Wyndham Hotels & Resorts, Inc. — 2019 Q1 Form 10-Q Summary
Business context and reporting period
Wyndham Hotels & Resorts is a global hotel franchisor and hotel manager operating in more than 80 countries. The filing covers the three months ended March 31, 2019. The company’s principal segments are Hotel Franchising and Hotel Management. The 2018 comparative period includes combined results before and after the June 2018 spin-off from Wyndham Worldwide and is affected by the acquisition of La Quinta in 2018.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net revenues | $468 million | $302 million | 55% |
| Operating income | $50 million | $56 million | (11%) |
| Operating margin | 10.7% | 18.5% | Down 7.8 points |
| Net income | $21 million | $39 million | (46%) |
| Net margin | 4.5% | 12.9% | Down 8.4 points |
| Diluted EPS | $0.22 | $0.40 | (45%) |
| Adjusted EBITDA | $111 million | $92 million | 21% |
| Adjusted EBITDA margin | 23.7% | 30.5% | Down 6.8 points |
Financial performance and key metrics
- Revenue growth primarily reflected $169 million of incremental revenue from La Quinta, including $97 million of cost-reimbursement revenue. Excluding La Quinta, the Knights Inn divestiture and currency effects, revenue increased approximately $1 million.
- Hotel Franchising revenue increased 33% to $269 million and Adjusted EBITDA increased 31% to $113 million. Hotel Management revenue increased 99% to $197 million, while Adjusted EBITDA was unchanged at $16 million.
- Total rooms increased 12% to 812,100, including 506,600 in the United States and 305,500 internationally. Total RevPAR increased 7% to $36.21; excluding currency effects, total RevPAR increased 9%.
- Marketing, reservation and loyalty expenses exceeded related revenues by $16 million, compared with breakeven in the prior-year quarter, primarily because of earlier marketing spending and cost reclassifications.
- Separation-related expenses increased to $21 million from $12 million. Transaction-related expenses increased to $7 million from $2 million, primarily reflecting La Quinta integration activities.
- Net interest expense increased to $24 million from $1 million because of debt incurred in 2018, primarily to fund the La Quinta acquisition.
- The effective tax rate declined to 19.2% from 29.1%, primarily because of a settlement with state taxing authorities in the first quarter of 2019.
- Cash and cash equivalents were $284 million at March 31, 2019, compared with $366 million at December 31, 2018. Current assets were $778 million and current liabilities were $663 million.
- Operating cash flow was $7 million, compared with $16 million in Q1 2018. Investing cash outflow was $11 million, including $9 million of capital expenditures. Financing cash outflow was $78 million, primarily reflecting $45 million of share repurchases and $28 million of dividends.
- Total debt was $2.136 billion, consisting principally of a $1.578 billion term loan, $494 million of senior unsecured notes and $64 million of finance leases. The $750 million revolving facility was undrawn, with $735 million of available capacity after letters of credit.
- The first-lien leverage ratio was 2.3 times versus a 5.0-times covenant maximum, and the company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- La Quinta materially increased reported revenue and room counts but also increased operating costs, depreciation, interest expense and integration-related expenses.
- Net income declined despite higher revenue and Adjusted EBITDA, mainly because of higher interest, separation-related and transaction-related costs.
- Cash generation weakened, while shareholder distributions increased. The company repurchased approximately 0.9 million shares for $44 million and paid $28 million of dividends during the quarter.
- The quarterly dividend was $0.29 per share, up 16% from $0.25 per share in the fourth quarter of 2018. Remaining stock-repurchase authorization was $136 million at March 31, 2019.
- The company adopted the new lease standard on January 1, 2019, recognizing a $12 million operating lease right-of-use asset and operating lease liability. Prior-year amounts were not recast.
- Interest-rate swap fair value losses increased accumulated other comprehensive loss by $8 million after tax during the quarter.
Guidance, outlook, risks and unusual items
- Management expected 2019 capital expenditures of approximately $60 million to $65 million, including $10 million to $15 million for La Quinta integration.
- Management stated that cash from operations, existing cash and expected access to financing facilities should be sufficient for operating needs, capital expenditures and growth requirements.
- The company expects to continue paying dividends and repurchasing shares, subject to board discretion, financial condition, debt covenants and other factors.
- Hotel industry seasonality generally produces higher franchise and management revenue in the second and third quarters than in the first and fourth quarters.
- Management identified risks related to economic and hospitality-market conditions, credit markets, interest rates, foreign currency, the spin-off, La Quinta integration, financing access, litigation, franchisee and hotel-owner performance, and geopolitical events.
- Legal reserves were $14 million at March 31, 2019. Potential exposure from adverse legal outcomes was estimated at up to approximately $5 million above recorded accruals, with a significant portion expected to be covered by insurance.
- Hotel management guarantees had a maximum potential future payment amount of $97 million, subject to a combined annual cap of $26 million. The related liability was $25 million.
- The company had $130 million of outstanding guarantees related to the former Parent’s sale of its European Vacation Rentals business. The guarantees had a $62 million fair value, partly offset by a $41 million receivable from the former Parent.
- The company expected to receive approximately $24 million from the former Parent in the second quarter of 2019 in connection with the European Vacation Rentals transaction and related working-capital adjustment.
Most important facts for investors to verify
- Whether La Quinta integration produces sustainable revenue and Adjusted EBITDA growth after cost reimbursements and one-time expenses normalize.
- Whether operating cash flow improves from the $7 million reported in Q1, particularly given scheduled debt service, dividends and repurchases.
- The pace of debt reduction and the effect of variable interest rates after hedging; approximately $592 million of variable-rate borrowings remained exposed to rate changes.
- Whether marketing and loyalty expenses continue to exceed related revenues and affect reported margins.
- The collectability of management guarantee receivables and development advance notes, as well as potential payments under hotel management guarantees.
- The settlement and recoverability of receivables and obligations involving the former Parent.
- Progress against the $60 million to $65 million 2019 capital-expenditure expectation and the $10 million to $15 million La Quinta integration budget.
- Whether legal, regulatory, foreign-currency and highly inflationary-country exposures remain within recorded reserves and management’s stated expectations.