 points.

In China, we are also expecting some modest improvement, which is consistent with the last 5 weeks of performance. Second quarter was the toughest comp. So we see a couple of hundred basis points improvement there in the second half. And then the rest of international, I would say, is pretty similar to what we saw in Q2.

With respect to maintaining our EBITDA guide on the RevPAR reduction, there are really 3 drivers here, Joe, all of which add up to a meaningful amount. First, our business is just getting more efficient, particularly on the technology side. We've integrated our commercial organization. We're leveraging third-party partners and new next-gen type solution. So this is showing up really in 2 places. It's boosting our non-RevPAR revenue, so that's contributing more to our EBITDA. And then we're also seeing some benefits in the G&A line item. So there's real margin expansion here.

Next, we've been disciplined with our costs initially in our budget. We match discretionary investment spend with expected RevPAR growth, and we were able to reprioritize those investments when we saw the RevPAR growth not materialize as we had expected. And so that helped a few million. And then on top of that, we're getting an extra boost from the insurance recovery. So when we put it all together...

[Joseph Greff, analyst]

[indiscernible] insurance recovery in the second half?

[Michele Allen, executive]

Sure. Yes, it's about $4 million.

[Operator]

We'll go next now to David Katz with Jefferies.

[David Katz, analyst]

Just looking through and frankly, appreciating some of the pages in the deck this morning with respect to the long-term algorithm and thinking about it in the context of sort of fees per room, right, and the degree to which your sort of business drivers as you have them labeled are growing your fees per room and then adding in the ancillary growth. Can you just help us just understand or fully digest the degree to which fees per room in the core business are growing? And I think the ancillary growth is pretty clear that it's an 8% CAGR. But help us look at those 2 drivers of the business for a minute, if you would.

[Michele Allen, executive]

Sure. With respect to ancillary fees, we are -- our long-term growth model is projecting fee growth in about 8%, and that we are currently tracking at 6% in 2024 and expecting to get up to about 7% on a full year basis, and that includes a number of different initiatives.

On the royalty rate, we've seen a 5 basis point improvement in the U.S. and international on average. And so we are expecting to see continued improvement on that side of the business. Over the long term, it should accumulate to about 15 basis points and in 2026, we think that would generate an incremental $15 million in EBITDA.

[David Katz, analyst]

Right. So part of what I'm getting at is, as we progress through this -- these next few years to 2026. It seems as though the ancillary fees, that growth rate is actually accelerating, right? And so when we get to that 2026, it will be higher than 8%, [ it just ] averages because of the CAGR, right? Is the acceleration similar, right, when you think about sort of the core business, right? Obviously, it's going to depend on RevPAR. But is your assumption, right, that the core business fees are going to accelerate also at the same rate? Or is one growing faster than the other?

[Michele Allen, executive]

Well, the ancillary fees are definitely growing faster and they do compound as we get through the plan because different initiatives start to ramp and have a larger impact. We also see that kind of same dynamic with royalty fees, right? They compound every year. So as we increase in 1 year, then we were just building increases, on top of that. So that's compounding. And then we are also expecting some net room growth acceleration. So there will be increased growth over the plan in the core business as well as in the ancillary fees. And then...

[Operator]

We go next now to Patrick Scholes of Truist.

[Charles Scholes, analyst]

A little bit more questions on that Slide 10, talking about the increases in royalty rate. I think it's very interesting. Historically, royalty rates was not something you really ever discussed and now it seems to be much more front and center. A little bit more color, please, on what's driving that. Is that going to be driven primarily by new brands entering such as ECHO that have an above-average royalty rate? Or do you see yourselves on contract or combination of contract renewals raising royalty rates on legacy brands? A little bit more color to that there.

[Michele Allen, executive]

Sure. The royalty rate improvement we're seeing today and that we're seeing in the pipeline and still expect to see over the planned period really reflects the great work our franchise sales and development teams, bringing in higher fee deals for our brands, both here domestically and around the world as well. As we said for the last few quarters, our goal is to make sure that we're signing deals that are accretive to the region or to the brand average royalty rate and the growth we've seen this quarter and really the growth we've seen since 2019 on that slide is a testament to that effort. So you should expect to continue to see improvement in new deals being signed.

[Operator]

We'll go next now to Steve Pizzella with Deutsche Bank.

[Steven Pizzella, analyst]

You've noted the value you see in the stock and potential returns from the incremental key money. What do you need to see to go towards the high end of the target leverage?

[Michele Allen, executive]

So that is really a Board decision, I would say. And at this point, we are targeting the 3.5x leverage for the end of the year, which does give us [ some ] amount of capital to either repurchase shares or to invest further in the business. If we were looking at a sizable M&A, then that is something we've always said we're comfortable going above the 3.5x so long as we had a plan to get back within range within 12 to 18 months.

Certainly, we see the stock as a compelling investment opportunity, given where it's been trading. But against this macro backdrop, 3.5x is a good leverage target, absent any really compelling investment opportunity.

[Steven Pizzella, analyst]

Okay. And then you continue to note the improvement in the retention rates, which has been pretty nice as we were compared to historicals. What's driving that right now? And how high do you think that can get?

[Geoffrey Ballotti, executive]

Yes. Steve, we've always said that our longer-term goal is to get to 96%, and we're moving that way. We were at 93-ish when we spun. We moved it to 95%, 95.5%. And I think as we grow our system and we manage our quality and portfolio, that number can certainly continue to go up.

On a last 12-month basis, which is the way we look at it, retention has improved 50 basis points globally. We had some good movement internationally. I think we can continue to make progress both domestically and internationally. And what's really exciting about the international growth is the ability to successfully swap out those lower valuation master license rooms in countries with lower royalties and replace them with direct franchise rooms that are coming in at 3x the license fee. So we're happy with our progress. We're going to continue to focus on that, and we think it could continue to go higher.

[Operator]

We'll go next now to Brandt Montour of Barclays.

[Brandt Montour, analyst]

I just want to circle back on the second half guidance and outlook and Michele or Jeff, maybe if you could just put a finer point on -- Michele, your comments on what you're implying for U.S. RevPAR growth, I thought it was really helpful the comment you gave. I think it's really tough for us with the -- looking at this year on a 1-year basis because comps get much easier. We can kind of make our own assumptions there. But if you could just maybe put a qualitative point on there, do you -- are you baking in any sort of rebound at all? Or is there some conservatism in terms of the U.S. consumer behavior implied there?

[Michele Allen, executive]

We are expecting some occupancy improvement in the U.S., consistent with what we're now seeing in July. And then we are expecting another point on top of that to reflect the continued ramping of infrastructure spend. So in the second half, the U.S., I think, is expected to be and our guide is expected to be up 1%. And that improvement from the first half is really driven by occupancy expectations.

[Brandt Montour, analyst]

That's really helpful. And then just a follow-up on the ECHO pipeline. It's been a few quarters now since some of your larger peers rolled out extended stay brands. And it's not necessarily -- maybe you'll tell me they're not directly competing with, which is an answer. But I'm just curious if you're seeing any incremental hesitation at the sort of franchisee signing table with developers that might be looking at those brands? Or are the owners just different and you're not seeing any competitive pressure there?

[Geoffrey Ballotti, executive]

We are not in that -- this is an extended stay economy, new construction product, which there's not much competition for out there today in terms of what these developers are looking for. We have executed this quarter, significant signings and progress for our new ECHO Suites and markets like Louisville, both at the airport and Downtown; Clarksville, Indiana; Lexington, Kentucky; Frankfort, Kentucky.

So we are beginning to see that signing pick back up. And as we reported from the first page of our IP, we opened the first Spartanburg in South Carolina. And we had not only the entire ECHO development council with us, we had prospective new developers in attendance. And they were very, very happy with the finished product. Most of those in attendance were developers who have either broken ground or soon will be breaking ground.

They're developers who've built hundreds of competitive economy, mid-scale, upper mid-scale extended-stay products, and they were absolutely [ very ] thrilled with the finished product. The commentary that was coming back from this new build, it not only looks like the prototype, but looks better than the prototype. It is something that they feel rarely happened. So there was a renewed sense of confidence and optimism and commitment among the development community and with over 33,000 rooms now in our pipeline, it remains our fastest-growing brand, and growth is picking up.

[Operator]

We'll go next now to Dany Asad with Bank of America.

[Dany Asad, analyst]

Jeff and Michele, I just want to start super high level, if you've seen -- like you've quantified a lot on the domestic side, on RevPAR, how we're moderating, but is there any insight as to what's actually going on, on the ground behaviorally domestically as we still have some points of occupancy. Why are people not showing up, is there pockets of the country that are behaving differently, there's outsized performance in one direction or another? Or kind of what -- just any qualitative insight that you can give us on that front?

[Geoffrey Ballotti, executive]

Thanks, Dany. Our teams are seeing demand improving. We are seeing positive trends. RevPAR growth, as we noted, improved 500 basis points from the first quarter to up 30 basis points in the second. Our teams on the ground continue to see gains in our domestic brands and market share with strong share gain midweek pointing to that increased infrastructure pickup that we know can accelerate with continued strength in our booking pace. Look, we're confident in the continued recovery of our segments here in the United States. Pricing power is still strong. Second quarter was up 17% to 19%. As Michele just noted, domestic occupancy was up 1%, but it was up for the first time since the second quarter of 2022 versus prior year, which is important. Domestic occupancy also improved 3% versus '19 from where it was in the first quarter. So if you think about it, it was down 10% in the first quarter, it was down only 7% in occupancy in the second quarter.

And I think we all need to remember that '19 was the peak of the longest-running industry cycle that the industry has ever seen and that our brands were the very first to recover from COVID, and that demand will continue to come back over the next few years with continued growth, as Michele noted, in the back half. We saw last week, demand being up 30 basis points in the economy and 60 in the mid-scale, and we know that the industry is projecting growth next year.

I think it's 100 to 200 basis points of economy or mid-scale RevPAR growth in '25. And we think back to the last 4 lodging cycles, select service domestic RevPAR has grown as we noted in the script, 3% on a CAGR basis, and that will eventually materialize.

In terms of all of our important consumer leading indicators that we continue to look at, leisure travel sentiment continues to improve. It's up now 400 basis points from where it was at the end of last June. We're not seeing any difference in who's checking into our hotels. Our middle-income guests are still both more employed on higher wages and savings than they had back in 2019.

Our booking windows are up. They're up now 6% to last year, and we're seeing longer lengths of stay. To your back part of the question in terms of across the country, we did see some normalization in those first to recover beach and mountain destination markets like Florida or California or Colorado, which were all down a little bit. But we saw demand continue to increase in oil and gas markets like Texas, New Mexico and Ohio, which were up mid-single digits to where they were last year.

And in other markets like Louisiana, West Virginia and North Dakota, important states for us, saw double-digit growth in RevPAR. And we would expect that growth to continue in the second half. We're seeing crews continue to come back into these markets. And natural gas continues to recover with production in many of those states back to where it was back at their peaks. So we're feeling good about the second half.

[Dany Asad, analyst]

That's great. And for my follow-up, just thinking about how nicely our rooms growth and the pipeline has accelerated. But can you help us think about how long it typically takes for a property to stabilize? We're just trying to think about how long does it take for that 3% to 4% rooms growth that we're seeing today to translate to a full [ fee ] 3% to 4% fee growth and kind of what you're putting up on the scoreboard.

[Michele Allen, executive]

Yes. Once the property opens in our system, it's typically ramping during the first full year and really during the first 9 months. So when they come into the system, I think you can expect to see within a year, there would be a full royalty production for us.

[Operator]

We'll go next now to Stephen Grambling of Morgan Stanley.

[Stephen Grambling, analyst]

Maybe as a follow-up to Dany's question on RevPAR trends. You mentioned share gains. Are there any brands specifically that are leading these RevPAR index premium gains? Is there any way to quantify maybe the ones that are taking the most share? And are you seeing development actions typically meaning like is there more development going on within those brands?

[Geoffrey Ballotti, executive]

There is, Stephen, our domestic large brands that are very important to us like Days Inn, Super 8, La Quinta, they're all over-indexing. And we publish every April as our competitors do in the April franchise disclosure documents. La Quinta is now well over. It's fair share. Hawthorne Suites is, Microtel is, Days Inn is one of our stronger performing brands.

To your point, that brand performed very well during the downturn and developers are looking for conversion opportunities, which is why it's important that, that transaction market continue to pick up. But what's driving it is the Wyndham Rewards program in our developers mind.

The share of occupancy in the quarter was up 250 basis points globally, and it's up a good nearly 800 basis points from where it was in 2019. And these are brands that perform very well in those infrastructure markets where those 1.8 million companies who are contracting for their workers are looking for recognizable brands that are clean and well maintained, and we believe that we could continue to drive that share gain, especially midweek.

[Stephen Grambling, analyst]

Great. And then maybe one clarification on operating expenses. Michele, I think you mentioned taking out some costs and some projects that maybe were put off RevPAR slowed. Are those things that we should anticipate if RevPAR reaccelerates relative to the expectations, those will come back quickly? Or is there a little bit of a longer lead time there?

[Michele Allen, executive]

I think it really is at our discretion, and it -- what we have -- with respect to the cost of discipline, we have really reprioritized the investment spend. So at this point in time, what we would do is just look at it again and determine whether or not it fits the strategic pillars of our long-term growth, and if that's something that we need to invest in. So it's hard to say. We would go line by line item. There's no silver bullet in there. There's just a bunch of small type of exploratory projects you can call them that we are eliminating at this point in time.

[Stephen Grambling, analyst]

Got it. I guess the takeaway there is there's flexibility.

[Operator]

We'll go next now to Michael Bellisario with Baird.

[Michael Bellisario, analyst]

First for Michele, I just wanted to clarify one thing on the key money. How much of the $110 million is for ECHO this year? And then when you're spending the key money, are those hotels opening up right away and you'd be seeing an immediate cash-on-cash return? Or are you funding some of those dollars pre or during development?

[Michele Allen, executive]

Yes, about $10 million for ECHO this year, and key money is generally funded at opening. So we would see immediate royalty improvements to the P&L.

[Michael Bellisario, analyst]

Got it. And then, Geoff, for you, kind of a bigger picture question, just broadly on the economy segment. Over the long run, not a ton of rooms growth domestically, your U.S. economy room count has trended downward. Maybe your thoughts there, how much of that is due to new brand introductions, yours included, how much of that is economy product is becoming older, more obsolete? Just kind of would -- appreciate your thoughts there and sort of just on the longer-term trajectory of the economy chain feel more broadly?

[Geoffrey Ballotti, executive]

Sure. Thanks, Mike. I think it's more of the latter of that statement that you have older legacy economy hotels being repurposed for other uses that really began coming out of COVID. And if you look at the economy supply over the last few years, I think it's down between 1% and 2% as those older legacy hotels move out of the system, and many of them are in urban downtown areas.

But look, in 2023 to the point that Stephen was just asking about, we experienced the highest economy add rate. A lot of those were Days Inn and Super 8 at since before we went public, again, because of how well those brands performed in the downturn of COVID in terms of the cash-on-cash returns.

Our gross additions for the second quarter were up about 3%, and we are running right now in terms of if you look at the industry retention rates that are really best in class of over 95%, pushing 96% in the economy space. So we're very pleased that our economy retention rate continues to improve. It's up 90 basis points on the last 12-month basis. We're pleased that we're experiencing a higher economy add rate. We know that as transaction volumes return, there are going to be economy opportunities for us to grow and that those will present themselves.

[Michele Allen, executive]

And I would just add to that. This isn't a surprise or a new trend. Geoff mentioned, the segment has had limited supply -- new supply for many years. But the portion that is growing is extended today, projected to grow 6% per year over the next several years, and that's where our growth strategy has been focused for the economy segment with more than 33,000 rooms in our pipeline. And then, of course, we're focused on the mid-scale and above segment with that portfolio has grown 3% year-over-year.

[Operator]

We'll go next now to Meredith Jensen at HSBC.

[Meredith Prichard Jensen, analyst]

I was hoping you might speak a little bit more about the Wyndham for Business Portal. I know a lot of the companies in the sector have added sort of managed travel programs and to attract SMEs. And I was wondering what might distinguish Wyndham for business and how Wyndham Connect might fit in with that. I know the presentation also flagged some alternative payment solutions. So if you could just help me sort of put the pieces together and where we might see this go in the near and longer term?

[Geoffrey Ballotti, executive]

Sure. Thanks for your interest in Wyndham Business, Meredith. I know you asked about it last time, and we're very excited about it. I mean our new Wyndham Business, which was launched right before we reported on our last call in April, has seen a weekly pace of applications, which has doubled since then. It's -- we said on last quarter's call, it's [ now ] owning 60% ahead of where it was with the previous program we had out there.

And when combined with the Wyndham Rewards credit card, it's a big driver for what our global sales, our field sales sellers are selling. It's important to have those tools, especially as we increase our field sales teams to go after those SMEs that you referenced. Wyndham Business was a big tool in their hands to help when they're talking to an account, manage their -- that accounts company's travel needs, allowing those planners to have that sort of one-stop solution, allowing them to instantly book without needing to RFP or contact the hotel and allowing them to really as they go out, leverage those tools with third parties who are contracting really across America for that business. So our teams are excited about it.

You mentioned Wyndham Connect. I'll tell you all of us that checked into the ECHO Suites opening in Spartanburg were served up. Do we want that early check-in. And given that just about all the developers that were coming into town, we're coming in before that 03:00 check-in, they bought that extra $20, $30, $40, I think in that case, it was $20 upsell fee. It was a no-brainer to anybody checking in early to the hotel, and it was money in that developer's pocket.

So we're going to continue to be rolling out tools like that as we -- as our teams go after those. Now 4,000 of the 40,000 projects across the country that are getting allocated, the infrastructure spending that are around markets where we have multiple hotels in those markets.

[Meredith Prichard Jensen, analyst]

Super. One quick follow-up on the auto inclusive sector. I was wondering if you could provide a little bit more color in terms of sort of the brand strategy as you continue to roll out and the Wyndham Rewards members can burn some of those points between trademark and registry and Alltra and sort of as you continue to grow there, what the focus might be?

[Geoffrey Ballotti, executive]

Sure. I think one of the things that make Wyndham Rewards now for 6 years in a row USA TODAY's #1 loyalty program -- top loyalty program with U.S. News and World reports, it is that what you refer to earn and burn opportunity. I mean we are heralded as the best program and the fastest track to earn a free night. At over -- not only our 9,200 hotels, but 60,000 hotels and resorts and vacation rental opportunities through partnerships we have with really aspirational check-in redemption opportunities like -- because members are looking for that vacation opportunity right now.

You referenced Alltra by Wyndham, which is an organic brand that we launched a few years ago with PLAYA, and we continue to grow that brand.

We recently opened a resort in the Dominican Republic with PLAYA, which will later this year be available for earn, burn along with another hotel of the Wyndham Alltra Punta Cana, which will be managed by PLAYA, which will join Alltra resorts in Cancun, Freeport, Bridgetown, Montego Bay.

We've had new executions with over a dozen hotels on the all-inclusive space in various stages of discussion and are working with PLAYA across the Caribbean, Mexico and Central America. And that ability to -- it's a great value to your question for our Wyndham Reward members, which is what keeps Wyndham Rewards top of mind for those 110 million members, which are up 7% year-on-year and 42% since 2019.

[Operator]

And Mr. Ballotti, it appears we have no further questions this morning. So I'll turn things back to you for any closing comments.

[Geoffrey Ballotti, executive]

Okay. Thanks, Bo, and thank you all for your questions and your interest in Wyndham Hotels & Resorts. Michele, Matt and I look forward to talking to and hopefully seeing many of you in the weeks and months ahead. And in the meantime, I would like to remind all of you [indiscernible] to tune into the Wyndham Championship, the final tournament of the PGA Tour's regular season before the playoffs where coverage begins on August 8 over in the golf channel and continues over the weekend on CBS. Have a great summer, everyone, and thanks again for joining us today.

[Operator]

Thank you, Ms. Ballotti. Ladies and gentlemen, this does conclude today's Wyndham Hotels & Resorts Second Quarter Earnings Conference. Please disconnect your line at this time, and again, have a wonderful day. Goodbye.