Since acquiring La Quinta last May, Wyndham Hotel & Resorts has consistently posted strong year-over-year results. With revenue increasing 23 percent and adjusted earnings before interest, tax, depreciation and amortization up 27 percent, the second quarter of 2019 proved no different.
In a call with investors, the company’s leadership touted its progress in integrating La Quinta, specifically in transitioning it to its technological platforms. President/CEO Geoff Ballotti estimated Wyndham will achieve full La Quinta synergies within the next few weeks. David Wyshner, Wyndham’s CFO, said the company has entered the final stage of the La Quinta transition, with small things, like decommissioning leftover systems, remaining to be finished.
Unlike Hilton, who downgraded its projections in Asia-Pacific yesterday because of a poor performance in China, Ballotti highlighted Wyndham’s performance in Southeast Asia, where he said its room numbers have grown more than 20 percent. “We continue to see excellent opportunities internationally,” Ballotti said. Specifically, he said the company has seen significant interest in the Caribbean and Latin America, where it recently signed a deal for eight hotels.
As of June 30, Wyndham’s hotel system consisted of approximately 9,200 properties and 817,000 rooms, a 3 percent YOY increase. Its development pipeline consisted of 1,400 hotels and approximately 188,000 rooms, a 10 percent YOY room increase. Approximately 55 percent of Wyndham’s pipeline is international and 74 percent is new construction.
La Quinta Drives Growth
Overall, Wyndham’s revenue grew from $435 million to $533 million YOY. The company attributed $98 million of incremental revenue to La Quinta. When excluding the impact from 2018 acquisitions and divestitures, revenue rose only 1 percent in constant currency. Higher license, royalty and other fees contributed to the slightly higher revenue, offsetting the impact of lower cost-reimbursement revenue and the timing of Wyndham’s global franchisee conference (held in April last year, it is scheduled for September this year). The company downgraded its full-year revenue projection from $2.11 billion to $2.16 billion to $2.05 to $2.08 billion.
Adjusted earnings before interest, taxes, depreciation and amortization rose from $125 million to $159 million YOY, with La Quinta contributing approximately $30 million of incremental adjusted EBITDA. Excluding the impact from 2018 acquisitions and divestitures, adjusted EBITDA rose 5 percent, again, because of growth in license, royalty and other fee revenues. Marketing expenses played a strong part in keeping this metric down, suppressing growth by $14 million. Wyndham tightened its adjusted EBITDA forecast from $605 to $620 million to $610 to $618 million. The company explained it made the adjustment as a result of its success in integrating La Quinta, favorable results at the company’s owned hotel in Puerto Rico and the softer-than-expected revenue-per-available-room environment.
Looking at 2019 overall, Wyndham downgraded its prediction of 1 to 3 percent revenue per available room growth (not including 2018 acquisitions and divestitures until their anniversary dates) to 1 percent, largely because of softer performance in the United States. In Q2, both global and U.S. RevPAR rose 5 percent YOY. Excluding 2018 acquisitions through their anniversary dates, both metrics increased only a fraction of a point. Wyshner said the company’s soft RevPAR growth was “consistent with broader macroeconomic and industry trends.”
Wyndham Exits Management Contracts
Wyndham plans on exiting two hotel management arrangements that it had initiated in 2012 and 2013. In the case of one of these arrangements, which Michael Bellisario, VP and senior analyst at Robert W. Baird & Co., identified as being with Hospitality Properties Trust, Wyshner said the company’s “guaranty options have been exhausted.” The arrangement covers 22 hotels and 3,600 U.S. rooms. Wyndham recorded a non-cash impairment expense of $45 million and a $9 million contract termination charge in the second quarter related primarily to the anticipated loss of the recapture opportunity. In an email to investors, Bellisario predicted Hospitality Properties Trust may retain the Wyndham brand at a handful of the hotels, particularly the select-service ones. According to him, the agreement was set to expire in July 2020.
The other agreement—Bellisario identified the company as RLJ Lodging Trust—covers eight hotel properties and 2,500 U.S. rooms. Wyndham has signed a non-binding letter of intent to make payments representing a significant discount to its remaining potential guarantee exposure, which is currently approximately $70 million. It expects to record a contract termination in the third quarter related to these future payments. Bellisario viewed the termination as a long-term positive for RLJ Lodging Trust, though he said it likely will have a short-term negative earnings impact.
Wyndham estimated the two agreement terminations will reduce future maximum annual hotel-management guaranty obligations from $26 million to $5 million. Ballotti said they will have no effect on EBITDA this year, but will help next year. According to him, proceeds from Wyndham Worldwide’s $1.3 billion sale of its European vacation rental business will help offset the costs of leaving these management contracts.