Wyndham Hotels & Resorts faced some declines in Q3, with decreases in both net income and revenue—but performed well in terms of improved earnings before interest, tax, depreciation and amortization and earnings per share.
Net income for the quarter was down 22 percent year over year to $45 million and both international and domestic revenue per available room dropped 1 percent, but adjusted EBITDA increased 14 percent to $190 million and adjusted net income increased 25 percent to $106 million. While diluted earnings per share declined 19 percent to $0.47, adjusted diluted EPS grew 29 percent to $1.10.
Revenues decreased 7 percent to $560 million compared with $604 million in the third quarter of 2018, largely in line with industry trends. The company blamed the decline on lower cost-reimbursement revenues in its hotel management business, which have no impact on adjusted EBITDA.
“Our team’s sharp execution against our strategic and operating plans allowed us to deliver solid results in the third quarter, despite a softening RevPAR environment, highlighted by continued expansion of our system size and significant growth in adjusted EBITDA,” President/CEO Geoff Ballotti said in a statement ahead of an earnings call with investors. “In addition, we increased our share repurchase authorization to reflect our strong free cash flow and our sustained focus on returning cash to shareholders. We remain confident that our business is well-positioned for continued success.”
Behind the Numbers
In the earnings release, the company noted that the drop in net income reflected contract-termination expenses and transaction-related items. Previous-year results included separation-related and transaction-related expenses associated with the company’s spin-off and acquisition of La Quinta.
Third-quarter earnings benefited from higher royalty and franchise fees and other revenues, as well as increased synergies from the acquisition and integration of La Quinta, partially offset by higher marketing expenses.
The increase in adjusted EBITDA, meanwhile, primarily reflected higher fee revenues and increased synergies from the acquisition and integration of La Quinta.
Earlier this month, the company entered into an agreement with CorePoint Lodging, the real estate investment trust spinoff of La Quinta. Wyndham now manages La Quinta-branded hotels, and through the agreement will collaborate on initiatives in support of CorePoint’s operations and to resolve open issues between the two companies.
As part of the agreement, the company will make payments of approximately $20 million to CorePoint, and CorePoint will commit to maintaining cash operating reserves of approximately $20 million. The two companies also agreed to finalize outstanding tax matters related to Wyndham's May 2018 acquisition of La Quinta Holdings. As a result of the agreement, Wyndham recorded charges of approximately $26 million ($21 million after tax) in the third quarter.
Systemwide rooms grew 3 percent year over year, including U.S. rooms growth of 1 percent and international rooms growth of 6 percent. As of the end of the quarter, the company’s portfolio had more than 9,200 properties and approximately 822,000 rooms, with the pipeline up 7 percent year over year to 1,450 properties and approximately 190,000 rooms. Approximately 56 percent of the company’s development pipeline is international and 74 percent is new construction.
The company recorded a $34 million charge during the quarter to terminate what it described as "an unprofitable hotel-management arrangement" initiated in 2012 that covered eight hotel properties with a total 2,500 rooms, all of which will remain in the company’s U.S. franchise system this year. With the termination of this arrangement, the company’s future maximum annual hotel-management guaranty obligations will be $5 million.
The company's previous outlook for the remainder of 2019 was for full-year RevPAR growth of approximately 1 percent, but the company now is anticipating a decline of 1 percent, or remaining flat for the final quarter. “The downward revision is not overly surprising given weaker-than-expected global RevPAR growth trends during the quarter,” noted Michael Bellisario, a senior research analyst at RW Baird, in an email to investors.
The company’s earnings beat estimates from both Baird and Zacks Equity Research, both firms noted.