Wyndham Hotels & Resorts, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Wyndham is a global hotel franchisor licensing brands to owners in more than 95 countries. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared primarily with the same periods in 2022. Beginning in 2023, the remaining international full-service management business was aggregated into Hotel Franchising after the company exited substantially all U.S. full-service management, select-service management and owned-hotel activities in 2022.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenues | $362 million | $386 million | $674 million | $757 million |
| Operating income | $123 million | $145 million | $236 million | $305 million |
| Net income | $70 million | $92 million | $137 million | $198 million |
| Diluted EPS | $0.82 | $1.00 | $1.59 | $2.13 |
| Adjusted EBITDA | $158 million | $175 million | $305 million | $334 million |
| Operating margin | 34.0% | 37.6% | 35.0% | 40.3% |
| Net margin | 19.3% | 23.8% | 20.3% | 26.2% |
Fee-related and other revenues increased 1% in Q2 and declined 1% year to date. Cost-reimbursement revenues declined $28 million in Q2 and $79 million year to date because of business exits; corresponding expenses also declined and had little effect on net income. Marketing, reservation and loyalty expense increased 20% in both periods, primarily due to timing of spending.
Global rooms increased 4% year over year to approximately 851,500, including 1% growth in the United States and 9% internationally. Global RevPAR increased 5% in Q2 and 7% year to date; excluding currency effects, increases were 7% and 9%, respectively. Q2 U.S. RevPAR declined 1% against a strong 2022 comparison, while international RevPAR increased 25%, or 34% excluding currency effects.
Cash flow from operations was $176 million for the six months ended June 30, 2023, down from $242 million in the prior-year period. Capital expenditures were $18 million, and net development advance note funding was $31 million. Investing cash flow was an outflow of $19 million versus a $244 million inflow in 2022, which included proceeds from asset sales and a management-contract termination fee. Financing cash flow was an outflow of $254 million, including $61 million of dividends and $164 million of share repurchases.
Cash and cash equivalents were $63 million at June 30, 2023, compared with $161 million at December 31, 2022. Total debt was $2.058 billion, including $37 million due within one year. The company reported approximately $800 million of liquidity, including $741 million of available revolving-credit capacity after letters of credit. Debt fair value was estimated at $2.031 billion.
Material changes versus the prior comparable period
- Q2 net revenues declined 6% and six-month net revenues declined 11%, primarily because of exited management and owned-hotel businesses and lower cost reimbursements.
- Q2 net income declined 24%; six-month net income declined 31%. The six-month comparison also benefited from a $35 million asset-sale gain in 2022 that did not recur.
- Interest expense increased 20% in Q2 and 18% year to date, principally because of higher variable rates on the term loan A.
- The effective tax rate increased to 27.1% in Q2 from 25.2% and to 26.7% year to date from 25.0%, due to state tax-rate remeasurement, geographic earnings mix and lower stock-compensation tax benefits.
- In May 2023, the company refinanced its term loan B, replacing the prior facility with a $1.14 billion term loan B maturing in 2030. The company also incurred $3 million of early-extinguishment costs and $4 million of transaction-related expenses.
- Adjusted EBITDA declined 10% in Q2 and 9% year to date. Hotel Franchising revenue increased 8% in Q2 and 11% year to date, but segment EBITDA declined 5% in Q2 and was essentially flat year to date due primarily to higher marketing spending.
Guidance, outlook, commentary and risks
- Management expects approximately $35 million of 2023 capital expenditures and approximately $60 million of net development advance note funding. The filing does not provide clear full-year revenue, EBITDA or EPS guidance.
- The development pipeline totaled nearly 1,850 hotels and approximately 228,000 rooms at June 30, 2023, up 10% year over year. Approximately 57% was international and 81% represented new construction.
- The company awarded 179 contracts for legacy brands during Q2, up 8% year over year. ECHO Suites had 265 contracts, representing nearly 33,000 rooms, including planned expansion into Canada.
- The company declared $0.35 per share in dividends in each of the first two quarters. It repurchased approximately 2.4 million shares for $165 million during the first six months and had $272 million of repurchase authorization remaining at June 30. The board increased authorization by an additional $400 million in July 2023.
- The company remained in compliance with debt covenants; its annualized first-lien leverage ratio was 2.4x versus a 5.0x maximum. More than 97% of the outstanding term loan B was hedged with interest-rate swaps, but $439 million of variable-rate borrowings remained unhedged at June 30.
- Key risks include inflation, higher interest rates, recessionary pressure, hospitality demand and travel conditions, franchisee financial health, geopolitical events, foreign-exchange exposure, refinancing and covenant compliance, and the potential effects of pandemics.
- The company was aware of approximately 35 pending sex-trafficking-related matters naming it or subsidiaries. Recorded legal reserves were $5 million, and potential aggregate exposure was estimated at up to approximately $7 million above recorded accruals, although management did not expect a material effect on overall financial position or liquidity.
Important facts for investors to verify
- Reconcile reported revenue and EBITDA trends using comparable continuing operations, given the 2022 exits and the 2023 segment reclassification.
- Assess whether international RevPAR growth and room additions can offset slower U.S. comparisons and higher marketing costs.
- Monitor interest expense, SOFR exposure, hedge expirations in 2024 and the maturity profile of the $2.058 billion debt balance.
- Evaluate cash generation after dividends, repurchases, capital expenditures and development advances; cash declined by $98 million during the first six months.
- Review the effect of additional share-repurchase authorization on leverage, liquidity and share count.
- Track litigation developments and possible losses exceeding the $5 million recorded reserve.
- Consider that the interim financial statements were reviewed by Deloitte & Touche LLP, not audited, and that quarterly results may be affected by hotel-industry seasonality.