WH - NYSE

Good morning, ladies and gentlemen. Welcome to the Wyndham Hotels & Resorts Third Quarter 2025 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.

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 and investor presentation, which are 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, 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.

Good morning, everyone, and thanks for joining us today. Our Q3 results illustrate yet another quarter of resilience and execution by our teams around the world. Despite a challenging macro environment, we delivered a 21% increase in room openings, signed 24% more deals in the quarter and grew our global pipeline by 4% to 257,000 rooms and nearly 2,200 hotels. We drove an 18% increase in ancillary fee streams and year-to-date, our resilient, highly cash-generative business has produced over $260 million of adjusted free cash flow and returned $320 million to our shareholders. As we continue to focus our development on higher FeePAR brands and geographies and expand our direct franchising in regions that previously relied on master licensees. We're adding hotels with stronger long-term economics. As of September 30, our global pipeline carried a FeePAR premium of over 30% domestically and 25% internationally compared to our existing system. Here in the United States, we grew our mid-scale and above system by over 200 basis points, led by solid conversion activity and some great new construction additions, including another 4 ECHO Suites opening in strong markets like Reno, Nevada and Sterling, Virginia. Earlier this month, we also introduced Dazzler Select by Wyndham, a domestic extension of our Latin America Dazzler by Wyndham brand into the economy lifestyle space here in the United States. Targeting hoteliers seeking flexibility without sacrificing the power of scale, we're attracting owners of high-quality economy hotels who want to preserve their properties' individuality while tapping into Wyndham's global distribution, loyalty, technology and marketing platforms. Internationally, we grew net rooms by 9%. EMEA grew its net rooms by 8% with several new construction additions like the stunning new Wyndham Grand Udaipur in India, where we now have 88 direct franchise hotels open across that important country and another 50 in our development pipeline. Along with spectacular new conversions like the Dolce by Wyndham, Comwell, an iconic upscale edition with 5-star meeting facilities in the heart of historic Aalborg Denmark. Latin America and the Caribbean grew net rooms by 4% with 5-star additions like the new Wyndham Grand Costa del Soul located inside of Lima, Peru's new Jorge Chavéz International Airport, as well as several exceptional conversions like the Isla Verde, a trademark collection by Wyndham Hotel near some of the most beautiful beaches in the Caribbean. In China, we grew our direct franchising system 16% with many outstanding new construction additions like the Wyndham Grand in the port city of Yucheng on the Yangtze River, our 50th Wyndham Grand in China, along with the La Quinta Turpan in the hub of the world famous Silk Road, our 10th La Quinta in the Asia Pacific region. In Southeast Asia and the Pacific Rim, net rooms increased 13% with several exceptional additions like the Hotel Traveltine, our first trademark collection hotel in Downtown Singapore. And in July, we announced a strategic partnership with the Ovolo Group, bringing 4 Design Forward Ovolo hotels and resorts into our system later this quarter and strengthening Wyndham's upscale offerings in Sydney, Brisbane, Canberra and Melbourne. RevPAR declined 5% in constant currency, both globally and domestically, reflecting continued consumer caution in an uncertain economic environment, especially within the select service segments here in the United States, where our guests are more price sensitive. While we saw continued outperformance across parts of the Midwest in states like Oklahoma, Michigan, Illinois, in Missouri, Minnesota and in Ohio, which collectively grew RevPAR 4% versus prior year, continued softness in the Sunbelt states where Wyndham over-indexes from a room count standpoint more than offset that strength. Internationally, RevPAR declined 2%, driven primarily by Asia Pacific, which was down 8%, led by China down 10% and Latin America, which declined 5%. Elsewhere internationally, performance remained strong. Both Europe and the Middle East grew 4% with considerable strength in Spain, Turkey and Greece. And in Canada, which continued to impact U.S. leisure drive-to markets, RevPAR increased 8% as Canadian travel domestically remained strong. Beyond RevPAR, our focus on growing our ancillary fees again delivered impressive results. New strategic partnerships, new technology initiatives and growth in our co-branded credit card program, where new accounts increased 11% and average spend grew 7%, fueled an 18% growth in third quarter ancillary fees, raising our year-to-date growth to 14%. A key contributor to this growth is the continued strength of Wyndham Rewards, which achieved a record 53% share of occupancy contribution for our domestic hotels and an 8% increase in our global membership enrollments. And earlier this week, we introduced Wyndham Rewards Insider, a travel rewards annual subscription program and a first of its kind among our branded peer set in the hotel loyalty space. As the $500 billion subscription economy is projected to grow to over $2 trillion, Wyndham wants to be a part of that, and Wyndham Rewards Insider offers unmatched value to our 121 million Wyndham Rewards members for an annual subscription of $95 per year. Members subscribing to these upgraded lifestyle benefits will enjoy savings of up to 30% and earn opportunities across flights, hotels, car rentals, cruises and so much more. They'll be granted annual Wyndham Rewards Gold status, exclusive concierge services, Ticketmaster, earn and burn access, expansive bonus earning opportunities on hotel stays and many additional exciting benefits. Capturing the essence and generosity that defines Wyndham Rewards as the fastest way to earn a free night, Wyndham Insider will further enhance the program's appeal and reinforce the strength that has kept Wyndham Rewards ranked the #1 hotel loyalty program by the readers of USA Today for the eighth consecutive year. Last quarter, we talked about the success of Wyndham Connect and Wyndham Connect PLUS, a suite of supercharge technology innovations that we're promoting to our owners as Wyndham AI. This quarter, over 230 AI agents with encyclopedic knowledge on each of our 8,300 hotels began leveraging the power of Salesforce, Oracle and Canary Technologies to generate and modify direct bookings while also answering questions and providing tailored travel recommendations by utilizing large language model AI and first-in-industry Agentic AI voice assistance. These new Wyndham AI Agentic Assistants are delivering seamless and complete natural language conversations with full guest service support while also handling live messaging through WhatsApp and Apple messaging. Wyndham AI is driving more direct bookings, introducing front desk workloads that's accelerating significant ancillary revenues for thousands of our hotel owners through automatic upsell opportunities like early check-ins, late checkouts and in-room amenity upgrades. To date, Wyndham AI has already handled more than 0.5 million customer interactions, delivering faster service, higher booking conversion and a 25% reduction in average handle time, all contributing to nearly 300 basis points of improvement in direct contribution for hotels leveraging Wyndham AI to its fullest potential. And with only 7% of our 8,300 hotels now live with this new Agentic AI by Wyndham component and adoption ramping quickly, we're only beginning to unlock what Wyndham AI can deliver. Before Michele takes us through the financials, we as always want to extend our sincere appreciation to our team members and franchisees worldwide without whose passion and collaboration, our solid performance and execution would not be possible. Their conviction in the opportunities ahead of us, coupled with their commitment to our strategic initiatives to deliver exceptional value, continues to be the cornerstone of our success. And with that, I'll now turn the call over to Michele.

Thanks, Jeff, and good morning, everyone. I'll begin my remarks today with a detailed review of our third quarter results. I'll then review our cash flows and balance sheet, followed by an update to our outlook. Before we begin, let me remind everyone that the comparability of our financial results continues to be impacted by the timing of our marketing fund spend. In the third quarter of this year, marketing fund revenues exceeded expenses by $18 million compared to revenues exceeding expenses by $12 million in the third 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 third quarter, we generated $382 million of fee-related and other revenues and $213 million of adjusted EBITDA. Fee-related and other revenues declined 3% year-over-year, primarily reflecting a 5% decrease in global RevPAR, as Jeff mentioned, as well as lower other franchise fees. These headwinds were partially offset by an 18% increase in ancillary revenues, a larger global system and royalty rate expansion, both domestically and internationally. Despite $12 million of lower fee-related and other revenue, adjusted EBITDA was flat year-over-year on a comparable basis as the revenue decline and elevated costs related to insurance, litigation defense and employee health-care programs, all of which are reflective of the broader operating environment were more than offset by operational efficiencies and onetime cost containment measures. Adjusted diluted EPS for the quarter was $1.46, up 1% on a comparable basis as the benefit of share repurchases was partially offset by higher interest expense. Adjusted free cash flow was $97 million in the third quarter and $265 million year-to-date with a conversion rate from adjusted EBITDA of 48%. Development advance spend totaled $22 million in the third quarter, bringing our year-to-date investment to $73 million. These investments support high-quality FeePAR accretive additions that strengthen our system and future earnings power. Year-to-date, about 30% of our openings have included development advances, and these hotels are entering our system at a FeePAR premium roughly 40% above our current system. We returned $101 million to our shareholders during the third quarter through $70 million of share repurchases and $31 million of common stock dividends. Year-to-date, we have now repurchased 2.5 million shares of our stock for $223 million. We closed the quarter with approximately $540 million in total liquidity, and our net leverage ratio of 3.5x remained as expected at the midpoint of our target range. Last week, we completed the refinancing of our revolving credit facility, increasing total capacity to $1 billion, a more than 30% increase in potential liquidity while reducing the borrowing cost of the facility by 35 basis points and extending maturity to 2030. Turning to outlook. With RevPAR trends softening throughout the third quarter, we now expect full year constant currency global RevPAR to range between down 3% to down 2%. This represents a reduction of 100 to 300 basis points from our prior outlook and implies fourth quarter global RevPAR of down 7% to down 4%. At the low end, this assumes roughly 200 basis points of additional softening beyond third quarter results, while the high end assumes slightly better performance than the 5% decline experienced in Q3. This outlook also assumes that U.S. performance continues to lag meaningfully behind our international regions and that international trends moderate modestly from recent levels. There are no changes to our net room growth outlook of 4% to 4.6%. Fee-related and other revenues are now expected to be $1.43 billion to $1.45 billion, down $20 million to $40 million from our prior outlook of $1.45 billion to $1.49 billion. Since our initial outlook in February, RevPAR has come in about 500 basis points softer and our revenue forecast has decreased by approximately $60 million. Through cost containment measures, including both operational efficiencies and onetime variable reductions, we have been able to offset approximately $30 million of that revenue shortfall as well as $15 million of incremental costs primarily related to litigation defense and employee health-care programs. As a result, adjusted EBITDA is now expected to be between $715 million and $725 million, down $15 million to $20 million, or approximately 2% from our prior outlook of $730 million to $745 million. Our marketing fund expenses are now expected to exceed marketing fund revenues by approximately $5 million, which reflects a modest investment to support in-flight initiatives that strengthen the long-term health of our franchise system. As a reminder, we do not adjust the performance of our marketing funds out of our reported results and we have a strong track record of recovering these investments and fully intend to do so here as well. Adjusted net income is projected to be $347 million to $358 million and adjusted diluted EPS is projected at $4.48 to $4.62, which is based on a diluted share count of 77.5 million and as usual, does not assume future share repurchase activity or incremental interest expense associated with any potential new borrowings. There are no changes to our outlook for development advance spend or free cash flow conversion. In closing, we remain focused on executing our plan in this challenging economic environment. We're maintaining cost discipline across controllable expenses, delivering strong ancillary revenue growth returning capital to shareholders and investing in our business to attract high-quality additions to our system, all while continuing to expand our royalty rate and grow our pipeline. With that, Geoff and I will be happy to take your questions.

[Operator Instructions] We'll go first this morning to Dan Politzer with JPMorgan.

This is dual-pronged, but as you think about this challenging RevPAR environment that we're currently in, especially in the economy segment, can you talk about, I guess, what's in your control and what you're doing, and what's out of your control and kind of the active things that you're doing? And then similarly, how do we gain comfort that there isn't something structurally wrong with the economy segment, just given the recent RevPAR trends are obviously pretty concerning?

The structural piece, I'll take first. I mean we're moving into our slowest quarter of the year. And despite the softness that we talked about in Texas, California, Florida, we are seeing nothing structural that concerns us in any of the leading indicators that we look at daily. Our booking lead times, they're up 2% to prior year. Our length of stay are consistent with last year, something that if we thought something structural was happening would not be the case. And our cancellation rates have actually improved over last year by 160 basis points in Q3 versus prior year. So on those indicators, we feel good. Slide 11 is an interesting slide that we've -- because we know you're getting a lot of questions, we're getting a lot of questions on this structural question. And we're looking at demand and occupancy. And this year, if you look at that slide, we're seeing occupancy down across all chain scales year-over-year with the divergence of RevPAR really being driven by ADR with the upscale segments taking rate, while the economy and the mid-scale where we're concentrated are not. Occupancy, as we all know, has not recovered to pre-COVID levels in any segment, but it has more so in economy and mid-scale. If we look versus 2019, STR mid-scale is down 5% to 2019 versus upper upscale and luxury, both down 8% to 2019, 100 basis points worse than economy and 300 basis points worse than mid-scale. So the question you ask in terms of is there anything structural that we're seeing out there aside from persistent inflation and consumer uncertainty and immigration in some of those states that we mentioned that aren't helping is the upscale hotels are able to price more aggressively to inflation than the lower chain scales are where the guest is obviously more price sensitive. STR ADR for economy is up 11% to 2019 versus up 29% in the luxury segment. And luxury is the only segment, as we know, that's been able to outpace inflation growth at 26%, which is very good news for economy and mid-scale segments from a pricing power standpoint moving longer term, especially as wage growth continues to outpace inflation, providing upside when that consumer confidence stabilizes and we get back to that 2% to 3% CAGR. In terms of the first part of the question, what we're doing to help our franchisees, franchisees in the lower chain scales are beginning to discount. We're seeing that in the rates, more so to try to capture demand right now. And we're helping franchisees where we can and urging franchisees to hold rate where it makes sense, especially on leisure versus the corporate contracted pricing and discounting where appropriate, but not playing heavily in that last-minute discounting on those all channel sales. We're trying not to discount last minute because of the long-term value dilution. And we're seeing our brands, they gained the most share in the mid-scale. We saw 160 basis points of RevPAR index, and it's being driven by the weekday, which was up 180 basis points for our mid-scale brands. And we're gaining with more rate index, which our revenue management teams really want to see continue for franchisee profitability.

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

So just a follow-on to that. We'll stick on the demand side for a minute. And maybe just talk about business and infrastructure-related travel demand, specifically to what extent the new administration's curtailment of government spending and that sort of program has slowed down the pipeline of projects that I know that you guys have been excited about that was driving a tailwind late last year. And maybe data centers have been a bit of a positive offset, but if you could sort of frame that up for us.

Thanks for the question, Brandt. Yes, look, we continue to view the $1.2 trillion of infrastructure as a multiyear tailwind for our franchisees. That's going to drive over $3 billion of revenue to our hotels. And the 150 basis points of growth that drove for us in the Q4 of last year is now more on par with the rest of our portfolio. Obviously, there's a lot of headlines out there that allocated monies have potentially been frozen as the federal government looks to possibly reallocate among states. And we're seeing some projects being paused as project priorities are certainly shifting. For example, EV-related spending is more shifting to energy spending or modernizing highways and bridges and air traffic control we read a lot about. But we're optimistic that the infrastructure spending, again, over 80% of which is not spend, is going to resume at some point. Infrastructure room nights contracted this year are up 2x versus consumed, and they're pacing well ahead of same time last year. And to the back part of your question, we're also very confident that private investment in reshoring and manufacturing will continue to boom as it has specifically with data centers, as you mentioned, where our hotels in those markets outperform the hotels from a RevPAR standpoint and have gained 500 to 600 basis points. Many of the states that we called out in our script are certainly benefiting from that. We're spending a lot of time with our teams. We've identified over 150 planned data centers. And the Wyndham hotels in those markets that we're tracking and targeting from the $1.6 billion Amazon Web data center in Canton, Mississippi to the $800 million Meta data center in Graniteville. They're seeing traction, and we're contracting with the surveyors from a GSO global sales standpoint and the design firms on the data centers that haven't even begun. There's so much early site development. Our teams, we met recently with the Mississippi Governor, Kate Reeves. And the $1.4 billion AWS data center in Richland, Mississippi is the biggest investment that's ever seen. So our hotels within the radius, and we've got a lot of them, are seeing improvement in Q3 market share, which gives us a lot of optimism compared to the other sites and markets outside of those radius that are under pressure for all the reasons we mentioned. So it's a really big deal and something that we're very excited about.

We go next now to Dany Asad of Bank of America.

Michele, in your prepared remarks, you mentioned that you expect U.S. RevPAR in Q4 to be in line with Q3. Look, we're obviously still early in the quarter, but any early reads you can share with us as to where we're trending today relative to that domestic down 5% expectation?

I'd say from an October perspective, we are encouraged by some of the early trends in our 3 largest states, California, Texas and Florida, we're seeing RevPAR track about 100 basis points above September performance. We've also seen stabilization in U.S. booking pace month-to-date in October and a really strong Oktoberfest in Germany. So those are some of the green shoots that we're tracking. The rest of the portfolio appears to be performing more in line with third quarter results. So our fourth quarter implied RevPAR is at the midpoint anchored to those third quarter results and also includes, I'd say, the headwinds from last year's hurricane. And then the high end would assume some modest improvement from those trends, not a sharp rebound at all. And again, it's supported by those things that I just mentioned. And then, of course, the low end would allow for some further softening. But we believe -- certainly believe it is potentially achievable if booking trends hold and some of that strength I mentioned continues through the end of the year.

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

With respect to net unit growth, right, presumably, the bigger it gets, the easier it is to weather RevPAR volatility. Geoff, can you -- or Michele, can you talk about what kinds of momentum we can expect to see from you in terms of net unit growth, and what the gating factors or puts and takes would be toward next year being the same or better than what we have in terms of total net unit growth in geographies, et cetera, a lot to talk about there.

Yes, there is, David, and our favorite David Katz quote, "Nothing lasts for a lifetime." We need RevPAR to get back. But we're feeling very good about our NRG outlook. Accelerating in the higher fee segments, it's continued. And as you've seen, we've opened a record 48,000 organic rooms year-to-date. which is up 9% to prior year. It's up 29% to 2019. And what we're really happy about and confident about looking forward is that openings are pacing ahead of prior year. And net room growth sequentially is pacing ahead each quarter throughout the year. So Q1, we added net 4,800 rooms. Q2, 6,800 net rooms were added and Q3, 8,700 net rooms were added in the quarter. So as of September 30, we have opened 9% more rooms versus where we were same time last year. So we're feeling again very good about our outlook. And 70% of those rooms are in the mid-scale and the above segments. We're -- in terms of next year, given just how strong the pipeline is, we're feeling very, very good. This was our 21st consecutive quarter of pipeline growth. and it's up sequentially and it's up 4% versus year-over-year with, again, a concentration in higher RevPAR segments in markets not only across the U.S., but obviously internationally as well. 60% of our pipeline is international with really steady growth across Europe, the Middle East, Eurasia, Latin America, which have grown 140% since spin and 170% in Latin America's case since spin. So with that type of continued growth in net rooms, we're feeling confident about the rest of the year, obviously, and more importantly, next year in '27.

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

Two-parter for you, probably for Michele here. Just first on the franchise fees in the third quarter. Can you maybe give us a little more detail on what's in that other bucket that you mentioned? And maybe also why were they down more than you thought? Any color there would be helpful. And then second part is just as we think about the bridge into next year, maybe help us put some of the moving pieces with G&A, the cuts this year and maybe any step-ups that you expect next year?

With respect to franchise fees, Mike, that line item captures a number of items that aren't tied directly to rooms or RevPAR. So those are things like termination fees, transfer fees, application fees, transactional revenue that's subject to varying revenue recognition policies. These items are event-driven. So the level of activity can vary quarter-to-quarter. For example, the number of transfers in any given quarter can shift based on deal timing and obviously, transaction volume, which is down quite meaningfully this year industry-wide 24% for the select service space. So I think when we look at these fees, they're healthy. It's a high-margin part of our business, but naturally variable. And that's why occasionally, you're going to see some movement year-over-year in this line item. This quarter, we saw a $7 million decline versus last year third quarter. But in terms of our internal expectations, we were only short about $3 million to our forecast. And year-to-date, I think these fees are just roughly maybe $2 million ahead of last year. So we're really -- we really look at the Q3 decline as timing related. I think the second part of your question was with respect to next year. And I'd say it's still too early to talk about our 2026 expectations. We're just beginning our planning process now. We are, of course, approaching the budget the same way we always do. We're staying very focused on what we can control. From an expense perspective, we did have some variable reductions this year. About half of those we expect will be permanent to the margin and the other half are more temporary for 2025.

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

Maybe we could pivot to ancillary revenue. Can you talk about your expectations for ancillary fee growth to accelerate from low teens this year to mid-teens in 2026? What are the drivers of that, specifically from a credit card perspective? How should we think about lapping the tough compares for most of this year? And do you expect the procurement business to also accelerate next year?

Okay. Yes. There's a lot in there. I'm going to try to remember your 6-part question. We're really pleased with how ancillary revenues are performing, up 18%, I think, in the quarter. Year-to-date, we're tracking 14%, pretty much in line with maybe modestly ahead of our low teens expectation. On the credit card side, we saw a 10% increase in new accounts. We saw a 7% lift in average spend per cardholder. That's an acceleration from the Q2 metrics, which were 5% and 2%, so 5% in new accounts and 2% in average spend. For ancillary revenues, we've got several initiatives driving this multiyear above algo growth. So Credit card is obviously the largest contributor to growth this year, but we've got the replatforming happening later this year as well as early next year. That's another inflection point from a growth perspective. Then we've got international expansion. We've got the debit card, which is ramping slowly and intentionally slowly. We've got technology like Wyndham Connect. And then we're really excited about Wyndham Insider. It's first of its kind, as Geoff mentioned, to add-on subscription service. It won't drive much in EBITDA this year or even perhaps next year as we focus on ramping the program and testing and proving out the model. But we think there's real opportunity here in future years from an ancillary fee perspective. So at this point in time, like I just mentioned, still a little too early to talk about 2026. We don't consider the forecast or the 2026 period as lapping a tough comparison. We see -- we're growing off of a higher base, obviously, post renewal, but we still think there is a significant growth opportunity, not just in 2026, but like I said, multiyear tailwinds from the number of initiatives we currently have in place.

I think the only thing you missed, Steve asked about was sourcing, a team that Michele leads and a team that's making significant strides, Steve. We've got new sourcing categories and global expansion of programs that are really benefiting our franchisees. New sourcing brands that Michele's team are adding like Nestle, Seattle's Best, Starbucks on the coffee side and a great program for franchisees when it comes to sourcing insurance through a program that's driving significant savings on franchisee insurance quotes, which is a big issue for small business owners, resulting in a lot of savings for franchisees. So we're optimistic as well that we've got a lot of upside on the sourcing side.

We'll go next now to Lizzie Dove of Goldman Sachs.

You mentioned in the presentation that your new deals which require key money are coming in at about a 40% FeePAR premium versus the portfolio. But then China is also becoming -- or has become a bigger part of the mix. Curious like how we should think about the kind of balance of that mix shift, the benefit from the key money deals versus China and whether this is kind of accretive or dilutive to RevPAR over time?

So key money is absolutely accretive to RevPAR over time. We are having great success with that strategy, bringing in high-quality product in higher demand, higher RevPAR markets. I think your question more has to do with the mix of net room growth, right? So as we grow faster in international regions that have lower royalty rate, that could wind up looking dilutive to the overall royalty rate and maybe even dilutive to FeePAR on a global basis, but still very accretive to revenue and very accretive to EBITDA. So we have -- from our perspective, the world is a very big place. Nothing -- no market is off limits just because it's a lower RevPAR market. We may not be incentivizing our development team as much to tap into those markets, and we may be adding more feet on the street in higher RevPAR markets, all of those things are very true. But if the deal comes our way and we can support it appropriately and drive the value proposition, we're not going to say no just because the RevPAR market itself is a lower RevPAR market. And again, like I said, I think from a key money perspective, feel highly confident that where we are deploying our money is for higher FeePAR product coming into our system.

And I think it's fair to say, Michele, that we're not deploying key money in China today, correct, or very little.

That's right.

Yes. I mean -- and we're, Lizzie, just having a great success over there with -- as we've talked a lot about with you when we've been out on the road driving that double-digit net room growth increase in direct FeePAR accretive rooms without key money. And it was just so great to see what happened again this quarter, the team executed 52 new deals in the quarter in China, 30% more than last year and 11% now more than last year year-to-date. And it was great to see that net room growth grow sequentially and the pipeline grow sequentially. Pipeline was up 3% in China without key money. And so many of those contracts awarded are new construction. I mean, just absolutely positively stunning new adds this quarter with Wyndham Grands and just some phenomenal locations competing against our larger peers in so many cities across China without the use of key money. So we're really excited that, that could continue. And congratulations on your recent nuptials.

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

Geoff, I appreciate some of the detail you gave on the AI front, but I want to make sure I understood some of what you're doing there. Is that largely an internal AI tool to drive bookings in the direct channels? And if so, how do you think about partnerships or opportunities with indirect channels? For example, what would make partnering with an LLM more or less attractive versus other LLMs or even considering compared to OTAs?

Well, a lot to unpack there, Stephen, how we would consider it. I mean, certainly, Chat, Perplexity, Gemini are reshaping how guests book hotels. And it is presenting a unique opportunity for us to continue to reduce our dependency on OTAs. I've heard you asked this question before. We continue to add new capabilities to optimize how our brand.com sites appear in LLM searches, and we're currently experimenting with MCP server, a sort of USB port, if you will. For AI to allow LLMs to plug into us to directly access all of our hotel availability, all of our rates, all of our inventory, making it easier for an LLM to receive fully updated hotel information from a trusted source. What we referenced in the script and that we've not put into the IP is what the last 6 years of investment, the $375 million that we have invested in our industry-leading tech stack with best-in-class providers who all embrace AI. We don't think we could build it better than Oracle or Adobe or any of these great providers we partner with. We were the first to cloud with a very scalable system that is fully optimized right now, 100% optimized to drive down cost. You could read a lot about our tech team's success. Rackspace, a global leader in cloud management recently said that Wyndham's cloud environment is more optimized for AI than most, if not all of its competitors. And that's enabling us to innovate faster and innovate at a lower cost. I mean AI has been helping everyone in the industry for years on the security front, the marketing front, the operations front. But what we're doing with Wyndham AI, which is an industry first is leveraging now that we have the system built Salesforce and Canary, Canary Technologies with the 250 AI agents that we talked about who are handling hundreds of thousands of guest calls. Mrs. Grambling calls and she wants to book the Gramblings on a holiday. And one of our AI agents know everything about whichever one of our 8,300 hotels, the Grambling kids want to visit. And it's able to answer any question, on any question that, that guest might have about any of our hotels and seamlessly book it. And that's what's driving direct bookings. That's what is allowing our franchisees to save on the labor cost. And it's what's driving right now 300 basis points of increased direct contribution for only 600 of our 8,300 hotels have that specific Wyndham AI piece enabled so far. We talked last call on Wyndham Connect, which is allowing us to talk to customers with AI. A lot of our competitors are doing that. We're taking labor-intense tasks away from our franchisees. We're allowing them to make extra money by seamlessly selling an early check-in or late checkout to the Gramblings, or an upgrade or amenities in terms of what the kids want in the refrigerator. But what we're doing right now with Wyndham AI in terms of that direct booking piece is what really excites our franchise sales team and our franchisees. We're told by Oracle, who works with all of our peers that we're doing things really no one else is, and it's something that our franchisees are very, very excited about.

We'll go next now to Ian

I just wanted to ask kind of a follow-up on the Wyndham Rewards Insider. Michele, I know you said kind of not a lot of EBITDA impact either this year or next year. But how do we kind of frame the opportunity here? Maybe just longer term, like when you conceptualize what it could deliver to you from either a profitability standpoint, et cetera, or maybe point us to kind of a comparable program that you might think your rewards system could deliver? And then also, how do you actually get there? Would that just be on the fees? Would it be on more loyalty? Just any other type of color you could give us there would be helpful.

I would frame it, and Michele could add to this, but we're very excited about it. I think it has the potential to deliver engagement on par at some point with our credit card. Wyndham Insider right now, as Michele said, we expect a strong take rate for members over the next 24 months. And over time, it has that type of potential. So long-term fee growth is certainly the goal. But short term, as Michele said, the focus is more on proving out the model and using returns to further grow Wyndham Rewards. Our new co-branded credit card complements it, and with the credit card rewarding everyday spend, and we're really excited about that, but Insider enhancing Wyndham Rewards value proposition. I mean we know, to frame the opportunity that the subscription economy is absolutely booming, the hotel loyalty travel subscriptions are really in their infancy. Of those that have something like this in the hotel space, they're tied and they're limited to select brands or hotel-only benefits. But at $95 a year, we expect the savings for the average Wyndham Rewards member to more than cover the fee after just one trip. Plus members earn a free night, and we hope you subscribe to this, Ian, at thousands of hotels with the 7,500 annual bonus points. It expands our value prop to our most important members and it basically stacks their discount. So if our promo rate to you is 10% off, as an Insider, Ian

We'll go next now to Alex Brignall of Redburn.

The first one is on the marketing expense overspend. Could you just talk a little bit about what that specifically is and you talk about getting it back. Does that sort of specifically mean in the next couple of years? And what are the benefits that you're getting and who's sort of sharing them between you and franchisees? And then the second, you talked a lot about the structural dynamics of RevPAR and demand in the U.S. It's obviously something that's a curiosity for a lot of people. In September, it was obviously a very, very hard comp for the economy segment because of the hurricane impact last year. But versus 2019, the gap between luxury and economy was actually -- there was no gap having previously been a very large gap in the months before. I guess what I'm wondering is if that gap is to close and you talked about franchisees cutting rates, are you worried that it will be because the higher segments will have to see price deterioration because you become a better value prop versus them because of the relative cumulative price growth over time? Or do you think that the economy segment can see sort of a big bounce back in pricing in 2026?

I'll take the fund question, Geoff, and then maybe you want to address the second part of Alex's question. I mean, look, it's $5 million overspend to the marketing fund, let's keep it in perspective. The fund is over $0.5 billion, right, so in annual activity. So it's only roughly 1% of total spend. So still a very immaterial amount when we're trying to kind of manage that level of spend. And remember, we're the only large lodging corporation that does not adjust these marketing funds out of our reported earnings. If you look at the peer set, their -- the variability from their marketing funds is much larger than $5 million. So we feel pretty good about how we've been able to manage that level of annual activity in this RevPAR environment. specifically. And I think as RevPAR deteriorated specifically throughout the third quarter, we had to make a conscious decision on whether or not we were going to stop some in-flight initiatives or we were going to continue them. And certainly, there were ones that we decided to pause, but there were a bunch of other ones that we looked at the overall benefits of those investments to our franchisees and to our -- the overall health of our franchise system. things like Wyndham Insider, for example, some of the AI initiatives that Geoff was talking about, a bunch of personalization initiatives that we're doing and some updates we're doing even to our digital platform to our websites. And so we decided that we were going to continue to invest in those programs. They will have benefits not just in 2025, but well beyond 2025. So ultimately, we view this modest overspend as an investment, and we do have a very strong track record of recovering these funds in future periods, and we're really comfortable with that decision. When we recover this $5 million could be as early as 2026. It could be 100% in 2026, it could be 100% in 2027. It could be some in '26 and some in 2027, but certainly more in the nearer term as opposed to the longer term.

In the back half, Alex, it's a really good question. I've seen your sort of the answer on it, I think, in your Hitchhiker's Guide. If you think about the rate for economy up whatever it is, 10% to where we were pre-COVID and luxury right now at up 30%. And to your point, what's happening there, it is very good news for our economy and mid-scale segments from a pricing power standpoint. And at some point, we do believe, to your question, that can flip when consumer confidence stabilizes. Remember, both of those segments, economy and mid-scale were the first to recover coming out of COVID. And we know that at some point, domestic RevPAR is going to return to that 2% to 3% long-term CAGR that it's always averaged, and especially given the earlier comments, everything that's out there from a macro setup on the infrastructure and private investment side, the historically low levels of supply and moreover on the leisure side, I mean, we've got a lot to look forward to next year, like America 250, the FIFA World Cup, which is a $20 billion impact in markets like STR says Atlanta's impact is $2.1 billion. We've got a lot of hotels in Atlanta, along with Dallas and Houston, right, which right now, with all of the consumer uncertainty and immigration activity is stressed, but Dallas and Houston are both going to benefit from that next year. L.A. and California, where we're down, is going to benefit. Miami is going to benefit from FIFA World Cup next year, where we've got a lot of hotels in Florida, 300 in Florida, 400 in California, 700 hotels in Texas, our 3 largest states, and we've got half a dozen other cities that this FIFA World Cup is going to play in where we've got collectively about 1,000 hotels. So it's an interesting observation.

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

So many questions, I don't know where to start. So I was thinking about something touching upon what Stephen mentioned. So realizing how the lodging sector supply continues to evolve and there's a wider array of options for consumers, including short-term rental and distribution shifting, all these moving parts. Of course, this is nothing new to Wyndham. But it is something we're increasingly fielding questions on given the push from OTAs like Booking and Expedia and Airbnb to get into the lodging sector. So I was really hoping you might be able to speak a little bit about how Wyndham views these opportunities and how you're going up against some of these challenges in nontraditional or as some might label it shadow supply. So that would be really helpful.

Yes. It's an interesting question. Our teams think about a lot, Meredith. Agentic AI, the possibility of STRs, short-term rentals coming into the space from a distribution standpoint is they're all certainly bringing a different rhythm to search that's more frequent and more automated. AI is really moving the traditional SEO to GEO, which we talk a lot about that generative engine optimization with these new channels searching for more trust and more contextual relevance. And so how we think about it is all about with our franchisees and our teams and our brand teams is our reputation and the confidence, which is always the top signal in any search. Whenever you go on vacation, you're doing your own research. And we're trying to find ways, and we are finding ways through Wyndham Connect, which we've talked a lot about and Matt put in the deck. It's improving that confidence with guests and more frequent reviews from our guests. We're engaging more frequently and more immediately through so many different ways, SMS messaging, voice and digital to add context to your search. And we're boosting higher online review scores. because immediately, when Meredith Jensen checks out now from one of our hotels, we're asking you for review on TripAdvisor, on Google Reviews, on all of the major OTAs because we want your feedback, and we want to improve that feedback because we know it's the key indicator of quality. And it's the whole point of consistency for overall satisfaction in those large language model searches.

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

All right. As always, Leo, thank you very much, and thanks, everybody, for your questions and your interest in Wyndham. Michele, Matt and I look forward to talking to and seeing many of you in the weeks ahead at several of the upcoming investor lodging conferences that we'll be attending. In the meantime, have a great weekend ahead, and happy Halloween, everyone. Thanks again for joining us today.