Wyndham Hotels & Resorts, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The filing covers the company’s global hotel franchising and hotel management businesses, with approximately 812,900 rooms in about 90 countries. Results were materially affected by the COVID-19 pandemic and related travel restrictions.
Financial performance and position
- Second-quarter revenue: $258 million, down 52% from $533 million in Q2 2019. Six-month revenue was $667 million, down 33% from $1.001 billion.
- Net income: Q2 net loss was $174 million, or $1.86 diluted loss per share, compared with $26 million of net income, or $0.27 per share, in the prior-year quarter. Six-month net loss was $152 million, or $1.63 per share, compared with $47 million of net income, or $0.49 per share.
- Operating results: Q2 operating loss was $194 million versus $62 million of operating income. Six-month operating loss was $138 million versus $112 million of operating income.
- Adjusted EBITDA: Q2 adjusted EBITDA was $63 million, down 60% from $159 million. Six-month adjusted EBITDA was $170 million, down 37% from $270 million.
- Margins: Q2 adjusted EBITDA margin was approximately 24%, compared with approximately 30% in Q2 2019. Six-month adjusted EBITDA margin was approximately 25%, compared with approximately 27% in the prior-year period.
- RevPAR: Total Q2 RevPAR declined 61% to $17.31; U.S. RevPAR declined 55% and international RevPAR declined 75%. Six-month total RevPAR declined 44% to $22.50.
- Segment performance: Q2 Hotel Franchising revenue declined 45% to $182 million and adjusted EBITDA declined 49% to $83 million. Hotel Management revenue declined 62% to $76 million and adjusted EBITDA fell to a $4 million loss from $16 million of income.
- Cash flow: Six-month cash used in operating activities was $40 million, compared with $137 million used in 2019. Capital expenditures were $18 million, and cash used in investing activities was $19 million.
- Liquidity: Cash and cash equivalents were $664 million at June 30, 2020, compared with $94 million at December 31, 2019. The increase primarily reflected $734 million drawn under the revolving credit facility.
- Debt: Total debt was $2.847 billion, including $734 million drawn on the $750 million revolving facility, $1.561 billion of term loans, $495 million of senior notes and $57 million of finance leases. Only $1 million of revolving capacity remained after letters of credit.
- Equity: Stockholders’ equity declined to $933 million from $1.212 billion at year-end 2019, primarily because of the net loss, dividends and share repurchases.
Material changes versus the prior comparable period
- COVID-19 caused a sharp reduction in travel demand, resulting in lower royalty, franchise, management, licensing and loyalty-related revenues.
- Q2 included $206 million of net impairment charges, principally $205 million related to trademarks and goodwill. The charges included a $155 million impairment of the La Quinta trademark, $36 million of other trademark impairments and $14 million of owned-hotel reporting-unit goodwill impairment.
- The company recorded $16 million of Q2 restructuring charges and $29 million for the first six months, including workforce reductions and facility consolidation. The company eliminated 442 positions and expects annual savings of approximately $50 million to $55 million.
- The company closed its two owned hotels temporarily during April and May 2020, reducing owned-hotel and management revenue.
- The company recognized a $16 million cumulative loyalty-revenue adjustment in Q2 because COVID-19 changed estimated member redemption patterns and costs.
- Share repurchases were suspended on March 17, 2020. The company repurchased approximately 0.9 million shares for $45 million during the first six months, all before the suspension.
- The quarterly dividend was reduced from $0.32 per share to $0.08 per share beginning in Q2. Dividends paid during the first six months totaled $38 million.
Guidance, outlook, risks and unusual items
- Liquidity outlook: Management stated that, at current monthly cash usage rates, the company had more than two years of liquidity before triggering the $200 million minimum-liquidity covenant. This assessment depends on continued cash conservation and the duration of the pandemic.
- Credit agreement amendment: The quarterly leverage covenant was waived through Q2 2021. In exchange, the company must maintain at least $200 million of liquidity, pay 25 basis points of additional interest, restrict share repurchases and limit dividends. Dividends may be limited to $0.01 per share if liquidity falls below $300 million, and are otherwise constrained to $0.16 per share during the amendment period.
- Capital spending: Management expected approximately $30 million of capital expenditures for 2020 and intended to provide approximately $25 million of development advance notes.
- Dividend uncertainty: Management described the $0.08 quarterly dividend as supportable but provided no assurance regarding future payments.
- Impairment risk: Prolonged COVID-19 effects, lower cash flows, higher discount rates or lower valuation multiples could result in additional impairments of trademarks, goodwill, franchise agreements and management contracts.
- Franchisee risk: Franchisees may face liquidity constraints, defaults, bankruptcies or inability to obtain financing, which could reduce fees and result in hotel exits from the system.
- Legal contingencies: The company was aware of approximately 30 sex-trafficking-related cases naming it or subsidiaries. It recorded $6 million of legal reserves and estimated aggregate potential exposure of up to approximately $5 million above recorded accruals, while noting that outcomes are unpredictable.
- Hotel-management guarantee: The company gave notice to terminate its remaining managed-hotel performance guarantee under a force majeure provision. A related $4 million receivable was fully impaired.
- Debt and market risk: Approximately $1.2 billion of variable-rate borrowings remained exposed to interest-rate movements after hedging. Management estimated that a one-percentage-point change in underlying rates would affect annual interest expense by approximately $12 million.
Most important facts for investors to verify
- Whether RevPAR and travel demand recover sufficiently to restore positive operating cash flow and adjusted EBITDA.
- Cash burn, unrestricted cash and compliance with the $200 million minimum-liquidity covenant.
- Availability of additional financing, given that substantially all revolving capacity was drawn at June 30, 2020.
- Future dividend levels and the timing of any permitted resumption of share repurchases.
- Potential additional impairment charges and the valuation assumptions used for trademarks and goodwill.
- Financial health, defaults and potential bankruptcies among franchisees and hotel owners.
- Developments in sex-trafficking litigation and other legal contingencies.
- Whether the expected $50 million to $55 million of restructuring savings are realized without impairing operations, brand standards or guest experience.