Business Context and Reporting Period
Wyndham Hotels & Resorts, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company is a global hotel franchisor and manager operating in more than 80 countries through Hotel Franchising and Hotel Management segments.
The financial statements are combined statements before the May 31, 2018 spin-off from Wyndham Worldwide Corporation, now Wyndham Destinations, Inc., and consolidated statements thereafter. Comparability is affected by the spin-off and the May 30, 2018 acquisition of La Quinta’s hotel franchising and management businesses.
Financial Performance and Key Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net revenues | $604 million | $347 million | $1,341 million | $967 million |
| Operating income | $105 million | $102 million | $201 million | $241 million |
| Net income | $58 million | $58 million | $118 million | $138 million |
| Diluted EPS | $0.58 | $0.58 | $1.19 | $1.39 |
| Adjusted EBITDA | $166 million | $124 million | $382 million | $307 million |
| Cash flow from operations | Not separately presented for the quarter | $101 million | $152 million |
Q3 operating margin was approximately 17.4%, compared with 29.4% in the prior-year quarter. Nine-month operating margin was approximately 15.0%, compared with 24.9%. Q3 net margin was approximately 9.6% in both periods; nine-month net margin declined to approximately 8.8% from 14.3%.
- Q3 revenue increased 74%, primarily from $238 million of incremental La Quinta revenue, including $154 million of cost reimbursement revenue. Excluding La Quinta, revenue increased 5%.
- Nine-month revenue increased 39%, including $315 million of incremental La Quinta revenue and $200 million of cost reimbursement revenue. Excluding La Quinta, revenue increased 6%.
- Q3 Adjusted EBITDA increased 34% and nine-month Adjusted EBITDA increased 24%. Adjusted EBITDA margins were approximately 27.5% and 28.5%, respectively, versus 35.7% and 31.7% in the comparable periods.
- Total system rooms increased 13% to approximately 798,300 at September 30, 2018. Total RevPAR increased 9% for both the quarter and nine months, excluding currency effects where disclosed.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $387 million at September 30, 2018, compared with $57 million at December 31, 2017. Total assets were $4.991 billion and total liabilities were $3.548 billion.
- Total debt was $2.145 billion, consisting primarily of a $1.585 billion term loan, $493 million of 5.375% senior unsecured notes due 2026, and $67 million of capital leases. The $750 million revolving facility was undrawn, with $736 million available after letters of credit.
- Net cash provided by operating activities was $101 million, while investing cash use was $1.697 billion, primarily reflecting the La Quinta acquisition. Financing activities provided $1.924 billion, including $2.1 billion of long-term debt proceeds.
- The company paid $52 million in dividends and repurchased approximately 1.0 million shares for $59 million during the first nine months. $241 million remained available under the $300 million repurchase authorization at September 30, 2018.
- Management expected 2018 capital expenditures of $50 million to $60 million, excluding Rio Mar property expenditures and La Quinta integration costs, plus $20 million to $30 million for Rio Mar repairs and renovations and additional La Quinta integration spending.
- The first-lien leverage ratio was 2.1 times versus a 5.0-times maximum covenant. Management stated that existing cash, operating cash flow and financing availability should be sufficient for operating, capital and growth needs.
Material Changes, Outlook and Unusual Items
- La Quinta was acquired for $1.95 billion in cash and added more than 900 franchised hotels and nearly 89,000 rooms. Managed properties increased from 116 to more than 430. The purchase accounting remained preliminary at September 30, 2018, including $1.094 billion of goodwill.
- Separation-related costs were $17 million in Q3 and $63 million for nine months. Transaction-related costs were $7 million and $37 million, respectively, primarily related to La Quinta; the nine-month amount was partially offset by a $23 million gain on the sale of the Knights Inn brand.
- Nine-month operating income and net income declined despite higher revenue, primarily because of separation and transaction costs, increased interest expense, and acquisition-related expenses. Net income also benefited from lower effective tax rates of 28.4% in Q3 and 28.5% for nine months, versus 42.0% and 41.5%, respectively.
- Argentina was treated as a highly inflationary economy beginning July 1, 2018, resulting in $4 million of foreign-currency losses in Q3 and nine months.
- The company adopted the revenue recognition standard retrospectively on January 1, 2018. The adoption affected initial franchise fees, contract costs, marketing and reservation expenses, and loyalty revenue recognition.
- Management highlighted risks related to integrating La Quinta, realizing spin-off benefits, hospitality demand, economic and geopolitical conditions, credit markets, foreign exchange, post-closing credit support, litigation, debt covenants and future dividends or repurchases.
Commitments and Contingencies
- Legal reserves were $28 million at September 30, 2018. Potential aggregate exposure from adverse legal outcomes was estimated at up to $28 million above recorded accruals, with a significant portion expected to be covered by insurance.
- Hotel management guarantees had maximum potential future payments of $104 million, subject to a combined annual cap of $26 million. Related liabilities were $23 million.
- The company had $63 million of liabilities related to post-closing credit support for Wyndham Destinations’ former European Vacation Rentals business, offset in part by $42 million of receivables from the former Parent.
- Contractual obligations totaled $3.263 billion, including $2.145 billion of principal debt, $734 million of estimated interest, $368 million of purchase commitments and $16 million of operating leases. The schedule includes $205 million expected to be paid in late 2018 or early 2019 for La Quinta-related tax obligations.
Facts Investors Should Verify
- Progress and final purchase-price allocation for La Quinta, including integration costs, synergies and goodwill or intangible-asset adjustments.
- Debt reduction capacity, variable-rate exposure and compliance with the first-lien leverage covenant.
- Whether operating cash flow recovers from the acquisition, tax payments and separation-related cash costs.
- Sustainability of RevPAR growth and the contribution of La Quinta versus underlying legacy-system growth.
- Amounts and timing of La Quinta tax liabilities, credit-support obligations, legal contingencies and management-guarantee payments.
- Future dividend and share-repurchase activity, which remains subject to board discretion, cash needs and debt covenant restrictions.