Wyndham Hotels & Resorts Inc

NYSE:WH

Earnings Call Analysis

Wyndham Rejects Choice's Offer, Focuses on Growth

Wyndham's board has unanimously rejected Choice Hotels' acquisition proposal, citing asymmetric risks and undervaluation of Wyndham's growth prospects. The all-stock offer is seen as financially unstable, potentially risking Wyndham's franchisee relationships and long-term plans. Despite the short-term volatility in Wyndham’s stock price, the board has full confidence in their strategic initiatives, aiming to achieve an organic EBITDA growth target of 7% to 8% by 2024. Management highlighted concerns over Choice's leverage levels post-acquisition, which could limit growth and investment opportunities, dampening shareholder value. Instead, Wyndham plans to leverage its own momentum in improving franchisee retention rates, expanding its new Echo Suites brand, and pursuing several undisclosed initiatives designed to enhance value for shareholders.

Overview of Wyndham's Q3 2023 Performance

Wyndham has presented another quarter of resilience and strategic dexterity. The company successfully grew global revenue per available room (RevPAR) by 3% in constant currency. The increase was particularly notable internationally, with a staggering 16% growth, signifying Wyndham's effectiveness in foreign markets. On the domestic front, the U.S. RevPAR saw a slight decrease of 1%; however, this was eclipsed by the growth trajectory of its economy brands which consistently outpaced their competitors by 100 basis points thanks to robust infrastructure-related business accounts. Systematic growth sustained its momentum as the company celebrated its 11th consecutive quarter of expansion, marking a 1% sequential and 3% year-over-year organic leap. The quarter alone saw the opening of 14,500 new rooms, with 5,900 attributed to the U.S., and with the yearly figure reaching over 42,600 rooms across 326 hotels, Wyndham upheld its impressive pace of inaugurating more than one hotel every day.

Enhanced Retention and Expanding Pipeline

Wyndham's ability to retain franchisees improved, as evidenced by a 20 basis point bump compared to the previous year. This is reflective of the highest franchisee retention rates in the U.S. economy segment. Reinforcing this uptrend, the company's project pipeline experienced a 4% sequential growth and a notable 12% increase year-over-year, of which the U.S. growth formed 2% and international growth accounted for a significant 16%. The pipeline is now richer with more diversified offerings, featuring Wyndham's Echo Suites extended stay brand and a heightened presence in the mid-scale to luxury segments. This diversity not only fortifies Wyndham's market presence but positions it favorably for future scalability.

Financial Highlights and Shareholder Value

Financially, the third quarter was marked by a sturdy 7% growth in fee-related and other revenues, a direct reflection of the company's wise revenue-generating strategies and net room growth. Adjusted EBITDA followed suit, displaying a healthy 5% growth, while the EBITDA margin remained steadfast at 83%. Particularly noteworthy is the 8% improvement in adjusted diluted earnings per share (EPS), fueled by strategic share repurchases and a lower effective tax rate. A testament to Wyndham's robust cash generation, $67 million in free cash flow was reported in the quarter, contributing to a year-to-date tally of $225 million. Shareholders were credited with $134 million during this quarter, including $105 million in share repurchases and $29 million in common stock dividends. The revised adjusted EPS guidance has been uplifted to $3.94 to $4.08, underscoring Wyndham's confidence in its continued growth and operational performance.

2024 Outlook and Growth Strategy

Wyndham is setting ambitious targets with their 2024 adjusted EBITDA outlook poised between $690 million to $700 million, forecasting a 7% to 8% organic year-over-year growth. The projection is conservative, only incorporating partial benefits from strategic initiatives while expecting full benefits in a longer term. Wyndham's growth narrative is buttressed by a capital allocation capacity of $700 million to $750 million, which amplifies the potential for future acquisitions and investment opportunities, solidifying an agenda for accelerated organic EBITDA growth. The company's consistent track record and commitment to growth through carefully selected initiatives position it favorably against competitors and bolster investor confidence for continued value creation.

Rejecting Choice Hotels' Acquisition Offer

A pivotal subject of the earnings call was the unanimous rejection by Wyndham's board of Choice Hotels' unsolicited acquisition offer. The board cited several reasons for the rebuff, including unbalanced risk to shareholders given the uncertainties in regulatory approval timelines without suitable protections. The proposed transaction was also criticized for undervaluing Wyndham's growth prospects and the fact that a substantial portion of the deal was to be paid in Choice stock. Wyndham's board emphasized its commitment to growth and the welfare of its shareholders, franchisees, and team members over a myopic acquisition deal that might pose risks to the company's value and long-term strategy. This sense of fiduciary responsibility was made clear by detailing the negative implications Choice's higher leverage approach would have on capital allocation for growth investments, potentially impeding Wyndham's successful trajectory in both organic and inorganic growth domains.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Wyndham Hotels & Resorts Third Quarter 2023 Earnings Conference Call.

[Operator Instructions]

I would now like to turn the call over to Matt Capuzzi, Senior Vice President of Investor Relations.

[Matt Capuzzi, executive]

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

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 will 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 and investor presentation, which will be available on our Investor Relations website at investor.wyndhamhotels.com. We are providing certain measures discussing future impact on a non-GAAP basis only because, without unreasonable efforts, we are unable to provide the comparable GAAP metric.

In addition, this morning, we posted an investor presentation containing information with respect to our Board's rejection of Choice's unsolicited offer. We may continue to provide supplemental information on our website in the future. Accordingly, we encourage investors to monitor our website in addition to our press releases, filings submitted with the SEC, and then the public conference calls or webcast.

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

[Stephen Holmes, executive]

Thanks, Matt. As all of you are aware, last week, Choice Hotels announced that they made unsolicited overtures to acquire our business. With no organic growth, a less vibrant loyalty program and virtually no international capabilities in Choice's platform, we are, frankly, not surprised. Our business offers a medicine cabinet full of remedies. Our Board has taken its fiduciary duties very seriously with respect to shareholders and other stakeholders, including franchisees, employees and guests.

We strongly believe that Wyndham's stand-alone plan and multiple levels -- levers of growth provide a more compelling proposition compared to Choice's offer. Our Board is also highly confident in our management team's capability to execute on the plan and create significant value for our stakeholders. We have received multiple inputs from key constituents over the past week providing us with further confidence in our decision to reject the offer. The team will be providing further insight into our decision-making rationale after we review our strong third quarter performance.

I'll now hand the call over to Geoff.

[Geoffrey Ballotti, executive]

Thanks, Steve, and thanks, everyone, for joining us today. We're very pleased to report another strong quarter of operating performance. Globally, RevPAR grew 3% in constant currency, led by international growth of 16%. While U.S. RevPAR declined by 1%, our economy brands continued to gain market share, outperforming their competitors by another 100 basis points this quarter, driven in part by revenue growth from our general infrastructure-related business accounts.

We grew our system for the 11th consecutive quarter, up 1% sequentially and 3% year-over-year, on an organic basis. Our teams opened over 14,500 new rooms in the third quarter, with 5,900 of those rooms opening in the U.S. Year-to-date through September 30, we've opened over 42,600 rooms across 326 hotels, opening more than 1 hotel each and every day.

We improved our retention rate by another 20 basis points from where it stood at the same time last year as our industry-leading brands maintain the highest overall franchisee retention rates in the U.S. economy segment. Our pipeline grew for the 13th consecutive quarter, up 4% sequentially and 12% versus prior year, including 2% sequential growth in the U.S. and 16% year-over-year.

Our teams awarded more than 230 contracts for over 26,000 rooms with 15% of our pipeline now representing our ECHO Suites Extended Stay by Wyndham brand, and an additional 70% of our pipeline now in the higher RevPAR mid-scale, upscale, upper upscale and luxury segments.

Our owner-first philosophy was on full display last month in Anaheim, where we held the largest global conference we've ever assembled with over 6,000 registered attendees and more than 150 sponsors. The conference provided our franchisees an opportunity to connect with their colleagues and learn firsthand how to unlock the power of recent investments we've made in next-generation technologies, sales and marketing initiatives, and hotel-level operating efficiencies. Our owners have never been more engaged with our teams and the superior value proposition that our brands today deliver.

Before Michele takes us through the financials, I would like to take a moment to acknowledge our team members. The incredible success of our owner-first operating philosophy would not be possible without their unwavering commitment and support. And we're thrilled about our most recent ranking at #8, up from #11 last year, on Newsweek's Top 100 Most Loved Workplaces for 2023.

We thank all of our team members around the world who put our owners at the very center of everything it is that we do, and who remain enthusiastic about the opportunities ahead for us and confident in our ability to deliver the outstanding value day in and day out to our shareholders, our guests and our franchisees.

I'll now turn the call over to Michele. Michele?

[Michele Allen, executive]

Thanks, Geoff, and good morning, everyone. During the third quarter, fee-related and other revenues grew 7%, reflecting global RevPAR net room growth as well as higher license and ancillary fees, and pass-through revenues in our marketing reservation and loyalty funds due to our global franchisee conference in September, which was held for the first time since 2019.

Adjusted EBITDA grew 5%, primarily reflecting higher fee-related and other revenues as well as marketing fund variability. Marketing fund revenues exceeded expenses by $17 million this quarter versus $12 million a year ago. Our adjusted EBITDA margin remained consistent at 83%. third quarter adjusted diluted EPS improved 8%, 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.

We generated $67 million of free cash flow in the third quarter and $225 million year-to-date. We remain on track to achieve our goal of converting 50% to 55% of full year adjusted EBITDA to free cash flow, which at the adjusted net income line, translates to approximately 100%. we returned $134 million to our shareholders during the third quarter through $105 million of share repurchases and $29 million of common stock dividends. Year-to-date, we have repurchased 3.8 million shares of our stock for $270 million.

We ended the quarter with approximately $710 million in total liquidity, and our net leverage ratio of 3.3x was in the lower half of our target range. We are reaffirming our adjusted EBITDA guidance of $654 million to $664 million and raising our adjusted diluted EPS outlook to $3.94 to $4.08, to reflect our continued strong performance as well as our third quarter share repurchase activity. That concludes our prepared remarks on our third quarter results.

Geoff will now walk you through the rationale behind our Board's rejection of Choice's unsolicited offer.

[Geoffrey Ballotti, executive]

Thanks, Michele. As Steve referenced in his opening remarks and consistent with its fiduciary responsibility, our Board, along with its third-party advisers evaluated Choice's proposals. Our Board begins from the premise that, as a public company with a well-distributed shareholder base, we're open to any and to all avenues to create value for our shareholders. Many of these value creation opportunities are driven from organic growth initiatives, some are from inorganic growth initiatives, and some are initiated by third parties. Our Board has deep experience and has always provided oversight on our major strategic initiatives and opportunities.

With respect to the offer made by Choice in August, our Board determined for several specific and well substantiated reasons, focusing on both transaction risk allocation and valuation, that the proposal was not in the best interest of Wyndham shareholders, and rejected the offer. We've been consistent with Choice from their initial inbound that our concerns would need to be satisfactorily addressed, something they have not done to date. In our press release last Tuesday, we provided initial rationale and insight into our Board's decision to reject the offer.

Today, we'll go through greater detail around that decision and walk you through our significant stand-alone growth prospects. This morning, we posted an investor presentation to our website, and we'll be referencing that throughout this discussion. We start by level setting who Wyndham is today on Slide 2. Not only are we the largest hotel franchisor in the world but we're also the only public hotel company of scale that is truly asset-light, generating significant free cash flow, which allows us flexibility on how we choose to allocate our capital, whether it be for investment in growth initiatives with attractive ROIs, or whether it be returning capital directly to our shareholders.

Since our spin-off from Wyndham Worldwide, we've undertaken a series of initiatives, as outlined on Slide 3, that lay a strong foundation and provide a runway for sustainable organic growth going forward. Initiatives like our ECHO Suites by Wyndham brand, the fastest-growing brand in the underserved economy extended stay space and one we're expecting outsized economic benefits from in the coming years.

Investments we've made in hotel level sales and marketing to grow our share of existing infrastructure bookings and to capture the opportunities just now emerging from the recent Infrastructure Bill. And investments we've made in our Wyndham Rewards loyalty program with over 105 million members, a program that's been voted the best hotel loyalty program by USA TODAY for 6 consecutive years.

We've also capitalized on the significant growth potential outside of the U.S., with our direct franchising capabilities now in 95 countries. These growth initiatives and so many others support Wyndham's owner-first reputation as the franchisor of preference for hotel owners in the segments we operate in. And our franchisee retention rates have correspondingly improved.

While some of the benefits of these actions are already reflected in our financial performance, we believe that there will be an even greater benefit from them in the coming years given the long tail for development, retention and new product innovations. We're confident that these initiatives provide a significant runway for outsized growth and enhanced shareholder value. And with that background on our company, we'd now like to detail some facts surrounding the Choice offer.

While the offer may have had an initial headline of $90 per share, the proposal is currently worth less and may continue to fluctuate in value over time as it includes a significant amount of stock consideration. Just last week, within a few days of Choice's public announcement, Choice's stock had decreased by over 9%, and the implied value of the offer was already $4 lower at $86 per share. And it's important to note that Choice has not offered our shareholders any protection against potential continued downward volatility.

Furthermore, the fixed value of the cash portion offered to our shareholders would not be realized until the conclusion of an extended regulatory process, which our advisers estimate could take 12 to 18 months. When we consider all of this, one point is clear. The actual offer is worth materially less to our shareholders if and when they receive it. At its core, there are 3 primary reasons why our Board has rejected Choice's offer, which you could find on Slide 4.

First, there is asymmetrical risk to Wyndham shareholders associated with an uncertain regulatory time line and outcome without commensurate protections and compensation provided to our shareholders for taking on these risks. Second, Choice's proposal does not provide appropriate value for Wyndham's standalone growth prospects and exploits short-term volatility in Wyndham's stock price without a consideration of a broader view of Wyndham's trading levels.

And third, the consideration mix includes a heavy portion of Choice stock. Our Board has concerns over Choice's organic growth prospects, and those concerns are exacerbated if the pro forma company will be left with an over-levered balance sheet that constrains its capital allocation strategy in a material way, further limiting its growth opportunities.

We'll delve into each of these points in more detail, and we'll start on Slide 6. Upon Choice's initial approach, our Board immediately engaged subject matter experts to assess the proposed combination. Our extensive diligence confirmed that the transaction would be subject to an uncertain prolonged approval process of 12 to 18 months.

Of particular concern is that U.S. antitrust investigations are at historic highs. There have been more second request issued by the Biden administration in their first fiscal year than in the preceding 20 years combined. The parties' advisers met on multiple occasions and Choice eventually acknowledge the probability of an extended regulatory review period of at least 12 months.

Our business would be uniquely exposed to deterioration risk during a long regulatory review period as our business is built on relationships. Our franchisees typically sign 10- to 20-year contracts with us. They care very much about who they are doing business with, and we believe we offer a differentiated service through the relationships we have fostered over not years but over decades, relationships that underpin our new business development activity and our improving franchisee retention rates.

As depicted on Slide 9, we opened more than 450 hotels annually. If this uncertainty work to persist for an extended period of time, some portion of our development and openings may not materialize, which compounds over time. Additionally, developers of our ECHO Suites brand have expressed significant reservations about deploying such large sums of capital with a brand steward other than Wyndham, jeopardizing the brand's future. Moreover, our considerable momentum and improving franchisee retention rates could also be impacted the longer this drags on as competitors capitalize on franchisee concerns around a potential combination.

There are significant business disruption risks that our Board believes have potential for irreparable damage to our business and erosion to Wyndham's shareholder value. We've made it clear to Choice from the very outset that we would need creative and appropriately scoped protections to address these asymmetrical risks to Wyndham's shareholders. Choice, however, dismissed our concerns as unfounded. As our advisers reviewed high regulatory risk transaction precedents more broadly, there was a clear theme of buyers compensating sellers with materially higher offer premiums and significant protections and compensation. We have been offered neither.

Moving on to our second concern. Our Board's strong belief that Choice's offer undervalues Wyndham's stand-alone growth prospects and the opportunistic nature of the offer, which does not at all stand up well when looking at our share price more holistically. As you'll see on Slide 11, their initial offer came at a time when the exchange ratio was the most in their favor over the past 24 months. The premium offer is unacceptable for a change of control transaction with the level of asymmetrical risks that we just discussed.

Industry research analysts recognize our strong sustained momentum and overwhelmingly believe Wyndham is undervalued and has significant upside as evidenced by their price targets and buy ratings on our stock. Our management team has consistently been able to execute on our near-term goals while also reinforcing the foundation for long-term value creation.

As shown on Slide 13, we've delivered organic room growth and beat consensus EPS estimates for 11 consecutive quarters. And as we've outlined on Slide 14, we have multiple levers to accelerate net room growth from the current 2% to 4%, to 3% to 5%, including building on the success of our new ECHO Suites brand, leveraging our best-in-class international direct franchising capabilities and continuing to enhance our franchisee retention rates, which have already improved 200 basis points since our spin-off.

Beyond system growth and market-driven RevPAR gains, we're pursuing several initiatives that will significantly enhance shareholder value, including those that we've previously discussed with you and others that are taking shape out of the spotlight. Combined, these opportunities set up an achievable path to accelerate organic EBITDA growth to a 7% to 10% compounded annual growth rate through 2026.

In addition, the ability to deploy significant incremental capital through excess free cash flow and leverage capacity will amplify earnings growth for our shareholders. And you can see this road map on Slide 15 and Slide 16. Today, we're introducing the first step on this path with our 2024 adjusted EBITDA outlook of $690 million to $700 million, reflecting year-over-year organic growth of 7% to 8%. This outlook includes only a partial earnings benefit from our initiatives, with full realization over a longer time horizon, and represents our growth potential before capital deployment.

In 2024 alone, we estimate our capital allocation capacity at the midpoint of our target leverage range to be between $700 million and $750 million, which translates to approximately $8.50 per share. This is a material amount of capital that can be deployed to accelerate growth above our current outlook. Our proven track record, capabilities and embedded value drivers give our Board confidence that our stand-alone plan will deliver superior risk-adjusted returns compared to Choice's proposal.

Finally, the third concern our Board has is the substantial equity consideration. We've consistently made it clear to Choice the stock portion of their offer poses significant risk to our shareholders. Our concerns are focused on several areas, and they're presented on Slides 18 through 22.

We'll first address the recent performance of the core business and financials of Wyndham versus Choice. We highlight these metrics as investors take them into account for helping to understand the appropriate valuations ascribed by the public markets. In the first half of 2023, Wyndham grew net rooms 3% organically, whereas Choice's system declined 2% organically. Wyndham grew first half 2023 EBITDA 9% organically, while Choice's organic EBITDA growth was 1%.

Choice's future growth prospects are equally challenged given their declining pipeline as shown on Slide 19. In particular, their revenue-intense pipeline has declined 38% between year-end 2019 and year-end 2022. And while that level of detail is not available on an interim basis, we could see that their total pipeline is contracted by 12% year-to-date through June. These adverse movements raised serious concerns for our Board around Choice's ability to organically grow their system, along with their ability to execute their stated revenue intent strategy.

Choice's multiple premium historically benefited from organic growth. However, its more recent performance, including 7 consecutive quarters of negative organic growth, combined with its declining pipeline, have reduced that premium as depicted on Slide 20, and make it susceptible to further valuation multiple contraction in the future. This challenging growth profile will only be exacerbated should Choice be required to operate within the proposed excessive leverage profile that this transaction would require. Prudent leverage and balance sheet flexibility are core tenets of how Wyndham operates and is a position shared by many hospitality peers, as shown on Slide 21.

We estimate choice would need to secure approximately $6 billion of debt to fund this transaction, including over $4 billion of incremental debt, and the remainder to replace Wyndham's existing debt. Our financial advisers estimate this leverage level would take 3 to 4 years to delever from even if the company were to allocate nearly all of its excess cash flow towards paying down the debt, and potentially longer, depending on the macro environment.

Choice has historically been heavily reliant on its balance sheet to grow its system. From 2017 through 2019, Choice deployed $0.5 billion to grow their system organically at a 3% CAGR. Conversely, from 2020 through the second quarter of this year, Choice has deployed less than $150 million, and their system has declined organically at a 1% CAGR. Choice has used M&A to mask its lack of organic growth through the $675 million acquisition of the rights to use the Radisson brand in the Americas, which has accounted for the entirety of their reported system growth since the transaction closed of August of 2022.

And Choice's declining organic growth will only be exacerbated when it could not use its balance sheet to generate net room growth as it's done in the past. The higher leverage contemplated for the transaction would drastically shift the pro forma company's focus to deleveraging preventing meaningful investment in growth for multiple years, which could significantly impact the pro forma company's trading multiple.

In addition, the cost of debt required to fund this transaction is materially higher than historical levels. Servicing the debt stack for the proposed transaction would require over $200 million of incremental interest cash outflows compared to just 2 years ago. This higher cost of financing would further diminish the cash available to invest in the business. And while synergies could help delever, we note they take multiple years to achieve and have an initial upfront cost to secure them.

The lack of availability of growth capital is a concern for our Board given how reliant Choice has been on their balance sheet historically to grow their system, and given the significant momentum and success Wyndham [ has enjoyed ] today, which may be impaired in a constrained capital environment.

In conclusion, our Board remains open to risk-adjusted valuation creation alternatives, whether those are driven from internal initiatives from external capital deployment or from third-party opportunities. And whenever reviewing any of these alternatives, our board believes that it is imperative to consider the impacts to our shareholders, our franchisees and our team members.

And so after a considerable review with our financial and legal advisers, our Board believes that the Choice proposal is inadequate on multiple fronts, including its unmitigated asymmetrical risk allocation, the confidence our Board has in our stand-alone growth strategy that is not being considered by Choice in its opportunistically timed offer, and the heavy portion of Choice stock in the consideration mix that we believe has potential for additional downside risk. We will continue to execute our business model, drive growth, allocate excess capital appropriately, and maintain strong partnerships with our franchisees to drive shareholder value.

And with that, we'd be happy to take your questions. Operator, if you could please open up the line.

[Operator]

[Operator Instructions] Our first question comes from Joe Greff of JPMorgan.

[Joseph Greff, analyst]

Surprisingly, my question is probably best directed to Steve. Interpreting -- the totality of your comments since last week, I'm interpreting them as Choice's offer and maybe any modest tweaks to what the most recent offer is, is dead on arrival. That's not my question, if that's a correct interpretation or not. My question is this, to Steve. Have you talked to Stewart or Pat since last week? And have there been any more current discussions, and I'll leave it broadly open to any kind of risk mitigants that you've eloquently referred to today, whether that is a sort of a creative breakup fee or collar or tipping fees, more cash, suggesting to them maybe how they can raise cash through equity issuance that would then wouldn't be given to you guys or equity transfer to you guys to take on all the risks that you referred to today? And that's -- those are my questions.

[Stephen Holmes, executive]

Well, thanks, Joe. There was a lot packed in there, and I haven't done these calls for 6 years, so it's good to hear your voice. I used to always say, Joe, that I don't comment on M&A rumors because that used to be what always came up. But this one is not a rumor, and it also is not really M&A. It seems like a desperate grab to try to solve problems that the company has. We have been responsive every step of the way. I have not heard from Choice since we sent them -- since we told them -- I called and spoke to Stewart and told them that we're disengaging. This is an amazing distraction for the businesses, not only ours, for theirs. A bigger distraction for ours probably than theirs.

And just to give you a little bit of history, 25 years ago, 20 years ago, I negotiated a deal to buy Choice. And I never talked about it because it's not appropriate but we negotiated a deal. The capital markets turned on us and the credit was not available to make an all-cash offer, which is what was desired from the other side. We disengaged as soon as I called and said, I never turned -- I've never walked away from a deal before, I've done 40-plus deals but this one just isn't going to work because the capital markets aren't attractive. Never said anything about it, just kind of went our merry way.

Choice has contacted us multiple times over the years, and we've told them, we've looked at it, we've decided what's in the best interest of our shareholders, and nothing has been done about it. This time is different. Now I'm not sure what is different other than the fact that they're not growing They have some serious issues within their organization. They're trying to address that by making us the elixir for their problems.

And so to answer your question directly, Joe, I've gone a little bit off the topic here but I have not heard from them. And we put up multiple ideas of what they could do, none of which were available to them. So I don't -- we weren't looking to sell the company. They called us. But they called us and they don't have a plan. So their plan seems to be to put out repetitive press releases and see if they can turn the water enough to make it interesting for us. I just don't see that as a plan. That's a bit of a desperate plan.

Did I answer the question, Joe?

[Operator]

Our next question comes from David Katz of Jefferies.

[David Katz, analyst]

Steve, good to have you back. I wanted to just talk about some commentary that has come up this week about taking share and -- market share within the limited service and economy segments, it came up yesterday with a peer and was discussed. And in that context, you make some points in your deck this morning about the suspension of development activities for an extended period and what the potential impact of that is. If you could talk about, broadly speaking, Geoff, the notion of where you think you are in terms of the share of opportunities out there?

And more importantly, within the context of this deal, it's come up with investors about whether there are change of control provisions within any of the contracts, particularly the one with ECHO that's top of mind and current, and whether there could be any impact to the existing franchisee base if this were to get to a place where it went somewhere. And I realize there's about 8 questions in there, too.

[Geoffrey Ballotti, executive]

Well. Thank you, David, and I loved your chorus of upside arguments today headline in terms of continuing net room growth and pipeline growth implying acceleration in long term [indiscernible] we couldn't agree with you more. And we're certainly seeing that. I mean, certainly, there was no slowdown in the third quarter. Q3 was a huge quarter for us with some really great momentum to your point, your note today.

In terms of brands gaining share to your question, we're gaining on both the conversion side and the new construction side. If you look at our brands on the new construction side, the one you mentioned that was talked about, I guess, in the deck and a bit yesterday, has had significant momentum to date with ECHO Suites. We executed another 60 contracts in the quarter with multi-unit developers. And to date there is no impact yet on any of the planned 2023 ground breaks. But to what was in our investor presentation today, certainly questions and concerns come up longer term as developers who have not yet broken ground are wondering, are they building an ECHO Suites by Wyndham Extended Stay economy brand for Wyndham, or are they building it for Choice? And that's certainly what we're concerned about.

But the quarter was tremendous from an opening standpoint. We opened 15,000 rooms, was above our openings level back in the third quarter of '19 where we hit that 3% net room growth. We saw great growth in our mid-scale, great growth in our international direct franchising business. And our pipeline is sitting at a record level of 13 consecutive quarters. And we want to keep that up. We want to keep that going. And we don't want the distraction that we talked about in our prepared remarks to impact it in any way.

[Operator]

Our next question is from Stephen Grambling of Morgan Stanley.

[Stephen Grambling, analyst]

This is a question for either Steve or Geoff. A lot of the comments focus on Choice's stand-alone business and Wyndham's stand-alone business. But given the prior dialogue you've had, I'm sure you've had time to think about the strategic merits of a combination and potential synergies. So would love to have you just help us understand how you think about the strategic rationale from a combination, particularly as we look longer term through industry dynamics where it seems like competition is ramping for the mid-scale space and perhaps that ultimately kind of comes down through economy.

[Geoffrey Ballotti, executive]

Sure. Yes. In the economy space, I mean we are, as we've said all along, Choice has been very open that they do not want to be in the economy space. We certainly do, Stephen. I mean it is why we've said all along we're so excited about what we're doing with our ECHO Suites by Wyndham product in the economy space. It's just a huge, huge market. There's 9,500 branded in economy hotels, there's 22,000 nonbranded hotels in the economy space. And certainly, there are synergies in scale and size and scope.

We've always said that M&A is in our DNA, 19 of our 24 brands have been acquired since Steve put this company together back in the HFS days. And we'll continue to look for all of those reasons, for immediately accretive tuck-in acquisitions that are both EPS and net room growth accretive, brands of high quality. But also brands that don't create displacement issues for any of our other brands.

I mean, this is less about the industrial logic and way more about the risks that we discussed. I mean certainly, there have been things out there on the benefits of a loyalty program combination. And we will not argue that Wyndham Rewards is a better loyalty program than Choice privileges, and it's the best program out there for 5 or 6 years with USA TODAY and U.S. News & World Report.

But I don't think our Days Inn or Super 8 owners on any street corner in America would want to share those guests with a Choice Econo Lodge or a Rodeway owner across the street who they compete with. So we're -- we understand the industrial logic but it's less about that and more about the risks as we said in our prepared remarks.

[Operator]

Our next question comes from Dan Wasiolek of Morningstar.

[Dan Wasiolek, analyst]

Just wondering if there's any more context maybe you can give on how your conversations have gone thus far with franchisees. And then this might be, I guess, hard to quantify or maybe you can talk about, are there already in your negotiations some third-party owners that are waiting to see what the outcome of this transaction or potential transaction is? Or what percent -- I guess, and that might be hard to quantify, what percent might have issues with the change in control that might impact future retention rate or not?

[Geoffrey Ballotti, executive]

Yes, it's a fair question, Dan, and we can't give you a percentage. As we mentioned in the script, we did see an immediate negative reaction from Choice's press release last Tuesday in terms of what they put out, and actually began feeling the impact from the Wall Street Journal [indiscernible] as May from both existing franchisees and prospective franchisees, who've been expressing uncertainty and concern over what a change in ownership would mean. There are not change of control provisions in our contracts. But franchisees are choosing us more so than they're choosing Choice as you've seen over the last few years.

And they're doing business with us because we say all the time to our teams, they know us, they like us and they trust us. And they're very concerned about losing that culture that we've built. They value our team's approachability and accessibility and flexibility. I think COVID was a great example of that, in terms of how throughout that pandemic and crisis, we supported them.

And so it's been very empowering for our teams to hear the stories of why our franchisees want to stay with us. And it is really what defines our culture. I mean our franchisees -- 2/3 of our franchisees and 2/3 of Choice's franchisees are AAHOA members. And we have a very long history supporting AAHOA . We believe in the power of dialogue. And we're standing with our franchisees and are -- for all the reasons we talked about, not in favor of the deals currently proposed.

[Operator]

Our next question is from Patrick Scholes of Truist Securities.

[Charles Scholes, analyst]

Question for Steve. And ask if you can be as granular as possible in your answer here. Clearly, you've outlined that Wyndham Hotels & Resorts would be materially harmed. An offer was made and that it was rejected by the Department of Justice for antitrust reasons or whatever. Could you be as granular as possible? What do you think would be a fair compensation or breakup fee to Wyndham if you were to agree to an offer?

[Stephen Holmes, executive]

Patrick, it's good to hear from you. I haven't heard your voice in a while. But the answer is no. I cannot be more granular because I don't think that's any -- there's no reason for us to discuss that on this call. We have tried to raise it with Choice at one point. They've been in denial for quite some time. Initially, they didn't think the antitrust issue was even an issue, then they came back and said, "Well, maybe it will take 3 months to clear it." And it took us many, many meetings with our professionals meeting with theirs for them to acknowledge that, no, this could be a 12- to 18-month process. So what do you think the odds are of us getting them to understand the impact it could have on our business?

They have no risk. This is -- they're playing with house money here. And frankly, they'd be playing with our money if they could get a deal done because that's how they would finance the purchase. We don't need them to do that. And so I think it's just -- I think it's inappropriate for me to try to address your question on this call. And I haven't heard from them. So I don't know what their ideas are.

[Operator]

Our next question is from Brandt Montour of Barclays.

[Brandt Montour, analyst]

Just following up along those lines, the risks that you listed out here of the combination doesn't necessarily address culture risk, right, which is something that thematically seems to be coming up in a lot of these discussions today, which is that, in a combination situation, given that your culture with your owners seems to be a primary driver of your organic growth, do you think that would be at risk in a combination outside of -- on top of the leverage and extended balance sheet?

[Geoffrey Ballotti, executive]

Yes. I think it absolutely is, Brandt, a concern and risk of our team. I mean we've made tremendous progress over the last several years improving our retention rate. And retention rates, we feel, are really the best measure of franchisee engagement. Our economy retention rates are several hundred basis points ahead of Choice's. And again, it gets back to the comment I made in terms of how our franchisees feel about our teams in terms of wanting to do business with us in terms of the way we conduct business with them, and that would be at risk.

[Operator]

Our next question is from Michael Bellisario of Baird.

[Michael Bellisario, analyst]

Just want to revisit your comment on the third-party opportunities. I guess sort of 2 parts maybe. One, why haven't you? Or two, maybe when will you run a more formal process to proactively evaluate potential transactions with either financial or strategic partners that could maybe maximize value in a more attractive risk-adjusted manner?

[Stephen Holmes, executive]

So thanks for that question. I'll take it and then Geoff or Michele can add in if they think they need to add anything. But we did not run a process. We -- they approached us. There was first a leak, not sure where that came from but there was a leak. So this has been out there for a while. And if anybody had a great idea that they wanted to bring to the table, we're all ears.

I mean when I first heard from the other side, their question was, are you prepared to transact? And I said, well, I'm always prepared to transact if it's in the best interest of our shareholders. I'm transactional if that's the right thing for our shareholders. But there hasn't been anything that I consider really close to transactional. So I don't know what to add to that, to answer your question.

Geoff or Michele, if you have anything, feel free to weigh in there. They're shaking their heads, no.

[Geoffrey Ballotti, executive]

Yes. No, nothing to add, Steve. Thanks.

[Operator]

Our next question is from Dany Asad of Bank of America.

[Dany Asad, analyst]

The -- I mean, thank you for all the details on the deck. In there, you did kind of lay out like an outlook -- an EBITDA outlook of $690 million to $700 million in '24, and that's about 7% to 8% growth. Can you help us walk through the building blocks of how we get there? And then translating that into the $700 million to $750 million of capital allocation capacity, what forms could that take of realizing that $8.50 a share of value that you kind of lay out?

[Michele Allen, executive]

Thank you. Thank you for the question. So for 2024, the outlook implies a 7% to 8% organic growth, and our business is already growing at 6%. So the only change there really is we're expecting 1 to 2 points from growth initiatives that are currently underway, and for which we have significant momentum built. That includes the Infrastructure Bill benefit as well as the royalty rate improvements we've been discussing, continued momentum on our retention rate, and then some occupancy recovery as well.

With respect to the $700 million to $750 million number, which is just a 2024 illustrative example of how much cash we would have available to deploy, at the midpoint of our target leverage range, and I would note that, that goes up to $1 billion at the 4x high end of our target leverage range. I think we're just trying to show that is capital we have available to invest to drive future growth at the EBITDA line, or obviously, to return to shareholders at the EPS line should no growth initiatives present themselves as compelling opportunities.

[Operator]

We'll take a question from Meredith Jensen of HSBC.

[Meredith Prichard Jensen, analyst]

Yes. I was just trying to look ahead and explain to people what sort of happens next and what we could look for, and just in terms of the -- what we see from you all in reporting. Would we look at retention rates to see how some of the franchisees are reacting to this? What can we kind of take a look at to feed into beyond all the great information you've given us today?

[Stephen Holmes, executive]

Well, I guess I'll -- this is Steve. I'll start that one. The -- right now, it's a confusing time. As you can imagine, the sales forces are out there not just sitting idly by and not trying to take advantage of this disruption. So we know that the other side is out there saying a lot of things that are not attractive to us and that make it more difficult to transact business. So I don't know that I would necessarily look at just retention in the short term. In the long term, absolutely. Our owner-first philosophy that Geoff has continued to push hard is all about us delivering more value for our owners.

Do you want to talk about that anymore, Geoff?

[Geoffrey Ballotti, executive]

Yes. Meredith, I think it's not, as Steve said, only about retention. It's really about our -- how our franchisees feel about us. So as you follow the threads through all of the whole chatter that's out there in terms of why Wyndham is a great company to do business with. It's also about, as Steve said, what's happening on the execution front. I mean, despite -- if you look at year-to-date, transaction volumes still down 50% to prior year and down 30% to '19, our teams were able in the third quarter to sign 10% more deals year-on-year with this rumor out there, and 60% more deals versus 2019.

And it's not just ECHO. Those signings were up without ECHO, and ECHO still are -- everybody in that ECHO camp is calling us and saying, we hope this deal doesn't happen and we're with you folks. But I think it's, as importantly, what happens to that continued pipeline that has marched on to an historic high right now. Yes, I guess I'll leave it at that.

[Stephen Holmes, executive]

Meredith, it's Steve again. You -- I'm thinking back to your question, you started the question, what are the next steps? And that's actually a very good question because it's hard for us to say no more than we've already said no. And really, they have to decide that they want to lay down their pen and their PR machine and let's get back -- let's all get back to business. We can't force that to happen. It's not attractive what they're doing. It's not -- I don't think it's very friendly. So if you want a friendly deal done, you don't approach it the way they've approached it. God only knows how they can get a deal through the FTC where we are not a willing participant.

I just -- I don't get why they would even release this. And they threatened to do it, and I just thought, well, they're smarter than that, they won't do it. But they made a different decision. So it's very hard for us to say what's next. The ball is really in their court.

[Operator]

[Operator Instructions] And it appears that we have no further questions at this time. I would now like to turn the call over to Geoff Ballotti for any closing remarks.

[Geoffrey Ballotti, executive]

Okay. Thanks, Leo, and we appreciate everyone's continued interest in Wyndham, and we thank you for joining this morning's call. Michele, Matt and I look forward to talking to many of you today and the weeks and months ahead at many of the upcoming investor conferences that we'll all be attending.

Thanks again, everybody, and have a happy Halloween next week.

[Operator]

Thank you. This does conclude today's Wyndham Hotels & Resorts Third Quarter 2023 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.