Description

Investment Summary:

WYN has a strong business that has generated and returned significant value to shareholders since its 2006 spinoff from Cendant.  The company is too cheap given the high level of fee based income generated.  The company will be splitting into two businesses in the first half of next year, likely unlocking material value.

Business Description:

WYN is a large operator of hotel brands, a seller of vacation ownership interests (VOI, i.e. timeshares), and a large operator of timeshare exchanges and vacation rental platforms.  During 2016, 63% of WYN’s sales were fee based, with the remainder coming from the sale of VOI and financing.  The business is split into three groups:

Wyndham Hotel Group- the world’s biggest hotel company (based on # of properties).  As of year-end 2016 WYN brands had 697,607 rooms.  The company competes in the upscale through economy ($145 through $65 per night) segments, though economy is its focus.  This segment counts 8,035 hotels that are somehow affiliated with WYN, 7,923 are franchised, WYN operated 110 through management agreements, and the company owns 2.  Biggest brands by available rooms include: Super 8, Days Inn, Ramada, Wyndham, and Howard Johnson.  The U.S. represents 61% of total rooms.

Source: Company Reports

Source: Company Reports

WYN provides brand names, marketing, IT, revenue management, training, operations support, strategic sourcing, and guest services to franchisees.  In addition to the services mentioned above, WYN also performs operations, human resource functions, budgeting, food and beverage services, among others services to hotels in which they provide full management services to.  

Wyndham Destination Network- This segment includes timeshare exchanges and vacation rentals. WYN owns RCI, a vacation exchange business.  It operates through RCI Weeks, RCI Points, and The Registry Collection.  In total the company has 3.8 million vacation exchange members (representing 62% of global timeshare owners who participate in an exchange).   Annual retention rates are around 90%.  New members are often acquired when a timeshare developer buys an initial term of RCI membership, this is usually 1 to 2 years, and includes it in the sale of the timeshare to the eventual owner.  Vacation rental brands include: Wyndham Vacation Rentals U.K., Novasol (Europe), Landal GreenParks (Netherlands), and Wyndham Vacation Rentals N.A.  Although the rental and exchange businesses are under different brands and structure, inventory does migrate between the channels when it's advantageous to WYN.

Wyndham Vacation Ownership- WYN is the largest vacation ownership business in the world, as determined by revenues and resorts.  The company develops and acquires resorts, which it then sells to consumers through a points based vacation ownership interest model.  The company had 219 resorts as or 12/31/2016.  In addition to sales of timeshares, the segment generates revenues through financing and property management (this is through a contract with property owners associations).  Brands in this segment include: Club Wyndham (destination resorts), WorldMark (drive-to resorts), Wyndham Vacation Resorts Asia Pacific, and Shell Vacations Club.  That vast majority of sales in this division were upgrades (about 2/3rds of all sales in 2016/15/14).

Spin-Off-

WYN announced its intention to split into two separate public companies in early August.  The company plans to spin off the hotel business, with the remaining entity comprised of the timeshare development, timeshare exchange and the U.S. vacation rental business.  The European rental business will look at strategic alternatives and will likely be sold.  A form 10 will likely be filed by year-end, with the targeted completion date sometime in the first half of 2018.  Below is some discussion surrounding comps for the proposed WYN entities:

Timeshare-

VAC- Marriott Vacations Worldwide- This company was spun-off from Marriott International in 2011.  They operate timeshares (and in some instances whole residence sales) through the Marriott Vacation Club, Grand Residence by Marriott, The Ritz-Carlton Destination Club, and the Ritz Carlton Residences brands.  They currently operate through 60 properties in 9 countries.  The company generates revenues through selling ownership stakes, resort management fees, financing ownership products (they securitize essentially all receivables), and renting vacation inventory.  The VOI owners participate in an exchange operated by Interval International.  Aside from the difference in quality (Marriott higher quality than Wyndham) this is an excellent comp.

HGV- Hilton Grand Vacations- Markets and sells vacation ownership intervals, receives financing fees, provides resort management services, exchange management services and they also rent out units while they are unsold, or they acquire via the exchange.  HGV owners participate in RCI.  The company currently has 48 resorts.  This too is a good comp for WYN’s vacation ownership business, though it has much less trading history compared to VAC.

Source: WYN Investor Presentation

Timeshare Exchange / Rental-

ILG- ILG operates in the Vacation Ownership and Exchange and Rental business lines. The vacation ownership segment generates revenues from selling, marketing, financing and developing VOI’s and managing resorts for HOA’s.  The company’s brands are on 41 resorts, while they manage 200 unaffiliated brands resorts.    

The exchange and rental segment offers exchange services for brands such as the Vistana Signature Network (19 resorts) and the Hyatt Residence Club (16 resorts), but they also operate Interval which is the second largest exchange behind RCI, with 3,000 participating resorts, and currently has 1.8 million members.

ILG was initially owned by IAC, then spun off in 2008.  The company subsequently acquired the Hyatt Vacation Ownership business in 2014 and the Vistana vacation ownership business in 2016, which was owned by Starwood and includes brand usage rights for Westin and Sheraton.  

Year-to-date EBITDA breakdown from these two segments is 38% vacation ownership and 62% exchange.  This is probably the best comp available for the WYN timeshare/exchange business.

Hotel Group-

CHH- Choice hotels is the most directly comparable comp for the Hotel Group.  The company generates 99% of its revenues from franchising, and familiar brands include: Comfort Inn, Quality, Clarion, MainStay Suites, among others.  The following graphic shows room breakdowns between CHH and WYN:

The following graphic shows the sum-of-the-parts for WYN.

For forward EBITDA, I use the midpoint of management’s guidance.  The destination business is decreased by the estimated EBITDA of the European rental business ($130 million per Q2 2017 call).  Considering 38% of ILG’s business is VOI and 62% is exchange and rental, I tried to adjust its current multiple to account for this (based on pure-play VOI businesses).  For VAC and HGV, I adjusted reported forward EV/EBITDA multiples for securitized debt.

The calculation of WYN’s value based on this analysis can be seen below:

I exclude securitized debt from this computation.

Note on Management-

The management roster of the company will change significantly at the time of the spin.  Stephen Holmes, currently CEO, will transition to Non-Executive Chairman of both firms.  The current CFO will exit.  The hotel group will be run by Geoff Ballotti with the CFO being David Wyshner (coming over from Avis, from which WYN was spun in 2006).  The Vacation Ownership business will be led by Michael Brown (previously worked at HGV).

Main Concern-

My primary concern is the high rate of charge-offs associated with WYN’s receivables.  The company has historically oscillated between high single digits and 10%, most recently this figure is at 10%.   VAC and HGV both report charge-offs in the low single digits.  The following link lays out past vintages and comparable deals to WYN, I can not find a reasonable explanation for this discrepancy: https://www.spratings.com/documents/20184/769219/Sierra+Timeshare+2017-1+Receivables+Funding+LLC/49ecfc83-9f43-4d84-a76c-9b04f6ab5ca7

One concern that has surfaced recently is third parties contacting WYN timeshare owners and encouraging them to default.  Oftentimes a law firm will gather a group of owners to gain leverage and claim WYN used unfair sales practices.  In return for dropping the suit, WYN would let owners off the hook without a significant negative mark on their credit report (at least this is my understanding).  This situation has occurred in the past (2012 timeframe) and appears to be stable at present.

The current charge-off rates are a concern and something to be monitored, however, it could also be a big boost if charge offs declined to peer levels, and allowance reset lower.  Though this would have to be balanced against sales growth.

Current Business Environment-

Hotel Group-

This business has been performing well.  In recent years, sales in this segment have been driven by room growth rather than revenue per available room (occupancy * average daily rate).  Room growth in the first two quarters of 2017 has been over 3%, a step up from the trend seen in recent years, while the pipeline growth is up 18% in Q2 2017 from a year earlier (this is due to new construction primarily).  RevPAR has been tepid in recent years (last year, in particular due to oil and gas exposure in the US and Canada), and it has grown marginally above 0% YTD.   For the full year, management is guiding to 3-5% system room growth and RevPAR to be flat (though up 0-2% in constant currency), and EBITDA to grow low to mid single digits.

For the industry as a whole, supply is expected to either be surpassing or will soon surpass demand.  The economy business appears to be balanced, with the majority of the mismatch in supply/demand occurring in the upscale, upper midscale and midscale segments.  Undoubtedly, if ADR’s are pressured too much in higher priced tiers, this may pressure WYN.

Source: PWC

Destination Networks-

The Wyndham Vacation Rental business has been doing really well, transaction volumes have grown in the mid to high single digits in recent years, though this has been offset by lower price per transaction.  Value per transaction has been weighed down by both higher growth in lower priced rentals and the implementation of dynamic pricing which is driving more demand to off-peak periods.  For the year, management expects this business to grow transactions at 7-9% with the net price declining 3-1% (though price would be 0-2% higher exfx).

The vacation exchange business has been treading water in recent years, with the average number of members marginally higher, but the value WYN receives per member (both annual fees and exchange fees) is lower.  YTD this business has seen a decline in the membership to -2% y/y in Q2, while the revenue per member has almost entirely offset this decline YTD.  For the full year, management expects exchange members to be flat, with revenue per member to be +1-3%.

For the full-year management is looking for EBITDA to grow by 6% in this business.  I believe that this number is at risk, as it implies a 13% growth rate in EBITDA in H2, and there is a lack of catalysts to create that momentum in the business.

Vacation Ownership Interest (VOI)-

Aside from higher provisioning, this business has been performing well.  The company has grown gross vacation ownership interests sales in recent years.  The company has seen strong momentum YTD 2017.   The main contributor to recent results has been higher tour flow.  The company has been focusing more on new to timeshare owners rather than upgrading existing owners.  Although new owners are less profitable (lower close rates relative to existing owner) they have a good lifetime value, and without new owners the ecosystem will die.

Gross VOI in this business is anticipated to be up 7-9%, but the EBITDA will be flat due to higher provisioning, sales mix shift, and lapping incentive comp miss in 2016.

Catalyst

• 2018 Spinoff
• General risks sorrounding the economy and discretionary consumption apply.  WYN more levered than most to a healthy consumer.