Despite Q3 softness, Wyndham presses on with pipeline
 
Despite Q3 softness, Wyndham presses on with pipeline
29 OCTOBER 2019 9:31 AM

Reporting third-quarter 2019 earnings, Wyndham Hotels & Resorts highlighted its year-over-year system growth, which executives said reflects continued developer interest, particularly in the company’s new prototype brands.

PARSIPPANY, New Jersey—After a run of several quarters in which year-over-year comparisons were skewed heavily by the benefits and costs related to significant acquisitions and divestitures, Wyndham Hotels & Resorts saw performance level out in the third quarter to a new normal, more in line with its competitors within the industry.

Key performance metrics for the company were consistent with industry trends, including a “softening” revenue-per-available-room environment industrywide, Wyndham executives said during a call with analysts to discuss Q3 2019 earnings.

Wyndham reported systemwide RevPAR in the third quarter decreased 3% year over year to $46.94. RevPAR in the U.S. and internationally each decreased 1% year over year.

Wyndham President and CEO Geoff Ballotti said this reflects a “continued softness in (average daily rate), especially in midscale, midweek segments and most notably in oil and gas markets.”

Five consecutive quarters after closing on its buy of La Quinta’s hotel franchising and management business, Wyndham met its expectation for run-rate synergies of $68 million annually during the third quarter.

Also related to that acquisition, the company reached an agreement in October with CorePoint Lodging, the real estate investment trust of nearly 300 owned La Quinta assets which Wyndham continues to manage. As part of the agreement, Wyndham will pay CorePoint approximately $20 million, and CorePoint will commit to maintaining cash operating reserves of approximately $20 million. The companies also finalized outstanding tax matters related to the acquisition, and agreed to “collaborate on initiatives,” according to a news release. The agreement resulted in a total cost of approximately $26 million for Wyndham in the third quarter.

“We will continue to invest in several ongoing pricing, revenue management, direct sales and reservations enhancements to further support CPLG and the La Quinta brand,” Ballotti said. “We will also work with CPLG to help identify and support sale of noncore hotels to buyers, whom we look forward to working with especially as they renovate and elevate these assets under the properties’ 20-year franchise agreements with us.”

He noted that the agreement “does not in any way change the underlying fee structures” set forth between Wyndham and CorePoint.

Termination of a hotel management contract, initiated in 2012 and covering 2,500 U.S. rooms across eight properties, cost the company $34 million in the third quarter, reducing Wyndham’s future annual hotel-management guaranty obligations to $5 million.

The benefit in exiting that contract lies in the fact that those properties “were not contributing to our (earnings before interest, taxes, depreciation and amortization) because of the structure of those deals,” according to Wyndham CFO David Wyshner.

Despite this, Wyshner said the company is “speaking with owners to see if there are opportunities for them to stay in our system depending on their long-term plans for the properties.”

Wyndham highlighted its portfolio growth in the quarter, noting that systemwide rooms grew 3% year over year—to approximately 822,000 rooms at more than 9,200 properties—driven by 6% growth in international rooms and 1% in the U.S. The company’s development pipeline also grew to 190,000 rooms—74% of which are new construction and approximately 56% international—reflecting a 7% increase from Q3 2018 and a 1% increase over the second quarter.

“Despite this industrywide softness, we’re not seeing any signs of overbuilding,” Ballotti said. “Supply growth remains steady, up 2% in the roadside markets that are important to our pipeline growth.

“We’ve seen great interest domestically in our new construction prototype brands,” as well as traditional brands such as Days Inn and Super 8, he said.

International growth is highlighted by China, where Wyndham debuted Microtel, the 11th of its 20 brands in the third quarter, with the opening of the Microtel by Wyndham Guiyang.

During the quarter, the company also returned more than $100 million to shareholders through share repurchases and dividends, reflecting “strong free cash flow,” Ballotti said.

Q3 performance
Adjusted EBIDTA increased 14% to $190 million, buoyed in part by the company’s hotel franchising operations, for which adjusted EBITDA grew 10% year over year to $195 million. Adjusted EBITDA for the company’s hotel management operations grew 160% in the quarter to $13 million.

Net income for the quarter was $45 million, down 22% from Q3 2018. Adjusted net income was $106 million, a 25% increase year over year. The company reported a 7% decline in net revenues to $560 million for the quarter.

For full-year 2019, Wyndham expects RevPAR to be flat to down 1%, which is revised down from a prior outlook of approximately 1% growth. The company also updated its outlook for adjusted EBIDTA, lowering the high point of its range from $618 million to $615 million, and adjusted net income ($311 million to $318 million, up from a prior outlook of $308 million to $315 million).

At press time, Wyndham Hotels & Resorts’ stock was trading at $52.64 a share, up 7.23% year to date. The Baird/STR Hotel Stock Index was up 9.657% for the same period.

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