Middle. The simple word and its shorter form, mid, rarely conjure happy thoughts. Middle seat. Middle child. Midlife crisis. And, of course, there’s stuck in the middle. But in terms of our industry—in terms of chain scale—that mid space, the one between economy and upscale—is not such a bad spot to be. And that spot is only getting sweeter. Just look at the research: By all accounts, and as reported earlier this year in our Industry Outlook (see the January 15th issue), midscale is in the spotlight and situated right in the center, yes…but at the front as well.
And Wyndham Hotel Group (WHG) not only knows this, but is strategically and confidently securing its spot as a midscale player. Perhaps, one could argue, the midscale player.
When Hotel Business named Geoff Ballotti, president/CEO of WHG, one of its “10 to Watch” at the end of 2017 (see the December 15th edition), he had just been through a particularly busy year—and one that made the headlines of not only our industry, but the business world at large. In August of last year, Stephen Holmes, chairman/CEO of Wyndham Worldwide, announced Wyndham Worldwide would spin off the company’s hotel business resulting in two companies: WHG, with its headquarters in Parsippany, NJ, would become a new, publicly traded, pure-play hotel company, and Wyndham Vacation Ownership, with its headquarters in Orlando, FL, would become the world’s largest publicly traded timeshare company, joining with Wyndham Destination Network, home to RCI, the world’s leader in timeshare exchange. At that time, the corporate names of the post-spin companies had not been decided—and, as of press time, we’re still waiting for the announcement, which is expected soon, as is the close of the transaction, which is on track for completion at the end of Q2.
The idea behind the separation agreement, so to speak, was, in part, designed to allow each company, post spin, to maintain a sharper focus on its core business and growth opportunities and respond to developments in its respective markets. And with significant scale and a robust portfolio of solid brands already part of WHG’s DNA, the strategic initiative is letting them continue to do what they do best: Grow. With Ballotti at the helm of the hotel business, his goal is to continue advancing the company’s leadership in the economy and midscale hotel segments, while growing the company’s upscale portfolio and management business. He wants to be bigger. Just ask him. Hotel Business did when we sat down with him and EVP/Chief Development Officer Chip Ohlsson, at the company’s headquarters in New Jersey, on what happened to be the day of Wyndham Worldwide’s earnings call.
“The first question I was asked on the call was, ‘As a public company, is Wyndham going to be a company that continues to acquire?’” said Ballotti. “And the answer is: Absolutely.” The CEO continued, “We want to continue to grow, and I think what’s most exciting is we’re growing in the segment of the market we want to grow in. We’re growing in the midscale segment.”
The CEO continued, “CBRE last week came out with the report that demand will continue to outstrip supply in both economy and midscale through next year, and new supply in the midscale space is still well under 2% looking ahead. When you’re looking at RevPAR in the 2-3% range, that’s a great place to be.”
Everybody has always known WHG as a leader in the economy—or, as WHG likes to term it, value—space. The company has four of the top five hotels ranked in the J.D. Power North America Hotel Guest Satisfaction Index Study: Microtel Inn & Suites by Wyndham, Days Inn, Howard Johnson and Super 8. But with the recent plan to acquire La Quinta’s hotel franchise and management business—announced in January—the NJ-based company will have four of the five top midscale brands, too. And that’s nothing to take too lightly. In fact, it’s “incredible,” as Ballotti told Hotel Business. With the acquisition of AmericInn completed in October 2017, and now La Quinta, as well as the company’s Baymont Inn & Suites and Wingate by Wyndham—which, has been number one for three years running—WHG’s midscale presence is stronger than ever.
“When you look at our now 21 brands, all but two have been acquired,” said Ballotti. “One is Wingate by Wyndham, and the other is The Trademark Hotel Collection [which launched as a soft brand in June of last year], which already has 70 hotels—high-quality assets.” According to Ohlsson, WHG took its time on this launch, identifying a gap in the marketplace in the upper-midscale space. “We are seeing no stoppage in terms of independent hoteliers who did a great job of developing in their marketplace and putting a fantastic hotel in place, but now have to compete with some of the bigger brands,” Ohlsson said. “So they keep their independence but have the engine behind them.”
“In terms of acquisition, there’s not a day that goes by that we don’t have a team out looking at something,” said Ballotti. “What becoming a public company allows us to do is to continue to acquire and do deals we otherwise would not be able to do as part of a much larger company. We will now have a multiple consistent with our peers, which will be higher with the corporate parent after the spin. We’re looking to grow both through acquisition and organically.”
On the acquisitions side, La Quinta adds 892 managed and franchised hotels and AmericInn added 202 hotels to Wyndham’s portfolio—and moreover, they build upon WHG’s strong midscale presence and expand its reach further into the fast-growing upper-midscale segment. “After the La Quinta acquisition, we’ll have 40% of the rooms in the midmarket space under the Wyndham flag,” said Ohlsson.
What the two brands had in common and what made them so attractive to WHG was they “fit a purpose,” said Ballotti. “They were very high quality, very consistent, and 85% of AmericInn hotels are four stars and above on TripAdvisor. They are brands we knew, Chip knew, his team knew and franchise sales team knew. And our new-construction team also knew both could grow from a new-build standpoint and a conversion standpoint.
“Also, when you look at La Quinta’s Del Sol prototype, I really see that as trending toward the upscale, upper-midscale,” Ballotti continued. “And when you look at what Raj [Trivedi, EVP/chief development officer at La Quinta] and David [Wilner, SVP, franchise development at La Quinta]—the team that’s going to join us—had been doing, when you look at their pipeline—252 hotels in their pipeline and 80% of those being Del Sol new-construction prototypes—that clearly fit a niche that would continue to grow on its own. It was clearly defined, very well positioned and has a lot of runway.”
Furthermore, looking at it from a research analysis standpoint, 30% of the markets in the U.S. and North America do not have a La Quinta, and there now is a combined team looking at those markets. “They can go in and say, ‘OK, Mr. Owner, you’re thinking of all these competitors, but isn’t La Quinta a more attractive, more compelling value proposition because it’s now part of a larger platform?’” said Ballotti. “Can the Del Sol prototype continue to grow? Absolutely.”
“We have 236 La Quintas in Texas alone,” added Ohlsson. “That gives us: 1) a great base of business that we can build off of and 2) allows so many other markets that we can take that same scalability to. That’s what excites us about this deal, and when we look at acquisitions, that’s what excites us in general.”
But every acquisition has to be a symbiotic relationship. What does WHG bring to the table? It brings scale and all of the associated benefits. What does the intended purchase bring to WHG? How does Wyndham avoid brand blur—avoid overlap with what it already does? Like any other relationship, it needs to feel right, be the right fit. “If it’s not complementary to what we do, why do it?” said Ohlsson.
Toward that end, Ballotti was quick to point out that not every opportunity is the right one, and they’ll pass if it’s not. “We had a team who came back late last night and it was, ‘Should we buy this brand?’ And we decided we should not because it didn’t do anything for us, even though it was in the midscale space and it was a very nice brand,” he said. It felt too much like another WHG brand, according to the CEO, and it wasn’t one they’d want to grow more than they want to grow their own brand from a new-construction standpoint. “So, we walked away from it,” said Ballotti. “It’s got a great multiple, it would probably have a great return and it would be dozens and dozens of new hotels, but it didn’t fit our purpose.”
Fitting their purpose, the $170-million acquisition of the AmericInn brand and its hotel management company boosted the hospitality giant’s footprint and strengthened its position as a midscale segment leader. The brand addition expanded the company’s North American portfolio by roughly 12,000 rooms and, maybe more significantly, takes the Midwestern name to the big stage, giving it national play. And the owners, beyond growth and recognition, will have access to the sales, marketing and distribution channels. Guests will have access to the award-winning Wyndham Rewards program.
“And that integration has gone really, really well,” said Ballotti. “We’re looking to put them onto our res platform and once that’s done, that will allow us to bring them onto our loyalty platform. It’s been six months of integration and six months of heavy lifting to get ready for the day to take those 202 AmericInn hotels and bring them onto Sabre’s reservation system.”
And back to the more recent planned $1.95-billion-cash purchase of La Quinta—its owned real estate assets to be spun off into a publicly traded REIT, CorePoint Lodging—the deal will result in Wyndham having some 9,200 locations and 807,000-plus rooms across more than 75 countries, making it the largest hotel company in the world by number of hotels and third largest by rooms. La Quinta will marry its rewards program of 13 million members with that of Wyndham’s, which has 55 million enrolled members.
Moreover, the La Quinta deal underscores WHG’s growth in the management side of the business, something that has been important to the hotel company for seven or eight years now, according to Ballotti, starting with a few large portfolio deals (FelCor Lodging Trust, RLJ, Hospitality Properties Management Trust). “Obviously, this will quadruple our size; this will make us one of the top five management companies in the U.S.,” said the CEO. “We’re still the largest franchisor. And when we look at our competition, scale has never been more important. As this industry continues to consolidate in the economy and midscale space, there will be all sorts of opportunities for folks knocking on our door looking for that lower cost of distribution, that lower OTA commission, looking for those revenue synergies but also often looking for management opportunities. And the larger we become in management, the stronger those management teams become.”
The CEO went on to say that one of the things he’s most excited about is that the larger Wyndham’s management system becomes, the more opportunity for talent development across the managed system—including opening up the 350 La Quinta general managers to opportunities at the company’s other 100 managed hotels in North America and around the world. “They might be looking to move up to the upper-upscale or upscale market where we’re strong today and becoming stronger,” said Ballotti. “And similarly, it will allow a lot of our department heads in our upper-upscale and upscale managed hotels who are looking for that first GM experience to have a first GM experience. That’s an awesome thing to be able to offer. There is so much movement of talent. Your average GM is moving every three to five years, everybody is looking for new opportunities, and so it’s really important to grow in the managed space. It’s important to have that offering domestically—and it’s especially important to have that capability overseas. The number of opportunities that present themselves if it is a managed deal are significant.”
“Moreover,” added Ohlsson, “It gives us firsthand knowledge of trends going on in the marketplace, what’s working and not working in each market, so we can translate that out to our ownership group on the franchise side. If we see something working in our managed hotels, and we don’t have to hear about it secondhand from our ownership, we can share that experience with our franchise side.”
That all being said, WHG recognizes there still needs to be a balance and will still deal with a lot of third-party management companies going forward. “Again, our size and the scale that we have allows us to open doors in a lot of different aspects of third-party management, so we’ll continue to do that also,” Ohlsson said.
AmericInn and La Quinta weren’t the only recent headlines for the hotel company, though; there was also the rebranding initiative with American Hotel Income Properties (AHIP), completed at the end of 2017: 46 hotels—approximately 3,800 rooms—including all of the hotels in AHIP’s Oak Tree Inns rail hotel portfolio, were converted to Wyndham hotel brands. In total, 28 hotels have converted to Travelodge hotels, 15 have become Baymont Inn & Suites, two are now Super 8 and one will remain a Days Inn. Each of these hotels can now be booked through Wyndham’s worldwide reservation network, and all converted hotels are now in sync with Wyndham Rewards. In reference to that deal, Ballotti stated, “This was the single largest conversion of hotels to Wyndham’s portfolio, yet the onboarding of these 46 properties has been absolutely seamless.”
“We talk about the cost to capture a guest and how to lower it,” said Ohlsson. “What are the best ways to do that? Align yourself with one of the largest companies. It’s part of the value proposition we brought to AHIP and, for that matter, the other owners of the world. It’s a simple math equation for them to understand: ‘I’m paying this for OTAs, I’m paying this for my credit cards, I’m paying this for marketing.’ If we can give them one centralized place that does a lot of that for them and drops those costs down, then everything else we provide through our channel shift is upside.”
The AHIP hotels are in the economy and midscale space, but really more toward midscale, said Ohlsson. “The transition has gone exceptionally well for us,” he said. “They’ve seen a great lift already in the first few months. There are some great economies of scale coming on with a company like us. Now we’re seeing a lift on top of it. It’s been a double win. They’re very happy.”
As the reigning brand in the economy segment, Hotel Business asked the executive how WHG’s strength in economy translates to midscale. Ballotti’s immediate response: “I think it’s scale and size.” He continued, “Think about La Quinta and what this deal will provide for roughly 900 franchisees and 350 REIT-owned CorePoint Lodging-owned hotels. Because of the size of our economy system, which is the largest in the world, they are going to benefit from the scale on the sourcing side, on the purchasing side, whether we’re buying fixtures or furniture or equipment, whether we’re buying their energy. You’ve got all of that system size behind it. There’s certainly tremendous cost savings because of the size of our economy system. And negotiating with the OTAs. We’re now negotiating on behalf of 9,200 hotels as opposed to 900 hotels for those owners.”
Another benefit is the cross selling and revenue opportunities WHG can provide. “Think about somebody looking on our website who has a budget for a $100 average rate hotel and they’re looking for a more upscale experience in a market where today we only have economy hotels. We can now cross sell those opportunities on our website, call centers, all of our social media channels and present tremendous revenue opportunities in the midscale space because of our size,” Ballotti said.
“And more than that,” Ohlsson said, “It’s also the evolution of the guest. That guest started in the economy segment and may have been traveling throughout college or with the family and now is at a different station in life. They know Wyndham, they trust Wyndham, and they want to be or stay part of that family. Owning that midscale segment as they move up, we can now continue to capture that guest. So it’s about owning that guest from the first time they travel to the last day they travel. That’s what you’ll see with Wyndham.”
Ohlsson remarked, “We talk about next generation a lot. But it’s not only about the next-gen guest. It’s also, for us, about the next-gen owner. A lot of people grew up and their first hotel was a Days Inn. Now I get to go out and work with their kids who are taking the company to the next level. And that’s why an acquisition like La Quinta is so important to us because that’s where they’re developing. That’s the next generation of hotel they’re developing: the Del Sol prototype. That’s what we want to see: That when your father or mother started with us, you can continue on with the Wyndham family.”
Ballotti told Hotel Business, “Not a day goes by where I don’t spend time on the phone with franchisees of La Quinta. And Chip is right: I would say two-thirds of them—probably higher—began their ownership with Days Inn and still own Days Inns. The pride in that brand and the awareness of that brand—it is nostalgic to most people in the industry.” The CEO was quick to recall and remind us that AAHOA was founded in the offices of Days Inn with Henry Silverman back in 1989.
WHG has built some new prototypes for the economy and midscale brands that are growing the fastest, and ones which Ohlsson is having the most success with out in the market (Wyndham Garden, Hawthorne Suites by Wyndham, Microtel Inn & Suites by Wyndham, Wingate by Wyndham). “They’re new and fresh,” said Ballotti.
“We just hired Gensler to go out there,” Ohlsson said. “We said, ‘Hey, you’ve done this in the luxury space, you’ve done this in some upscale properties, now show us what you can do in the midscale space. Show us how to do it at a more economic value.’ And they’ve come up with some great ideas that we’ll be implementing. It’s a nonstop process [defining the brands]. You can’t sit on your laurels; you have to always go out there and look and ask, ‘How do we get better at what we do?’”
And while there will be a new prototype for a handful of the brands—new guestroom designs—the other thing WHG is doing right now is putting a VR (virtual reality) campaign around the other hotels that it doesn’t have prototypes for. “You’ll be able to put on the goggles and walk through a room and have that experience,” said Ohlsson. “It’s going to be a full experience from the minute you walk into it.”
Bolstering its leadership position in the midscale space aside, what excites the CEO the most for 2018? “We’ve been on this three year journey of technology transformation that required the last 2.5 years of doing some really heavy lifting,” said Ballotti. “We are transitioning our hotels across the U.S. off of servers that were twice the size down in the basement onto a new state-of-the-art cloud-based secure PMS. And we’ve been moving brand by brand onto the Sabre Synxis system, which is the most connected global distribution system on the planet. We’re now plugging our brands in brand by brand.”
All of WHG’s economy and midscale brands are expected be on Sabre by the middle of this year. “We will not have the heavy capital expenditure and have to keep up with the continued technology releases that you think about each time you’re asked to upgrade your iPhone,” said Ballotti. “We will have something that is two to three years ahead of where others will ultimately land. We will now have the proof that is so apparent to other companies, like La Quinta [which will be plugged into that platform by Q1 2019], and any other companies that might present themselves or be acquired by then. I really think it gets down to technology and distribution. It’s more important than ever in this midscale, economy space where everyone is fighting for share.”
“So where will we be in five years? In two years? Where will we be next year?” Ballotti queried. “I’d like to say we’re going to be bigger than we are today. We’re going to continue to grow in that midscale space. We still see great room and great growth.” HB