WYNDHAM HOTELS & RESORTS, INC. Management report and analysis of the financial situation and operating results. (Unless otherwise indicated, all amounts are in millions except per share and per share amounts) (Form 10-Q)
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended. These statements include, but are not limited to, statements related to our expectations regarding our strategy and the performance of our business, our financial results, our liquidity and capital resources, share repurchases and dividends and other non-historical statements. Forward-looking statements include those that convey management's expectations as to the future based on plans, estimates and projections at the time we make the statements and may be identified by words such as "will," "expect," "believe," "plan," "anticipate," "intend," "goal," "future," "outlook," "guidance," "target," "objective," "estimate," "projection" and similar words or expressions, including the negative version of such words and expressions. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Factors that could cause actual results to differ materially from those in the forward-looking statements include without limitation general economic conditions; the continuation or worsening of the effects from the coronavirus pandemic, ("COVID-19"); its scope, duration, resurgence and impact on our business operations, financial results, cash flows and liquidity, as well as the impact on our franchisees and property owners, guests and team members, the hospitality industry and overall demand for and restrictions on travel; the success of our mitigation efforts in response to COVID-19; our continued performance during the recovery from COVID-19, and any resurgence or mutations of the virus; actions governments, businesses and individuals take in response to the pandemic, including stay-in-place directives (including for instance, quarantine and isolation guidelines and mandates), safety mitigation guidance, as well as the timing, availability and adoption rate of vaccinations, booster shots and other treatments for COVID-19; concerns with or threats of other pandemics, contagious diseases or health epidemics, including the effects of COVID-19; the performance of the financial and credit markets; the 18
economic environment for the hospitality industry; operating risks associated with the hotel franchising and management businesses; our relationships with franchisees and property owners; the impact of war, terrorist activity, political instability or political strife; risks related to restructuring or strategic initiatives; the Company's ability to satisfy obligations and agreements under its outstanding indebtedness, including the payment of principal and interest and compliance with the covenants thereunder; risks related to our ability to obtain financing and the terms of such financing, including access to liquidity and capital; and the Company's ability to make or pay, plans for and the timing and amount of any future share repurchases and/or dividends, as well as the risks described in our most recent Annual Report on Form 10-K filed with the
U.S. Securities and Exchange Commission(the "SEC") and subsequent reports filed with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, subsequent events or otherwise. We may use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Disclosures of this nature will be included on our website in the "Investors" section, which can currently be accessed at www.investor.wyndhamhotels.com. Accordingly, investors should monitor this section of our website in addition to following our press releases, filings submitted with the SECand any public conference calls or webcasts.
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BUSINESS AND OVERVIEW
We operate in the following segments:
RESULTS OF OPERATIONS Discussed below are our key operating statistics, consolidated results of operations and the results of operations for each of our reportable segments. The reportable segments presented below represent our operating segments for which discrete financial information is available and used on a regular basis by our chief operating decision maker to assess performance and to allocate resources. In identifying our reportable segments, we also consider the nature of services provided by our operating segments. Management evaluates the operating results of each of our reportable segments based upon net revenues and adjusted EBITDA. Adjusted EBITDA is defined as net income/(loss) excluding net interest expense, depreciation and amortization, early extinguishment of debt charges, impairment charges, restructuring and related charges, contract termination costs, transaction-related items (acquisition-, disposition- or separation-related), gain/(loss) on asset sale, foreign currency impacts of highly inflationary countries, stock-based compensation expense, income taxes and development advance notes amortization. We believe that adjusted EBITDA is a useful measure of performance for our segments and, when considered with
U.S.Generally Accepted Accounting Principles ("GAAP") measures, gives a more complete understanding of our operating performance. We use this measure internally to assess operating performance, both absolutely and in comparison to other companies, and to make day to day operating decisions, including in the evaluation of selected compensation decisions. Adjusted EBITDA is not a recognized term under U.S.GAAP and should not be considered as an alternative to net income or other measures of financial performance or liquidity derived in accordance with U.S.GAAP. Our presentation of adjusted EBITDA may not be comparable to similarly-titled measures used by other companies. We generate royalties and franchise fees, management fees and other revenues from hotel franchising and hotel management activities, as well as fees from licensing our "Wyndham" trademark, certain other trademarks and intellectual property. In addition, pursuant to our franchise and management contracts with third-party hotel owners, we generate marketing, reservation and loyalty fee revenues and cost reimbursement revenues that over time are offset, respectively, by the marketing, reservation and loyalty costs and property operating costs that we incur. 19
Table of Contents OPERATING STATISTICS The table below presents our operating statistics for the three months ended
March 31, 2022and 2021. "Rooms" represent the number of hotel rooms at the end of the period which are either under franchise and/or management agreements, or are Company-owned, and properties under affiliation agreements for which we receive a fee for reservation and/or other services provided. "RevPAR" represents revenue per available room and is calculated by multiplying average occupancy rate by average daily rate. "Average royalty rate" represents the average royalty rate earned on our franchised properties and is calculated by dividing total royalties, excluding the impact of amortization of development advance notes, by total room revenues. These operating statistics are drivers of our revenues and therefore provide an enhanced understanding of our business. Refer to the section below for a discussion as to how these operating statistics affected our business for the periods presented. As of March 31, 2022 2021 % Change Rooms United States 491,900 486,000 1% International 321,400 311,200 3% Total rooms 813,300 797,200 2% Three Months Ended March 31, 2022 2021 Change RevPAR United States $ 42.11 $ 30.6238% International (a) 21.95 15.83 39% Global RevPAR (a) 34.06 24.90 37% Average Royalty Rate United States 4.6 % 4.6 % - International 2.3 % 2.0 % 30 bps Global average royalty rate 4.0 % 4.0 % - ______________________
(a) Excluding currency effects, international RevPAR increased by 46% and global RevPAR by 39%.
Excluding currency effects, global RevPAR for the three months ended
March 31, 2022increased 39% compared to the prior year period, including 38% growth in the U.S.and 46% internationally. The increase was driven by approximately two-thirds of stronger pricing power and one-third from higher occupancy levels. 20
Table of Contents THREE MONTHS ENDED
MARCH 31, 2022VS. THREE MONTHS ENDED MARCH 31, 2021Three Months Ended March 31, 2022 2021 Change % Change Revenues Fee-related and other revenues $ 316 $ 232 $ 8436 % Cost reimbursement revenues 55 71 (16) (23 %) Net revenues 371 303 68 22 % Expenses Marketing, reservation and loyalty expense 104 92 12 13 % Cost reimbursement expense 55 71 (16) (23 %) Gain on asset sale (36) - (36) n/a Other expenses 88 77 11 14 % Total expenses 211 240 (29) (12 %) Operating income 160 63 97 154 % Interest expense, net 20 28 (8) (29 %) Income before income taxes 140 35 105 300 % Provision for income taxes 34 11 23 209 % Net income $ 106 $ 24 $ 82342 %
Net income for the three months ended
•$32 million in higher royalties and franchise fees primarily due to higher RevPAR;
•$26 million higher marketing, booking and retention expenses, primarily reflecting higher RevPAR; and
•$16 million of higher management and other fees primarily reflecting the RevPAR increase and strong operating performance at our owned hotels; partially offset by
• $16 million of lower cost reimbursement revenue in our hotel management businesses due to
Total expenses for the three months ended
• $16 million of lower cost reimbursement expenses consistent with the revenue decline discussed above; partially offset by
•$12 million higher marketing, reservation and loyalty expenses mainly due to higher marketing revenues; and
•$8 million of higher operating expenses, primarily associated with higher volume-related expenses at our owned hotels.
Interest expense, net for the three months ended
March 31, 2022decreased $8 million, or 29%, compared to the prior-year period as a result of the redemption of our $500 millionsenior notes in April 2021. Our effective tax rates were 24.3% and 31.4% during the three months ended March 31, 2022and 2021, respectively. During 2022, the lower effective tax rate was primarily related to a higher tax benefit associated with stock based compensation. During 2021, the higher effective tax rate was primarily related to the remeasurement of net deferred tax liabilities as a result of changes in certain state tax rates and non-deductible separation costs.
As a result of these items, net earnings for the three months ended
The table below is a reconciliation of net earnings to adjusted EBITDA.
Three Months Ended March 31, 2022 2021 Net income $ 106 $ 24 Provision for income taxes 34 11 Depreciation and amortization 24 24 Interest expense, net 20 28 Stock-based compensation expense 8 5 Development advance notes amortization 3 2 Gain on asset sale (36) - Separation-related expenses - 2 Foreign currency impact of highly inflationary countries - 1 Adjusted EBITDA $ 159 $ 97 Following is a discussion of the results of each of our segments and Corporate and Other for the three months ended
March 31, 2022compared to the three months ended March 31, 2021: Net Revenues Adjusted EBITDA 2022 2021 % Change 2022 2021 % Change Hotel Franchising $ 272 $ 20930% $ 155 $ 10548% Hotel Management 99 94 5% 20 5 300 % Corporate and Other - - n/a (16) (13) (23 %) Total Company $ 371 $ 30322% $ 159 $ 9764% Hotel Franchising Three Months Ended March 31, 2022 2021 % Change Total rooms 793,200 748,700 6% Global RevPAR (a) $ 33.08 $ 24.0238%
(a) Excluding currency effects, overall RevPAR increased by 40%.
Rooms increased 6% from the prior year period primarily due to
U.Sopenings and the conversion of managed properties to franchise due to the completion of the exit from our select-service hotel management business.
Excluding currency effects, global RevPAR increased by 40% compared to the prior year period due to a 38% increase in
Net income increased
•$28 million in higher royalties and franchise fees; and
• $26 million in increased marketing, booking and loyalty revenues.
Adjusted EBITDA increased
Hotel ManagementThree Months Ended March 31, 2022 2021 % Change Total rooms 20,100 48,500 (59%) Global RevPAR (a) $ 56.55 $ 38.1748% ______________________
(a) Excluding currency effects, overall RevPAR increased by 49%.
The number of rooms decreased by 59% compared to the previous year period, due to
Global RevPAR increased by 48% compared to the prior year period, mainly due to a 63% increase in
Net income increased
• $17 million in revenue from owned hotels due to improved operating performance; and
• $4 million in higher termination fees primarily due to
• $16 million of lower cost reimbursement revenue, as noted above, which had no impact on adjusted EBITDA.
Adjusted EBITDA increased
Businesses and others
Adjusted EBITDA was unfavorable by
DEVELOPMENT We awarded 165 new contracts this quarter, including 50 new construction projects for our new extended-stay brand, compared to 112 in the first quarter 2021. On
March 31, 2022, our global development pipeline consisted of approximately 1,600 hotels and approximately 204,000 rooms. Our pipeline grew 9% year-over-year, including 12% domestically and 7% internationally. Approximately 63% of our development pipeline is international and 79% is new construction, of which approximately 35% has broken ground. Approximately 80% of our global development pipeline is in the midscale and above segments, including nearly 70% in the U.S.FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Financial Condition March 31, 2022 December 31, 2021 Change Total assets $ 4,292$ 4,269 $ 23Total liabilities 3,133 3,180 (47) Total stockholders' equity 1,159 1,089 70 Total assets increased $23 millionfrom December 31, 2021to March 31, 2022primarily due to an increase in cash as a result of $202 millionin net proceeds from asset sales, partially offset by an $87 millionreduction in assets held for sale due to the completed sale of our owned hotel Wyndham Grand Bonnet Creek Resortand an $84 millionreduction in intangible assets related to CorePoint. Total liabilities decreased $47 millionfrom December 31, 2021to March 31, 2022primarily due to a reduction in deferred income taxes and in the value of our interest rate swap. Total equity increased $70 millionfrom December 31, 2021to March 31, 2022primarily due to our net income for the period, partially offset by $38 millionof stock repurchases and $30 millionof dividends.
Cash and capital resources
Historically, our business generates sufficient cash flow to not only support our current operations as well as our future growth needs and dividend payments to our stockholders, but also to create additional value for our stockholders in the form of share repurchases or business investment. As of
March 31, 2022, our liquidity approximated $1.2 billion. Given the minimal capital needs of our business, the flexible cost infrastructure and the mitigation measures taken, we believe that our existing cash, cash equivalents, cash generated through operations and our expected access to financing facilities, together with funding through our revolving credit facility, will be sufficient to fund our operating activities, anticipated capital expenditures and growth needs. As of March 31, 2022, we were in compliance with the financial covenants of our credit agreement and expect to remain in such 23
compliance with no additional waivers or amendments required. As of
March 31, 2022, we had a term loan with an aggregate principal amount of $1.5 billionmaturing in 2025 and a five-year revolving credit facility maturing in 2023 with a maximum aggregate principal amount of $750 million, of which none was outstanding and $9 millionwas allocated to outstanding letters of credit. The interest rate per annum applicable to our term loan is equal to, at our option, either a base rate plus a margin of 0.75% or LIBOR plus a margin of 1.75%. Our revolving credit facility is subject to an interest rate per annum equal to, at our option, either a base rate plus a margin ranging from 0.50% to 1.00% or LIBOR plus a margin ranging from 1.50% to 2.00%, in either case based upon the total leverage ratio of the Company and its restricted subsidiaries. In April 2022, we amended our $750 millionrevolving credit facility, extending the maturity from May 2023to April 2027on similar terms as the previous facility, and issued a new $400 millionsenior secured term loan A facility, which matures in April 2027. The proceeds from the term loan A were used to repay a portion of our existing $1.5 billionterm loan facility, which is scheduled to mature in May 2025. There was no increase in rates from the existing $1.5 billionterm loan facility to the new term loan A. As of March 31, 2022, $1.1 billionof our term loan is hedged with pay-fixed/receive-variable interest rate swaps hedging our term loan interest rate exposure. The aggregate fair value of these interest rate swaps was an $18 millionasset as of March 31, 2022. The Federal Reservehas established the Alternative Reference Rates Committee to identify alternative reference rates for when the U.S.dollar LIBOR ceases to exist after June 2023. Our credit facility, which includes our revolving credit facility and term loan, gives us the option to use LIBOR as a base rate and our interest rate swaps are based on the one-month U.S.dollar LIBOR rate. In the event that LIBOR is no longer published, the credit facility allows us and the administrative agent of the facility to replace LIBOR with an alternative benchmark rate, subject to the right of the majority of the lenders to object thereto. In April 2022we amended and extended the revolving credit portion of the credit facility and the Secured Overnight Funding Rate ("SOFR") will be utilized as the new benchmark rate. In addition, the International Swaps and Derivatives Associationissued protocols to allow swap parties to amend their existing contracts, though the Company's existing swaps will continue to reference LIBOR for the foreseeable future. As of March 31, 2022, our credit rating was Ba1 from Moody's Investors Service and BB+ from Standard and Poor's Rating Agency. A credit rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal by the assigning rating organization. Reference in this report to any such credit rating is intended for the limited purpose of discussing or referring to aspects of our liquidity and of our costs of funds. Any reference to a credit rating is not intended to be any guarantee or assurance of, nor should there be any undue reliance upon, any credit rating or change in credit rating, nor is any such reference intended as any inference concerning future performance, future liquidity or any future credit rating. Our liquidity and access to capital may be impacted by our credit ratings, financial performance and global credit market conditions. We believe that our existing cash, cash equivalents, cash generated through operations and our expected access to financing facilities, together with funding through our revolving credit facility, will be sufficient to fund our operating activities, anticipated capital expenditures and growth needs. CASH FLOW
The following table summarizes the changes in cash, cash equivalents and restricted cash during the three months ended
Three Months Ended March 31, 2022 2021 Change Cash provided by/(used in) Operating activities
$ 135 $ 64 $ 71Investing activities 192 (5) 197 Financing activities (82) (21) (61)
Net change in cash, cash equivalents and restricted cash
Net cash from operating activities increased
Net cash provided by investing activities increased
$197 millioncompared to the prior-year period primarily due to the proceeds from the sale of the Wyndham Grand Bonnet Creek Resortand the termination fee received from CPLGin connection with the exit of our select-service management business in the first quarter of 2022.
Net cash used in financing activities increased
Our first priority is to invest in the business. This includes deploying capital to attract high quality assets into our system, investing in select technology improvements across our business that further our strategic objectives and competitive position, brand refresh programs to improve quality and protect brand equity, business acquisitions that are accretive and strategically enhancing to our business, and/or other strategic initiatives. We also expect to maintain a regular dividend payment. Excess cash generated beyond these needs would be available for enhanced stockholder return in the form of stock repurchases.
In the three months ended
In addition, during the three months ended
March 31, 2022, we spent $7 millionon development advance notes. During 2022, we anticipate spending approximately $55 millionon development advance notes. We may also provide other forms of financial support such as enhanced credit support to further assist in the growth of our business.
We expect that all of our cash requirements will be funded from cash and cash generated from operations, and/or availability under our revolving credit facility.
Share buyback program
May 2018, our Board approved a share repurchase plan pursuant to which we were authorized to purchase up to $300 millionof our common stock. In August 2019, the Board increased the capacity of the program by $300 millionand in February 2022, increased an additional $400 million. Under the plan, we may, from time to time, purchase our common stock through various means, including, without limitation, open market transactions, privately negotiated transactions or tender offers, subject to the terms of the tax matters agreement entered into in connection with our spin-off. Due to our confidence in our ability to generate significant cash flow, the resiliency of our business model and the ongoing recovery of travel demand, we resumed our share repurchase program in August of 2021. Under our current stock repurchase program, we repurchased approximately 0.5 million shares at an average price of $83.72for a cost of $38 millionduring the three months ended March 31, 2022. As of March 31, 2022, we had $443 millionof remaining availability under our program.
We declared cash dividends of
The declaration and payment of future dividends to holders of our common stock is at the discretion of our Board and depends upon many factors, including our financial condition, earnings, capital requirements of our business, covenants associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. LONG-TERM DEBT COVENANTS Our credit facilities contain customary covenants that, among other things, impose limitations on indebtedness; liens; mergers, consolidations, liquidations and dissolutions; dispositions, restricted debt payments, restricted payments and transactions with affiliates. Events of default in these credit facilities include, among others, failure to pay interest, principal and fees when due; breach of a covenant or warranty; acceleration of or failure to pay other debt in excess of a threshold amount; unpaid judgments in excess of a threshold amount, insolvency matters; and a change of control. The credit facilities require us to comply with a financial covenant to be tested quarterly, consisting of a maximum first-lien leverage ratio of 5.0 times. The ratio is calculated by dividing consolidated first lien indebtedness (as defined in the credit agreement) net of consolidated unrestricted cash as of the measurement date by consolidated EBITDA (as defined in the credit agreement), as measured on a trailing four-fiscal-quarter basis preceding the measurement date. As of
March 31, 2022, our annualized first-lien leverage ratio was 1.8 times which was unusually low due to the higher than normal cash balance as a result of the proceeds from the sale of 25
Wyndham Grand Bonnet Creek Resortand the termination fee received from CPLGin connection with the exit of our select-service management business in the first quarter of 2022. The indenture, as supplemented, under which the senior notes due 2028 were issued, contains covenants that limit, among other things, our ability and that of certain of our subsidiaries to (i) create liens on certain assets; (ii) enter into sale and leaseback transactions; and (iii) merge, consolidate or sell all or substantially all of our assets. These covenants are subject to a number of important exceptions and qualifications.
SEASONALITY While the hotel industry is seasonal in nature, periods of higher revenues vary property-by-property and performance is dependent on location and guest base. Based on historical performance, revenues from franchise and management contracts are generally higher in the second and third quarters than in the first or fourth quarters due to increased leisure travel during the spring and summer months. Our cash from operating activities may not necessarily follow the same seasonality as our revenues and may vary due to timing of working capital requirements and other investment activities. The seasonality of our business may cause fluctuations in our quarterly operating results, earnings, profit margins and cash flows. As we expand into new markets and geographical locations, we may experience increased or different seasonality dynamics that create fluctuations in operating results different from the fluctuations we have experienced in the past. COMMITMENTS AND CONTINGENCIES We are involved in claims, legal and regulatory proceedings and governmental inquiries related to our business. Litigation is inherently unpredictable and, although we believe that our accruals are adequate and/or that we have valid defenses in these matters, unfavorable results could occur. As such, an adverse outcome from such proceedings for which claims are awarded in excess of the amounts accrued, if any, could be material to us with respect to earnings and/or cash flows in any given reporting period. As of
March 31, 2022, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to approximately $4 millionin excess of recorded accruals. However, we do not believe that the impact of such litigation should result in a material liability to us in relation to our financial position or liquidity. For a more detailed description of our commitments and contingencies see Note 12 - Commitments and Contingencies to the Condensed Consolidated Financial Statements contained in Part I, Item 1 of this report. CRITICAL ACCOUNTING POLICIES In presenting our financial statements in conformity with U.S.GAAP, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. If there is a significant unfavorable change to current conditions, it could result in a material impact to our consolidated results of operations, financial position and liquidity. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time. These Condensed Consolidated Financial Statements should be read in conjunction with our 2021 Consolidated and Combined Financial Statements included in our most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission(the "SEC") and any subsequent reports filed with the SEC, which includes a description of our critical accounting policies that involve subjective and complex judgments that could potentially affect reported results.
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