Business Context and Reporting Period
Wyndham Hotels & Resorts, Inc. filed its Form 10-K for the fiscal year ended December 31, 2018. The filing includes quarterly data for the fourth quarter, but the primary reporting period is the full 2018 fiscal year. Wyndham became an independent public company on May 31, 2018, following its spin-off from Wyndham Destinations.
The company is an asset-light hotel franchisor and manager with 20 brands, 9,157 affiliated hotels, approximately 809,900 rooms, more than 5,900 franchisees and operations in over 80 countries. Approximately 92% of its system was franchised at year-end. The company completed its $1.95 billion cash acquisition of La Quinta's franchising and management businesses on May 30, 2018.
Financial Performance and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net revenue | $1,868 million | $1,280 million | 46% |
| Operating income | $283 million | $249 million | 14% |
| Net income | $162 million | $230 million | (30%) |
| Diluted EPS | $1.62 | $2.31 | (30%) |
| Adjusted EBITDA | $507 million | $383 million | 32% |
| Operating cash flow | $231 million | $278 million | (17%) |
| Capital expenditures | $73 million | $46 million | 59% |
Reported operating margin was approximately 15.1%, compared with 19.5% in 2017. Net margin was approximately 8.7%, compared with 18.0%, while Adjusted EBITDA margin was approximately 27.1%, compared with 29.9%. The margin comparisons were affected by the La Quinta acquisition, cost reimbursements, spin-off expenses, transaction costs and the unusually low 2017 tax rate.
- Hotel Franchising revenue increased 27% to $1,135 million and Adjusted EBITDA increased 28% to $515 million.
- Hotel Management revenue increased 90% to $726 million, including $586 million of cost reimbursements, and Adjusted EBITDA increased 124% to $47 million.
- Excluding cost reimbursements, franchising represented approximately 89% of revenue and hotel management approximately 11%.
- Total RevPAR increased 8% to $40.80; excluding currency effects, total RevPAR increased 9%. U.S. RevPAR increased 10% and international RevPAR increased 3% on a reported basis.
Liquidity, Debt and Capital Allocation
Cash and cash equivalents were $366 million at December 31, 2018, compared with $57 million at December 31, 2017. Total debt was $2,141 million, consisting principally of a $1,582 million term loan, $494 million of 5.375% senior unsecured notes due 2026 and $65 million of capital leases. The $750 million revolving credit facility was undrawn, with $735 million of available capacity after letters of credit.
Net cash used in investing activities was $1,728 million, primarily reflecting the La Quinta acquisition. Financing activities provided $1,808 million, principally from acquisition-related borrowings. The company reported a first-lien leverage ratio of 2.1 times versus a 5.0 times covenant maximum and stated that it was in compliance with its debt covenants.
- The company paid $75 million of dividends in 2018, or $0.75 per share.
- It repurchased approximately 2.3 million shares for $119 million and had $181 million remaining under its $300 million authorization at year-end.
- 2019 capital expenditures were expected to be $60 million to $65 million, including $10 million to $15 million for La Quinta integration.
- Contractual obligations totaled $3,146 million, including $2,141 million of debt, $655 million of estimated interest and $205 million of La Quinta-related tax liabilities expected to be paid in early 2019.
Material Changes Versus the Prior Comparable Period
- La Quinta added more than 900 hotels and nearly 89,000 rooms, increased the managed portfolio from 116 to approximately 440 properties and contributed $513 million of revenue, including $324 million of cost reimbursements.
- Revenue growth substantially exceeded operating-income growth because of acquisition-related costs, cost reimbursements, higher depreciation and amortization, and stand-alone public-company expenses.
- Net income declined despite higher operating income because net interest expense increased from $6 million to $60 million and the 2017 results included an $85 million tax benefit from U.S. tax reform.
- The company incurred $77 million of separation-related costs and $36 million of net transaction-related costs in 2018. The 2017 period included $41 million of non-cash impairment charges.
- Operating cash flow declined by $47 million, primarily because of lower net income and $35 million of tax payments assumed with La Quinta.
- The hotel system expanded from 8,422 to 9,157 properties and from 728,200 to approximately 809,900 rooms.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal earnings or revenue guidance. Management emphasized continued international expansion, growth in franchised and managed properties, integration of La Quinta, potential acquisition opportunities, recurring franchise fee streams and returning capital through dividends and share repurchases. The company reported a pipeline of more than 1,400 hotels representing nearly 180,000 rooms, more than half international.
Management stated that it expects sufficient liquidity from cash, operating cash flow and financing facilities to fund operations, capital expenditures and growth needs. However, the company has substantial leverage and variable-rate debt exposure; a one-point change in underlying interest rates was estimated to affect annual interest expense by approximately $6 million.
- Integration of La Quinta may not deliver anticipated synergies, cost savings or revenue benefits and is dependent in part on the company's relationship with CorePoint Lodging.
- The hotel business is exposed to economic downturns, changes in travel demand, seasonality, competition, labor and operating costs, natural disasters, terrorism, pandemics and geopolitical events.
- Franchisee financial distress, hotel quality issues, contract nonrenewals and failures to maintain properties could reduce fees and damage brand reputation.
- The company faces risks from online travel intermediaries, short-term rental platforms, cybersecurity incidents, privacy regulation and technology-system disruptions.
- Post-spin-off arrangements with Wyndham Destinations include a 100-year trademark license, transition services, tax matters and other indemnification obligations. The company provided approximately $130 million of post-closing credit support related to the former parent's European vacation-rentals sale and assumed one-third of certain related losses.
- Hotel management guarantees had a maximum potential future payment of $103 million, subject to a combined annual cap of $26 million. Legal proceedings could result in up to approximately $35 million of exposure above recorded accruals, although management expects insurance to cover a significant portion and does not expect a material overall impact.
- La Quinta represented approximately 46% of total assets and 27% of 2018 revenue, and was excluded from management's year-end internal-control assessment under SEC acquisition guidance.
Important Facts for Investors to Verify
- Reconcile reported revenue growth and margins for the full-year and fourth-quarter periods, distinguishing La Quinta contributions and cost reimbursements from underlying fee growth.
- Review debt maturities, interest-rate swaps, covenant calculations and the effect of variable interest rates on cash flow.
- Assess whether La Quinta integration synergies and the projected $10 million to $15 million of 2019 integration spending are tracking as expected.
- Evaluate franchisee retention, room and hotel pipeline conversion, RevPAR trends and the concentration of managed hotels with CorePoint.
- Monitor the $205 million La Quinta tax liability, management guarantees, litigation exposure, former-parent indemnities and the $130 million European vacation-rentals credit support.
- Consider the comparability limitations of pre-spin-off financial statements, which include allocations from Wyndham Destinations and do not fully represent stand-alone public-company costs.
- Verify the sustainability of dividends and share repurchases in light of leverage, debt covenants, acquisition plans and future operating cash flow.