Business Context and Reporting Period
Wyndham Hotels & Resorts, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company is a global hotel franchisor and manager operating in more than 80 countries through Hotel Franchising and Hotel Management segments. Comparisons with 2018 are affected by the May 2018 acquisition of La Quinta and the company’s separation from Wyndham Worldwide.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net revenues | $533 million, up 23% | $1.001 billion, up 36% |
| Operating income | $62 million, up 59% | $112 million, up 17% |
| Net income | $26 million, up 24% | $47 million, down 23% |
| Diluted EPS | $0.27, versus $0.21 | $0.49, versus $0.61 |
| Adjusted EBITDA | $159 million, up 27% | $270 million, up 24% |
| Operating margin | 11.6%, versus 9.0% | 11.2%, versus 13.0% |
| Net margin | 4.9%, versus 4.8% | 4.7%, versus 8.3% |
- Revenue growth primarily reflected La Quinta, including $55 million of second-quarter and $152 million of six-month cost-reimbursement revenue. Excluding La Quinta, currency effects and the Knights Inn divestiture, revenue growth was approximately 3% for the quarter and 1% for the six months.
- Hotel Franchising generated second-quarter revenue of $331 million and Adjusted EBITDA of $162 million. Hotel Management generated revenue of $201 million and Adjusted EBITDA of $16 million.
- Total RevPAR increased 3% in the second quarter and 4% for the six months; excluding currency effects, increases were 5% and 7%, respectively. International RevPAR declined on a reported basis but increased excluding currency effects.
- Cash, cash equivalents and restricted cash declined to $107 million at June 30, 2019, from $366 million at December 31, 2018. Current assets were $596 million versus current liabilities of $481 million.
- Net cash used in operating activities was $137 million for the six months, compared with $33 million provided in the prior-year period. The result included a $188 million payment for tax liabilities assumed in the La Quinta acquisition.
- Capital expenditures were $25 million for the six months. Management expects approximately $60 million of capital expenditures for 2019, including approximately $10 million for La Quinta integration.
- Total debt was $2.131 billion, including a $1.574 billion term loan, $494 million of senior unsecured notes and $63 million of finance leases. The $750 million revolving facility was undrawn, with $735 million of available capacity after letters of credit.
- The first-lien leverage ratio was 2.6x versus a 5.0x covenant maximum, and the company reported compliance with its debt covenants.
Material Changes Versus Prior Comparable Period
- Second-quarter net income increased despite higher interest expense, which rose to $26 million from $10 million. Six-month net income declined because the prior period included less debt-related interest expense and the current period included unusual charges.
- The company recorded a $45 million non-cash impairment charge and a $9 million contract termination charge related to the expected termination of an unprofitable hotel-management arrangement covering 22 hotels.
- Separation-related costs declined to $1 million from $35 million in the quarter and to $22 million from $46 million for the six months. Transaction-related costs declined to $11 million from $28 million in the quarter and to $18 million from $30 million for the six months.
- The company repurchased approximately 1.8 million shares for $94 million during the six months and had $86 million remaining under its $300 million authorization at June 30, 2019. It paid $56 million of dividends during the six months.
- The company adopted the new lease standard on January 1, 2019, recognizing a $12 million operating lease right-of-use asset and liability at adoption. New headquarters and call-center leases added $22 million of operating lease assets and liabilities during the second quarter.
Outlook, Commentary, Risks and Unusual Items
- Management expects its asset-light model and recurring franchise fees to support operating activities, capital expenditures, strategic investments, dividends and share repurchases. The filing does not provide formal full-year revenue or earnings guidance.
- The company is negotiating termination of another hotel-management agreement covering eight properties. It expects payments to the owner to be significantly below the remaining potential guarantee exposure of approximately $70 million and expects to record a contract termination expense in the third quarter.
- Hotel-management guarantees had a maximum potential future payment of $97 million, subject to a combined annual cap of $26 million. The company carried a $14 million liability for these guarantees at June 30, 2019.
- Risks include hospitality industry and economic conditions, interest rates, foreign exchange, integration of La Quinta, leverage and financing access, litigation, performance guarantees, planned management-contract terminations, seasonality, and geopolitical or security events.
- Legal reserves were $8 million at June 30, 2019. Potential aggregate exposure from adverse litigation outcomes could be up to approximately $10 million above recorded accruals, although management does not expect a material effect on financial position or liquidity.
- Interest-rate swaps hedged approximately $1.1 billion of term-loan exposure. The swaps had a $37 million liability at June 30, 2019, contributing to a $24 million after-tax unrealized loss in accumulated other comprehensive income for the six months.
Investor Verification Items
- Verify the sustainability of underlying franchising growth after removing La Quinta, currency translation, Knights Inn, and timing effects from marketing activity.
- Assess leverage, interest expense and liquidity following the La Quinta acquisition and the $188 million tax payment.
- Monitor the third-quarter contract termination charge and the financial consequences of the eight-property management-agreement negotiation.
- Evaluate the $45 million impairment and related guarantee write-offs, including whether additional management-contract or guarantee exposures remain.
- Reconcile Adjusted EBITDA to U.S. GAAP earnings and consider the effect of excluding impairment, termination, separation, transaction and other unusual costs.
- Confirm future capital allocation, including the remaining share-repurchase authorization, dividend policy and projected 2019 capital expenditures.