Wyndham Hotels & Resorts, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly results for the three months ended March 31, 2020, filed May 5, 2020. Wyndham is a global hotel franchisor operating in approximately 90 countries through Hotel Franchising and Hotel Management segments, with approximately 828,300 rooms at quarter-end. Results were materially affected by the COVID-19 pandemic and related travel restrictions.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net revenues | $410 million | $468 million | Down 12% |
| Operating income | $56 million | $50 million | Up $6 million |
| Net income | $22 million | $21 million | Up 5% |
| Diluted EPS | $0.23 | $0.22 | Up $0.01 |
| Adjusted EBITDA | $107 million | $111 million | Down 4% |
| Cash flow from operations | $17 million | $7 million | Up $10 million |
| Capital expenditures | $7 million | $9 million | Down $2 million |
| Interest expense, net | $25 million | $24 million | Up $1 million |
| Effective tax rate | 29.0% | 19.2% | Higher |
Net income benefited from lower operating, general and administrative, marketing, and separation-related costs, partially offset by lower revenue and $13 million of COVID-19-related restructuring charges. The implied net income margin was approximately 5.4%, compared with approximately 4.5% in the prior-year quarter; adjusted EBITDA margin was approximately 26.1%, compared with 23.7%.
- Total RevPAR was $27.68, down 24%; U.S. RevPAR fell 18% and international RevPAR fell 36%.
- Hotel Franchising revenue decreased 10% to $243 million and adjusted EBITDA decreased 4% to $108 million.
- Hotel Management revenue decreased 15% to $167 million, while adjusted EBITDA increased 6% to $17 million, partly due to higher termination fees.
- Cash and cash equivalents were $749 million at March 31, 2020, versus $94 million at December 31, 2019.
- Total debt was $2.852 billion, including $734 million drawn on the $750 million revolving facility; only $1 million of revolver capacity remained after letters of credit.
- Total liabilities were $4.046 billion and stockholders’ equity was $1.112 billion at March 31, 2020.
- Financing activities provided $647 million, primarily from revolver borrowings. The company paid $30 million of dividends and repurchased $50 million of stock during the quarter.
Material changes versus the prior comparable period
- COVID-19 drove a sharp decline in travel demand and RevPAR, reducing royalties, franchise fees, marketing and loyalty revenues, management fees, owned-hotel revenues, and license revenues.
- Rooms increased 2% year over year to 828,300, primarily from international franchising growth, but Hotel Management rooms declined 11% following CorePoint Lodging asset sales and termination of unprofitable agreements.
- The company incurred $13 million of COVID-19-related restructuring charges and eliminated 262 employees during the quarter.
- Separation-related costs declined to $1 million from $21 million in the prior-year quarter; transaction-related costs increased to $8 million from $7 million.
- The company adopted the current expected credit loss standard, recording a $10 million after-tax cumulative adjustment to retained earnings. The allowance for doubtful accounts ended at $58 million.
- Other comprehensive loss was $39 million, primarily from unrealized cash-flow-hedge losses of $36 million, compared with other comprehensive loss of $7 million in Q1 2019.
- On March 17, 2020, the company suspended share repurchases.
Guidance, outlook, management commentary and risks
- Management estimated April U.S. RevPAR declined approximately 70% and expected the second quarter to be the most severely affected period. Recovery timing remained uncertain.
- The company temporarily closed its two owned hotels, reduced advertising and discretionary spending, limited capital expenditures, and implemented workforce and compensation reductions.
- Management expected 2020 capital expenditures of approximately $25 million to $30 million and development advance notes of approximately $25 million to $30 million.
- Management expected less than $50 million of previously incurred separation, transaction and contract-termination costs to be paid during 2020.
- The company expected approximately $30 million of annual savings from the first-quarter restructuring. A subsequent May 4 plan eliminated approximately 180 additional positions and was expected to produce $21 million to $25 million of annual savings, with approximately $18 million of pre-tax charges.
- In April 2020, the revolving credit agreement was amended to waive the quarterly leverage covenant through the second quarter of 2021. The amendment requires minimum liquidity of $200 million, restricts share repurchases, increases borrowing costs, and limits dividends to $0.16 per share or, if liquidity is below $300 million, $0.01 per share.
- The company stated that it had more than two years of liquidity at then-current monthly cash usage rates before triggering the $200 million minimum-liquidity covenant, but had no significant additional borrowing capacity at March 31.
- The quarterly dividend policy was subsequently reduced from $0.32 to $0.08 per share beginning with the expected second-quarter declaration, subject to Board approval.
- Key risks include prolonged or worsening COVID-19 effects, franchisee and property-owner financial distress or bankruptcy, reduced access to capital, debt covenant compliance, potential impairment of goodwill and trademarks, weaker room growth, litigation, foreign-exchange exposure, and interest-rate risk.
- The company identified approximately 30 sex-trafficking-related lawsuits naming it or subsidiaries. It had accrued $6 million for legal matters and estimated aggregate potential exposure of up to approximately $5 million above recorded accruals, although loss likelihood and amounts were not yet estimable for the identified cases.
Most important facts for investors to verify
- Whether travel demand, RevPAR, franchisee liquidity, and hotel closures improve or deteriorate after March 31, 2020.
- Compliance with the amended credit agreement’s $200 million minimum-liquidity requirement and dividend restrictions.
- Actual cash burn, revolver repayment capacity, debt maturities, and interest costs.
- Whether COVID-19 results in impairment charges for goodwill, trademarks, franchise agreements, management contracts, or owned-hotel assets.
- The timing and cash cost of the May workforce-reduction plan and the realization of projected savings.
- Future dividend declarations and the continued suspension of share repurchases.
- Developments in litigation, including sex-trafficking claims, and whether recorded reserves remain adequate.