Wyndham Hotels & Resorts, Inc. — 2019 Q3 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. Its reportable segments are Hotel Franchising and Hotel Management. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The nine-month comparison includes significant effects from the May 2018 acquisition of La Quinta.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net revenues | $560 million | $604 million | $1,561 million | $1,341 million |
| Operating income | $91 million | $105 million | $205 million | $201 million |
| Net income | $45 million | $58 million | $93 million | $118 million |
| Diluted EPS | $0.47 | $0.58 | $0.95 | $1.19 |
| Adjusted EBITDA | $190 million | $166 million | $461 million | $382 million |
| Operating margin | 16.3% | 17.4% | 13.1% | 15.0% |
| Net margin | 8.0% | 9.6% | 6.0% | 8.8% |
| Adjusted EBITDA margin | 33.9% | 27.5% | 29.5% | 28.5% |
Q3 revenue decreased 7%, while operating income decreased 13% and net income decreased 22%. Nine-month revenue increased 16%, primarily from La Quinta, but operating income rose only 2% and net income declined 21%, reflecting higher interest expense and unusual charges. Adjusted EBITDA increased 14% in Q3 and 21% for the nine months.
- Hotel Franchising revenue and Adjusted EBITDA increased 9% and 10%, respectively, in Q3, and 17% and 19% for the nine months.
- Hotel Management revenue decreased 29% in Q3, primarily because of lower cost reimbursements and a $20 million customer settlement charge, while Adjusted EBITDA increased from $5 million to $13 million. Nine-month revenue increased 16% and Adjusted EBITDA increased 55%.
- Total system rooms increased 3% year over year to approximately 821,800 at September 30, 2019, including 509,200 U.S. rooms and 312,600 international rooms.
- Total RevPAR decreased 3% in Q3, including a 1% U.S. decrease and a 5% international decrease. For the nine months, total RevPAR increased 1%, or 3% excluding currency effects.
Cash flow, liquidity, debt and capital allocation
- Cash provided by operating activities was $9 million for the nine months, compared with $101 million in 2018. The decline primarily reflected $188 million of payments for tax liabilities assumed in the La Quinta acquisition.
- Capital expenditures were $35 million; management expected approximately $50 million to $55 million for full-year 2019, including approximately $10 million for La Quinta integration.
- Cash and cash equivalents declined to $134 million from $366 million at December 31, 2018. Net cash used in financing activities was $204 million, including $168 million of share repurchases and $84 million of dividends.
- Total debt was $2.127 billion at September 30, 2019, consisting primarily of a $1.572 billion term loan and $494 million of senior unsecured notes. The revolving credit facility was undrawn, with $735 million of available capacity after letters of credit.
- The first-lien leverage ratio was 2.4 times versus a 5.0-times covenant maximum, and the Company stated that it was in compliance with its financial covenants.
- The Company repurchased approximately 3.2 million shares for $169 million during the nine months and had $312 million of remaining authorization. It declared quarterly dividends of $0.29 per share.
Material changes versus the prior comparable period
- The La Quinta acquisition increased nine-month 2019 revenue by an estimated $267 million and expenses by approximately $198 million, but also increased debt and interest expense. Net interest expense rose to $76 million from $36 million.
- Q3 2019 included a $20 million CorePoint settlement charge recorded as a reduction of hotel management revenue and a $6 million charge related to associated tax matters.
- The Company recorded a $34 million Q3 contract termination charge for an agreement covering eight hotels. Nine-month contract termination costs totaled $43 million.
- A $45 million non-cash impairment charge was recorded in Q2 related to the expected termination of an unprofitable hotel-management arrangement covering 22 properties. The charge included write-offs of receivables and a guarantee asset.
- Separation-related costs declined to less than $1 million in Q3 and $22 million for the nine months, compared with $17 million and $63 million, respectively, in the prior-year periods.
- The Company adopted the new lease standard on January 1, 2019, recognizing a $12 million operating right-of-use asset and corresponding liability at adoption.
Guidance, outlook, risks and unusual items
Management stated that its asset-light model, recurring franchise revenue, existing cash, operating cash flow and available financing were expected to be sufficient for operating needs, capital expenditures and growth. The Company expected to continue regular dividends and use excess cash for share repurchases. No specific revenue or earnings guidance was provided in the filing.
- Management expected to terminate certain unprofitable hotel-management agreements. Remaining performance-guarantee exposure was expected to decline to a maximum of $25 million, with a $5 million annual cap, after the applicable termination agreements become effective.
- Hotel-management guarantees had a maximum potential future payment amount of $47 million at September 30, 2019, before the described terminations, with a combined annual cap of $26 million.
- Legal proceedings were reserved at $6 million. Potential aggregate exposure in excess of recorded accruals was estimated at up to approximately $10 million, although management did not expect a material effect on financial position or liquidity.
- Interest-rate, foreign-currency, credit, hospitality-industry, economic, geopolitical, La Quinta integration and CorePoint relationship risks could materially affect results. The Company also identified risks related to terminating hotel-management agreements and future dividends or repurchases.
- Interest-rate swaps hedged $1.1 billion of term-loan exposure. The swaps had a $42 million fair-value liability at September 30, 2019, and $27 million of after-tax unrealized losses were recorded in accumulated other comprehensive income for the nine months.
Investor verification checklist
- Verify the sustainability of franchise revenue and Adjusted EBITDA growth after removing La Quinta acquisition effects.
- Assess whether RevPAR weakness, particularly internationally, affects future royalty and franchise fee growth.
- Monitor cash conversion, including the effect of tax payments, dividends, repurchases and capital expenditures on liquidity.
- Review debt reduction capacity, interest-rate exposure, LIBOR transition provisions and compliance with leverage covenants.
- Confirm the final costs and timing of CorePoint matters and hotel-management agreement terminations.
- Evaluate the recurring versus nonrecurring nature of the $45 million impairment, $43 million of contract termination costs and other transaction-related charges.
- Review the Company’s latest Form 10-K for the full risk-factor discussion and detailed commitments, guarantees and litigation disclosures.