Wyndham Hotels & Resorts, Inc. — 2019 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2019, filed February 13, 2020. Wyndham is an asset-light global hotel franchisor and manager with approximately 9,280 affiliated properties, 831,000 rooms, 20 brands and operations in approximately 90 countries. Only two hotels were owned. The company operates through Hotel Franchising and Hotel Management segments.
Results include the continuing integration of the La Quinta franchise and management business acquired in May 2018. Historical pre-spin-off financial information was prepared on a stand-alone basis using allocations from former parent Wyndham Destinations and may not reflect costs that would have been incurred as an independent company.
Financial and operating metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenues | $2,053 million | $1,868 million | 10% |
| Operating income | $307 million | $283 million | 8% |
| Operating margin | 15.0% | 15.1% | Approximately flat |
| Net income | $157 million | $162 million | (3%) |
| Diluted EPS | $1.62 | $1.62 | Flat |
| Adjusted EBITDA | $613 million | $507 million | 21% |
| Adjusted EBITDA margin | 29.9% | 27.1% | Improved |
| Cash flow from operations | $100 million | $231 million | (57%) |
| Capital expenditures | $50 million | $73 million | Lower |
- Revenue consisted primarily of royalties and franchise fees of $480 million, marketing, reservation and loyalty revenue of $562 million, license and other revenue from the former parent of $131 million, hotel management revenue of $125 million and cost reimbursements of $623 million.
- Hotel Franchising revenue increased 13% to $1,279 million and adjusted EBITDA increased 21% to $622 million. Hotel Management revenue increased 6% to $768 million and adjusted EBITDA increased 40% to $66 million.
- Total RevPAR was $40.92, essentially flat year over year; U.S. RevPAR increased 2% to $46.39, while international RevPAR declined 4% to $31.85 as reported, but increased 1% excluding currency effects.
- System rooms increased 3% to 831,000, including 6% international growth. The company added 523 hotels and ended the year with nearly 1,500 properties and 193,400 rooms under development.
- Cash and cash equivalents were $94 million versus $366 million at year-end 2018. Total debt was $2,122 million, comprising a $1,568 million term loan, $494 million of senior unsecured notes and $60 million of finance leases. The $750 million revolving facility was undrawn, with $735 million available after letters of credit.
- The first-lien leverage ratio was 2.4 times versus a 5.0-times maximum covenant, and the company reported compliance with its debt covenants.
- Dividends declared totaled $113 million, or $1.16 per share. The company repurchased approximately 4.5 million shares for $244 million. Remaining repurchase authorization was $237 million at year-end.
- Current assets were $499 million and current liabilities were $462 million. The company stated that cash on hand, operating cash flow and financing availability were sufficient for anticipated operating, capital and growth needs.
Material changes versus the prior comparable period
- Revenue growth was substantially supported by the La Quinta acquisition. Excluding the acquisition and a $5 million unfavorable currency impact, reported revenue declined 4%, principally because of lower cost reimbursements, property terminations and a $20 million fee credit to a customer.
- Interest expense increased $40 million to $100 million because of debt incurred to finance La Quinta. This offset operating income growth and contributed to the decline in net income.
- Operating results included $45 million of non-cash impairment charges and $42 million of contract termination charges related to exiting unprofitable hotel-management guarantee arrangements.
- Other unusual charges included $40 million of transaction-related costs, $22 million of spin-off-related costs, $8 million of restructuring costs and a $27 million charge related to the CorePoint agreement and associated tax matters.
- Operating cash flow declined primarily because the company paid $195 million of tax liabilities assumed in the La Quinta acquisition. Cash used in financing activities was $320 million, driven mainly by dividends, share repurchases and debt amortization.
- Assets declined by $443 million and equity declined by $206 million, primarily because of tax payments, dividends and share repurchases.
Guidance, outlook, commentary and risks
- For 2020, management expected capital expenditures of approximately $45 million to $50 million, development advances of approximately $25 million to $30 million, and less than $50 million of previously incurred separation, transaction and contract termination payments.
- Management expected to continue regular dividends and, absent an accretive strategic acquisition, use available cash and operating cash flow for share repurchases. In February 2020, the quarterly dividend was increased 10% to $0.32 per share.
- The company planned to continue expanding its development pipeline, improving retention, investing in technology and brand initiatives, and integrating La Quinta into Wyndham Rewards and other systems.
- Key risks include economic or travel-industry declines, competition from hotel franchisors and alternative lodging, franchisee financial distress, hotel quality and retention, international and foreign-currency exposure, reliance on third-party reservation technology, cybersecurity and privacy incidents, labor and regulatory costs, and changes in relationships with CorePoint and Wyndham Destinations.
- The company identified approximately 30 sex-trafficking-related cases naming it or subsidiaries but could not estimate losses. Recorded legal reserves were $7 million, and potential aggregate exposure from legal proceedings could be up to approximately $10 million above recorded accruals.
- The company provided approximately $127 million of post-closing credit support related to the former parent’s sale of its European vacation-rentals business. Its potential share of losses under the related arrangements was described as one-third.
- One remaining hotel-management performance guarantee had a maximum potential payment of $20 million, subject to a $5 million annual cap and recapture provisions.
- Management identified the Wyndham Rewards liability as a critical audit matter because redemption-rate estimates materially affect deferred revenue and the loyalty-program liability. The recorded loyalty liability was $90 million at year-end.
- The company expected a pre-tax cumulative-effect reduction to retained earnings of approximately $8 million to $12 million upon adoption of the credit-loss accounting standard on January 1, 2020.
Most important facts for investors to verify
- Whether franchise and management fee growth, RevPAR and room additions can offset potential lodging-cycle weakness and international currency pressure.
- The sustainability of adjusted EBITDA and operating cash flow after excluding acquisition, impairment, termination, restructuring, spin-off and other unusual items.
- Debt repayment capacity, interest-rate exposure, LIBOR transition effects, covenant headroom and the maturity profile concentrated after 2024.
- Progress and economics of the La Quinta integration, including remaining transaction costs and expected operating synergies.
- Exposure to CorePoint, Wyndham Destinations, franchisee concentration and the post-closing credit-support guarantees.
- Potential financial and reputational effects of sex-trafficking litigation, cybersecurity incidents, privacy claims and other regulatory matters.
- The impact of loyalty-program redemption assumptions, deferred revenue recognition and adoption of the expected-credit-loss standard.