Business Context and Reporting Period
Wyndham Hotels & Resorts, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2023. The company is a global hotel franchisor with brands in more than 95 countries and approximately 844,800 rooms at quarter-end, up 4% year over year.
Beginning in the first quarter of 2023, the remaining international full-service management business was prospectively aggregated into Hotel Franchising after the company exited select-service management, sold its two owned hotels, and exited substantially all U.S. full-service management.
Financial Highlights
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenues | $313 million | $371 million | Down 16% |
| Operating income | $113 million | $160 million | Down 29% |
| Net income | $67 million | $106 million | Down 37% |
| Diluted EPS | $0.77 | $1.14 | Down $0.37 |
| Adjusted EBITDA | $147 million | $159 million | Down 8% |
| Cash flow from operations | $93 million | $135 million | Down $42 million |
- Fee-related and other revenues declined 3% to $308 million, while cost-reimbursement revenues declined 91% to $5 million. Cost reimbursements generally have corresponding expenses and limited impact on net income.
- Operating margin was approximately 36.1%, compared with 43.1% in the prior-year period. Net margin was approximately 21.4%, compared with 28.6%.
- Adjusted EBITDA margin on net revenues was approximately 47.0%, compared with 42.9%; comparisons are affected by the management-business exits and segment reclassification.
- Global RevPAR increased 9% on a reported basis and 12% excluding currency effects. U.S. RevPAR rose 4%, while international RevPAR rose 28%, or 37% excluding currency effects.
- Rooms increased 1% in the United States and 9% internationally. The global average royalty rate declined 10 basis points to 3.9%.
Liquidity, Debt and Capital Deployment
- Cash and cash equivalents were $150 million at March 31, 2023, compared with $161 million at December 31, 2022.
- Total debt was $2.077 billion, including $26 million classified as current. Debt consisted primarily of a $1.141 billion term loan B due 2025, a $399 million term loan A due 2027, and $494 million of senior unsecured notes due 2028.
- The revolving credit facility had $741 million of available capacity after $9 million of letters of credit. Management reported total liquidity of approximately $890 million.
- The company was in compliance with its debt covenants. Its annualized first-lien leverage ratio was 2.2x against a maximum permitted ratio of 5.0x.
- More than 96% of the term loan B was hedged with interest-rate swaps. Net variable-rate borrowings after swaps were $444 million; a one-percentage-point rate change would affect annual interest expense by approximately $4 million.
- Net cash used in financing was $95 million, including $31 million of dividends and $54 million of cash repurchases of common stock. The company repurchased approximately 0.8 million shares at an average price of $70.48 and had $381 million of remaining repurchase authorization.
- Capital expenditures were $9 million and net development advance notes funded were $13 million during the quarter.
Material Changes Versus the Prior Comparable Period
- Net revenue decreased primarily because 2022 included revenue from the exited select-service management business, sold owned hotels, and substantially exited U.S. full-service management activities. The related revenue reduction included $50 million of lower cost reimbursements.
- Q1 2022 included a $36 million gain on the sale of the Wyndham Grand Bonnet Creek Resort; no comparable gain occurred in 2023.
- Higher royalties, marketing and loyalty fees, and license fees reflected stronger RevPAR and room growth, partially offsetting the effects of the management-business exits.
- Marketing, reservation and loyalty expense increased $20 million, primarily due to higher related revenues and the timing of spending. Interest expense increased 10% because of higher variable interest rates.
- Operating cash flow declined because of working-capital timing, the management-business exits, and higher development advances. Investing cash flow changed from $192 million provided in Q1 2022 to $9 million used in Q1 2023 because prior-year asset-sale proceeds were absent.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide specific full-year revenue, earnings or adjusted EBITDA guidance in the filing. It expects approximately $35 million of 2023 capital expenditures and approximately $60 million of development advance notes.
- The development pipeline contained approximately 1,800 hotels and 226,000 rooms, up 11% year over year; approximately 57% was international and 80% was new construction.
- The ECHO Suites Extended Stay by Wyndham brand accounted for 35 new contracts in the quarter and more than 25,000 rooms in the pipeline.
- Management expects cash on hand, operating cash flow and available financing to fund operations, capital expenditures and growth needs, but future dividends and repurchases remain subject to board discretion, financial performance, debt covenants and other factors.
- Interest-rate, foreign-currency, inflation, recession, travel-demand, hospitality-industry, franchisee-credit, geopolitical and pandemic-related risks could affect results. The company intends to transition its interest-rate swaps from LIBOR to SOFR by the end of the second quarter of 2023.
- The company was aware of approximately 35 pending matters alleging sex trafficking incidents at certain franchised or managed hotels. Recorded legal reserves were $4 million, and potential aggregate exposure was estimated at up to approximately $8 million above recorded accruals, although management did not expect a material effect on overall financial position or liquidity.
- Other unusual items included $2 million of separation-related costs and $1 million of foreign-currency impact from a highly inflationary economy.
Investor Verification Items
- Verify the comparability of reported revenue and EBITDA given the 2023 segment reclassification and the 2022 exits and asset sale.
- Monitor the $1.176 billion of debt maturing within two to three years, including the term loan B due in 2025, and refinancing conditions as interest rates remain elevated.
- Assess whether RevPAR, international room growth and the development pipeline convert into sustained royalty and fee growth without excessive marketing or franchisee support costs.
- Track cash conversion, development advance funding, capital expenditures, dividends and share repurchases against available liquidity.
- Review developments in the pending sex-trafficking litigation and other legal proceedings, including any changes to reserves or estimated exposure.