Business Context and Reporting Period
Wyndham Hotels & Resorts, Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2018. The financial statements are combined statements of the hotel franchising and management businesses formerly operated within Wyndham Worldwide Corporation, prepared on a standalone basis before the May 31, 2018 spin-off. Wyndham is a global hotel franchisor operating in more than 80 countries through Hotel Franchising and Hotel Management segments.
Wyndham Worldwide distributed approximately 100 million Wyndham Hotels shares to its stockholders on May 31, 2018. The shares began regular-way trading on the NYSE under “WH” on June 1, 2018.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net revenues | $302 million | $289 million | 4% |
| Operating income | $56 million | $57 million | (2%) |
| Income before taxes | $55 million | $55 million | Flat |
| Net income | $39 million | $33 million | 18% |
| Adjusted EBITDA | $92 million | $78 million | 18% |
| Cash flow from operations | $16 million | $23 million | $(7) million |
| Capital expenditures | $14 million | $5 million | Increase |
Net income margin was approximately 12.9% in Q1 2018 versus 11.4% in Q1 2017. Operating margin was approximately 18.5% versus 19.7%. Adjusted EBITDA margin was approximately 30.5% versus 27.0%.
- Hotel Franchising revenue increased 6% to $203 million; Adjusted EBITDA increased 10% to $86 million.
- Hotel Management revenue increased 1% to $99 million; Adjusted EBITDA increased 78% to $16 million, primarily reflecting lower owned-hotel operating costs and insurance recoveries related to 2017 hurricanes.
- Total system rooms increased 3% to approximately 723,000. Total RevPAR increased 7% to $33.95; excluding currency effects, total RevPAR increased 5%.
- The effective tax rate declined to 29.1% from 40.0%, principally because of the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act.
- Cash, cash equivalents and restricted cash totaled $73 million at March 31, 2018, compared with $59 million at December 31, 2017.
- Debt due to Parent was $197 million at March 31, 2018, compared with $184 million at December 31, 2017. This debt was contributed to Parent’s net investment before the spin-off.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher royalty, marketing, reservation and loyalty revenues, supported by system growth and higher RevPAR.
- Expenses increased 6% and included $12 million of separation-related costs and $2 million of transaction-related costs, compared with no comparable charges in Q1 2017.
- Operating expenses improved, particularly at the Puerto Rico owned hotel, because of insurance recoveries associated with hurricane damage.
- Marketing, reservation and loyalty expenses equaled related revenues in Q1 2018, compared with a $4 million expense excess in Q1 2017.
- Operating cash flow declined because of working-capital timing, despite higher net income.
- The company adopted the revenue recognition standard using full retrospective application. The adoption reduced previously reported 2017 net revenue by $67 million and net income by $13 million, based on the filing’s reconciliation.
Liquidity, Debt, Outlook and Unusual Items
- Historically, cash was centrally managed by Wyndham Worldwide. Following the spin-off, liquidity is expected to depend on cash on hand, operating cash generation and standalone financing arrangements.
- Management stated that existing cash, operating cash flow and expected financing access should be sufficient for operations, capital expenditures and growth needs, although liquidity may be affected by credit ratings, performance and credit-market conditions.
- Management expected 2018 capital expenditures of $50 million to $60 million, plus approximately $20 million for Rio Mar repairs and renovations expected to be funded with insurance proceeds.
- In April 2018, the company issued $500 million of 5.375% senior unsecured notes due 2026. In May 2018, it entered into $2.35 billion of senior secured credit facilities, consisting of a $1.6 billion term loan due 2025 and a $750 million revolving facility due 2023, undrawn at closing.
- The May 2018 financing funded the $1.95 billion acquisition of La Quinta’s hotel franchising and management businesses. La Quinta added more than 900 franchised hotels and nearly 89,000 rooms and increased managed properties from 116 to more than 430. La Quinta results were not included in Q1 2018 reported operations.
- Management provided pro forma Q1 2018 net revenue of $457 million and operating income of $59 million assuming La Quinta had been included from January 1, 2018; these figures exclude fair-value and other acquisition-related adjustments.
- Wyndham approved a $300 million share repurchase authorization and declared a quarterly dividend of $0.25 per share, conditional on completion of the spin-off.
- In May 2018, Wyndham sold the Knights Inn brand and franchise system for $27 million and expected to record an approximately $20 million pretax gain.
- Performance guarantees had maximum potential future payments of $110 million, subject to a combined annual cap of $27 million. Recorded liabilities related to these guarantees totaled $21 million at March 31, 2018.
- Legal reserves were $3 million. Potential aggregate litigation exposure was estimated at up to $12 million above recorded accruals, although management did not expect a material effect on financial position or liquidity.
- The filing identifies seasonality, hospitality demand, economic conditions, foreign exchange, interest rates, integration of La Quinta, spin-off execution, financing terms and post-closing credit support as material risks.
Investor Verification Items
- Verify post-spin-off standalone results and cash flows, since the Q1 financial statements are combined and include Parent allocations that may not reflect future standalone costs.
- Assess leverage, interest expense, covenants and refinancing needs following the La Quinta acquisition and the $2.1 billion of notes and term-loan financing.
- Track La Quinta integration, acquired-property performance, expected synergies and the final purchase-price allocation, which was pending third-party valuation.
- Confirm the timing and accounting impact of the Knights Inn sale gain, Rio Mar insurance recoveries and other unusual items.
- Evaluate the ability to fund capital expenditures, dividends, repurchases, development advance notes and guarantee obligations from post-spin-off operating cash flow.
- Review performance guarantees, European Vacation Rentals credit support of up to approximately $87 million plus a potential additional $47 million, litigation exposure and other contingencies.
- Confirm the effect of the retrospective revenue-standard adoption and the comparability of future revenue, margins and contract-liability balances.