Business Context and Reporting Period
Wyndham Hotels & Resorts, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company became a separate publicly traded hotel franchisor and manager following its May 31, 2018 spin-off from Wyndham Worldwide Corporation, now Wyndham Destinations, Inc. Historical financial statements before the separation are combined results derived from the former Parent. Wyndham operates hotel franchising and hotel management businesses in more than 80 countries.
The company completed its $1.95 billion acquisition of La Quinta’s hotel franchising and management businesses on May 30, 2018, adding more than 900 franchised hotels and nearly 89,000 rooms.
Financial Highlights
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Net revenues | $435 million | $331 million | $737 million | $620 million |
| Operating income | $39 million | $84 million | $96 million | $140 million |
| Net income | $21 million | $48 million | $61 million | $81 million |
| Adjusted EBITDA | $125 million | $105 million | $217 million | $183 million |
| Diluted EPS | $0.21 | $0.48 | $0.61 | $0.81 |
| Operating cash flow | Not separately provided | Not separately provided | $33 million | $80 million |
- Second-quarter revenue increased 31%; six-month revenue increased 19%. Excluding La Quinta, revenue increased 8% in the quarter and 6% year to date.
- Second-quarter operating margin was approximately 9.0%, compared with 25.4% in the prior-year period. Six-month operating margin was approximately 13.0%, compared with 22.6%.
- Second-quarter net margin was approximately 4.8%, compared with 14.5%; six-month net margin was approximately 8.3%, compared with 13.1%.
- Adjusted EBITDA margin was approximately 28.7% in the quarter and 29.4% for the six months, compared with approximately 31.7% and 29.5%, respectively, in the comparable periods.
- System rooms increased 12% to 792,300 at June 30, 2018. Total second-quarter RevPAR increased 9%, or 8% excluding currency effects.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $416 million at June 30, 2018, compared with $57 million at December 31, 2017.
- Total debt was $2.145 billion, consisting primarily of a $1.585 billion term loan due 2025, $493 million of net senior notes due 2026 and $67 million of capital leases. Debt fair value was estimated at $2.164 billion.
- The $750 million revolving credit facility was undrawn, with $736 million of available capacity after letters of credit.
- The first-lien leverage ratio was 2.1 times versus a covenant maximum of 5.0 times; the company reported compliance with its financial covenants.
- Operating cash flow was $33 million, down from $80 million, primarily because of lower net income after separation and transaction costs. Investing cash flow was negative $1.672 billion, primarily because of the La Quinta acquisition. Financing cash flow was positive $1.996 billion, principally from acquisition-related borrowings.
- Capital expenditures were $33 million in the first six months. Management expects 2018 capital expenditures of $50 million to $60 million, plus $20 million to $30 million for Rio Mar repairs and La Quinta integration.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by La Quinta, higher royalty and franchise fees, higher marketing, reservation and loyalty revenues, 6% franchising system growth and stronger RevPAR.
- Net income declined 56% in the quarter and 25% for the six months despite revenue and Adjusted EBITDA growth. Results included $35 million of second-quarter and $46 million of year-to-date separation costs, plus $28 million and $30 million, respectively, of net transaction-related costs.
- Transaction-related costs primarily reflected La Quinta acquisition expenses, partially offset by a $23 million gain on the sale of the Knights Inn brand and franchise system.
- Interest expense increased to $10 million in the quarter and $11 million year to date from $2 million and $4 million, respectively, due to the new acquisition financing.
- The effective tax rate declined to 27.6% from 41.5% in the quarter and to 28.2% from 40.4% year to date, primarily because of the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act.
- Hotel Franchising revenue increased 24% in the quarter and 16% year to date; segment Adjusted EBITDA increased 16% and 13%, respectively. Hotel Management revenue increased 49% and 26%, while segment Adjusted EBITDA increased 100% and 71%.
Outlook, Commentary, Risks and Unusual Items
- Management expects the asset-light model and recurring franchise fees to support cash generation, dividends and share repurchases. A $0.25-per-share dividend was paid in June, and the company had $285 million remaining under its $300 million repurchase authorization at June 30.
- Management stated that cash on hand, operating cash flow and financing availability are expected to fund operations, capital expenditures and growth needs; however, future dividends and repurchases remain discretionary.
- La Quinta purchase-price allocations were preliminary at June 30 and could change after final valuation work. The acquisition included $1.113 billion of preliminary goodwill and requires an estimated $240 million payment related to taxes in the third quarter of 2018.
- Hotel management guarantees had a maximum potential future payment amount of $104 million, with a combined annual cap of $26 million. The company carried a $25 million liability for these guarantees.
- Legal proceedings were accrued at $28 million. Potential aggregate exposure from adverse legal outcomes was estimated at up to $29 million above recorded accruals, although management did not expect a material impact on overall liquidity or financial position.
- The company provided up to approximately $87 million of post-closing credit support related to the former Parent’s European Vacation Rentals divestiture and could be required to provide an additional $47 million of support.
- Variable-rate borrowings totaled approximately $600 million. A 100-basis-point interest-rate change would affect annual interest expense by approximately $6 million.
- Key risks include integration of La Quinta, realization of spin-off benefits, leverage and refinancing conditions, hospitality demand, seasonality, foreign currency exposure, litigation, management guarantees and post-closing credit obligations.
Important Facts for Investors to Verify
- Confirm the final La Quinta purchase-price allocation, goodwill and intangible-asset valuations, including the $240 million tax-related payment.
- Track post-acquisition operating performance, integration costs, room growth, RevPAR and the effect of La Quinta on margins and cash flow.
- Monitor debt amortization, interest-rate exposure, leverage covenant compliance and available revolving-credit capacity.
- Assess whether operating cash flow improves from the $33 million first-half level and supports planned capital expenditures, dividends and repurchases.
- Review the final impact of separation-related costs and whether standalone corporate costs differ materially from historical Parent allocations.
- Evaluate legal accruals, hotel management guarantees and the European Vacation Rentals credit-support obligations.
- Note that the interim financial statements were reviewed, not audited, and that the filing states historical combined results may not reflect the company’s standalone cost structure.