WYNDHAM HOTELS & RESORTS, INC. quarterly report, Q3 FY2020

Wyndham Hotels & Resorts, Inc. — Q3 2020 Form 10-Q Summary

Business context and reporting period

Wyndham is a global hotel franchisor operating in approximately 90 countries through Hotel Franchising and Hotel Management segments, including two owned hotels. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The interim financial statements received a review report from Deloitte & Touche LLP, not an audit opinion.

Financial performance and liquidity

Metric	Q3 2020	Q3 2019	9M 2020	9M 2019
Net revenues	$337 million	$560 million	$1,004 million	$1,561 million
Operating income/(loss)	$71 million	$91 million	$(67) million	$205 million
Net income/(loss)	$27 million	$45 million	$(125) million	$93 million
Diluted EPS	$0.29	$0.47	$(1.34)	$0.95
Adjusted EBITDA	$101 million	$190 million	$271 million	$461 million
Cash flow from operations	Not separately presented for the quarter	$57 million	$9 million

Q3 revenue declined 40%; Q3 operating margin was approximately 21.1% versus 16.3% in 2019. Adjusted EBITDA margin declined to approximately 30.0% from 33.9%.
Nine-month revenue declined 36%, and the Company reported an operating margin of approximately negative 6.7% versus 13.1% in 2019. Adjusted EBITDA margin declined to approximately 27.0% from 29.5%.
Total RevPAR declined 38% in Q3 and 42% for the nine-month period. International RevPAR declined 50% in Q3 and 55% for the nine-month period, excluding currency effects where stated.
System rooms declined 2% year over year to approximately 804,000, including the removal of approximately 9,200 unprofitable, non-compliant and operationally challenged rooms during Q3.
Cash and cash equivalents were $735 million at September 30, 2020, compared with $94 million at December 31, 2019. Total assets were $4.894 billion and stockholders’ equity was $963 million.
Operating cash flow was $57 million; investing cash outflow was $24 million; financing cash inflow was $609 million. The financing inflow primarily reflected borrowings and the issuance of senior notes.
Total debt was $2.835 billion, including $234 million drawn under the revolving credit facility, a $1.558 billion term loan, $987 million of senior unsecured notes and $56 million of finance leases. Available revolver capacity was $501 million after $15 million of letters of credit.
Net interest expense increased to $29 million in Q3 and $83 million for nine months, versus $25 million and $76 million, respectively, in the prior-year periods.

Material changes versus the prior comparable period

COVID-19-related travel demand reductions drove lower royalties, franchise fees, marketing and loyalty fees, license fees and owned-hotel revenue. Q3 Hotel Franchising revenue declined 38% and adjusted EBITDA declined 40%; Hotel Management revenue declined 44% and adjusted EBITDA declined 85%.
Nine-month expenses decreased 21%, reflecting lower reimbursement, marketing, operating and general and administrative costs, but these savings did not offset the revenue decline and unusual charges.
The Company recorded $206 million of net impairment charges for the nine months, including $205 million in Q2 for the La Quinta trademark, other trademarks and goodwill associated with an owned-hotel reporting unit, plus a $4 million impairment of a management-guarantee receivable partially offset by a $3 million recovery.
The Company recorded $29 million of COVID-19-related restructuring charges, reduced headcount by 628 employees, and expects annual savings of approximately $50 million to $55 million. A $10 million restructuring liability remained at September 30, 2020.
Revenue comparisons benefited from the absence of a $20 million fee credit recorded in Q3 2019. Prior-year results also included higher contract termination, transaction-related and separation-related charges.
The Company recognized a $16 million cumulative adjustment in Q2 2020 that increased loyalty revenue because COVID-19 changed assumptions regarding member redemptions and related fulfillment costs.
The quarterly dividend was reduced from $0.32 to $0.08 per share beginning in Q2 2020. The Company paid $45 million of dividends during the first nine months, compared with $84 million in 2019. Share repurchases were suspended March 17, 2020.

Guidance, outlook, commentary and risks

Management stated that recovery timing remains uncertain. The Company expects travel demand and RevPAR may remain depressed for some time, although its concentration in economy and midscale hotels, highway corridors and suburban or small-metro markets may provide some relative resilience.
The Company expects approximately $35 million of 2020 capital expenditures and approximately $20 million of development advance notes. It expects cash needs to be funded from cash on hand and operating cash flow.
Management believes existing cash, expected operating cash flow and available financing will be sufficient for operating activities, capital expenditures and growth needs, but continued access to capital may be affected by COVID-19, credit ratings and market conditions.
In August 2020, the Company issued $500 million of 4.375% senior unsecured notes due 2028 and used the net proceeds to repay $500 million of revolver borrowings.
An April 2020 credit agreement amendment waived the quarterly leverage covenant until Q2 2021 and imposed minimum liquidity of $200 million, restrictions on share repurchases and limits on dividends. Dividends may be limited to $0.01 per share if liquidity falls below $300 million and are otherwise constrained to $0.16 per share during the relevant amendment period. The Company reported compliance with its covenants at September 30, 2020.
The Company temporarily closed its two owned hotels in April and May, deferred certain franchisee requirements and fees, provided payment relief, reduced advertising and discretionary spending, and implemented other liquidity-preservation measures.
Further impairment charges remain possible if COVID-19 persists or valuation multiples and projected cash flows decline. The owned hotels were not considered impaired based on the filing’s undiscounted cash-flow analysis at September 30, 2020.
The Company was aware of approximately 40 sex-trafficking-related cases naming it or subsidiaries. It had $8 million of litigation reserves and estimated aggregate potential exposure of up to approximately $5 million above recorded accruals, while stating that a material impact on financial position or liquidity was not expected.
A remaining managed-hotel performance guarantee was subject to a termination notice under a force majeure provision, with alternate dispute resolution ongoing. A related $4 million receivable was fully impaired in Q2.

Important facts for investors to verify

Whether RevPAR, hotel occupancy, room counts and franchisee financial health recover or deteriorate as the COVID-19 pandemic and travel restrictions evolve.
The Company’s ability to maintain minimum liquidity and comply with amended debt covenants while operating with reduced revenue and elevated leverage.
Future dividend restrictions, the timing of any reinstatement of share repurchases and remaining capacity under the repurchase program.
Potential additional impairments to trademarks, goodwill, franchise agreements and management contracts.
Actual restructuring savings and remaining restructuring cash payments through 2021.
Developments in litigation, including sex-trafficking-related claims, management guarantees and CorePoint-related obligations.
Interest-rate and LIBOR-transition effects on the term loan, revolver and related hedges; approximately $1.1 billion of term-loan exposure was hedged and the swaps had a $79 million liability at quarter-end.