WYNDHAM HOTELS & RESORTS, INC. quarterly report, Q3 FY2023

Business Context and Reporting Period

Wyndham Hotels & Resorts, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company is a global hotel franchisor serving more than 95 countries, with approximately 858,000 rooms at quarter-end. In 2023, the remaining international full-service management business was prospectively aggregated into the Hotel Franchising segment following the 2022 exit from select-service management, owned hotels and substantially all U.S. full-service management.

Financial Performance and Position

Metric	Q3 2023	Q3 2022	9M 2023	9M 2022
Net revenues	$402 million	$407 million	$1,076 million	$1,164 million
Operating income	$163 million	$160 million	$399 million	$465 million
Net income	$103 million	$101 million	$240 million	$299 million
Diluted EPS	$1.21	$1.13	$2.79	$3.26
Adjusted EBITDA	$200 million	$191 million	$505 million	$524 million
Cash flow from operations	Not provided for the quarter	Not provided for the quarter	$253 million	$349 million

Derived margins were approximately 40.5% operating and 25.6% net in Q3 2023, compared with 39.3% and 24.8%, respectively, in Q3 2022. Nine-month operating and net margins were approximately 37.1% and 22.3%, compared with 40.0% and 25.7% in the prior-year period. Adjusted EBITDA margin was approximately 49.8% in Q3 and 46.9% for the nine-month period.

Q3 fee-related and other revenue increased 7% to $400 million, while reported net revenue declined 1% because cost-reimbursement revenue fell $30 million following the management-business exits.
Global RevPAR increased 1% in Q3 and 5% for the nine months; excluding currency effects, global RevPAR increased 3% and 7%, respectively. Global rooms increased 3% year over year to 858,000.
Q3 adjusted EBITDA increased 5% and net income increased 2%. Nine-month adjusted EBITDA declined 4% and net income declined 20%.
Cash and cash equivalents were $79 million at September 30, 2023, compared with $161 million at December 31, 2022. Total assets were $4.10 billion and total liabilities were $3.24 billion.
Total debt was $2.16 billion, including $37 million classified as current. The weighted-average debt rate was 4.59%, compared with 3.79% at year-end 2022.
The company had $631 million of undrawn revolving-credit capacity after $110 million of borrowings and $9 million of letters of credit. Management reported total liquidity of approximately $710 million.
Operating cash flow declined $96 million year over year, primarily due to higher trade receivables, development advance notes and working-capital timing. Capital expenditures were $28 million and net development advance note funding was $47 million.

Material Changes Versus the Prior Comparable Period

Nine-month reported revenue decreased $88 million, primarily because 2022 businesses that were exited contributed $79 million less revenue and U.S. full-service management cost reimbursements declined $78 million. These reimbursements generally have no impact on net income.
The 2022 nine-month results included a $35 million gain on the sale of Wyndham Grand Bonnet Creek Resort; no comparable gain was recorded in 2023.
Higher RevPAR, room growth, marketing and loyalty fees, license fees and international management fees partially offset the discontinued businesses and supported a 10% increase in 2023 Hotel Franchising segment revenue.
Marketing, reservation and loyalty expense increased $62 million for the nine months, including spending associated with the global franchisee conference and advertising timing.
Net interest expense increased 22% for the nine months to $73 million, primarily because of higher variable rates. The company refinanced its term loan B with a new $1.14 billion facility maturing in 2030.
The company repurchased approximately 3.8 million shares for $270 million during the nine months and paid $90 million of dividends. Remaining repurchase authorization was $569 million at September 30, 2023.
Global development pipeline reached more than 1,930 hotels and approximately 237,000 rooms, up 12% year over year; 58% of the pipeline was international and approximately 80% represented new construction.

Guidance, Outlook, Risks and Unusual Items

Management expected approximately $35 million of 2023 capital expenditures and approximately $60 million of 2023 development advance note funding. Management stated that cash on hand, operating cash flow and revolver availability should fund expected needs.
The company expected to maintain regular dividends, subject to Board discretion, financial condition, debt covenants and other factors.
The company’s first-lien leverage ratio was 2.5 times at September 30, 2023 versus a 5.0-times maximum covenant, and management reported compliance with its credit covenants.
Approximately $1.1 billion of term loan B exposure was hedged with interest-rate swaps. Variable-rate borrowings net of swaps were $541 million; management estimated that a one-percentage-point change in underlying rates would affect annual interest expense by approximately $5 million.
On October 17, 2023, the Board unanimously rejected Choice Hotels’ unsolicited, highly conditional proposal, described as having a nominal value of $90 per share, consisting of 45% stock and 55% cash.
The company identified approximately 35 pending matters alleging sex trafficking incidents at certain franchised or managed hotels. It recorded $7 million of litigation reserves and estimated potential exposure up to approximately $7 million above recorded accruals, while stating that a material impact on financial position or liquidity was not expected.
Key stated risks include inflation, higher interest rates, recessionary pressures, hospitality demand, franchisee relationships, geopolitical events, foreign currency exposure, debt covenant compliance, access to capital and litigation. The filing provides no specific full-year revenue or earnings guidance.

Investor Verification Items

Verify that the 2023 segment reclassification and discontinued management businesses are considered when comparing revenue and EBITDA with 2022.
Assess the effect of higher interest rates, debt maturities and the transition of interest-rate hedges expiring in 2024.
Reconcile reported liquidity of approximately $710 million with $79 million of cash, $631 million of revolver availability and outstanding letters of credit.
Monitor cash conversion, trade receivables and development advance note funding, which contributed to lower operating cash flow.
Evaluate the sustainability of share repurchases and dividends relative to leverage, liquidity and operating cash flow.
Review developments in the Choice proposal and any resulting transaction-related costs or strategic changes.
Track the sex-trafficking and other legal proceedings because losses beyond recorded reserves could affect earnings or cash flows despite management’s current assessment.