Forward-Looking Statements 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 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 ofWyndham Hotels 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 and duration 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 travel; the success of our mitigation efforts in response to COVID-19; our performance in any recovery from COVID-19, the performance of the financial and credit markets; the 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; concerns with or threats of pandemics, contagious diseases or health epidemics, including the effects of COVID-19 and any resurgence or mutations of the virus and actions governments, businesses and individuals take in response to the pandemic, including stay-in-place directives and other travel restrictions; risks related to restructuring or strategic initiatives; risks related to our relationship with CorePoint Lodging; our spin-off as a newly independent company; 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 as a result of COVID-19; and the Company's ability to make or pay dividends, plans for and 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 theSEC . 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. 23 -------------------------------------------------------------------------------- Table of Contents 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 theSEC and any public conference calls or webcasts. References herein to "Wyndham Hotels ," the "Company," "we," "our" and "us" refer toWyndham Hotels & Resorts, Inc. and its consolidated subsidiaries. BUSINESS AND OVERVIEWWyndham Hotels & Resorts is a leading global hotel franchisor, licensing its renowned hotel brands to hotel owners in nearly 95 countries around the world. We operate in the following segments: •Hotel Franchising - licenses our lodging brands and provides related services to third-party hotel owners and others. •Hotel Management - provides hotel management services for full-service and limited-service hotels as well as two hotels that are owned by us. RESULTS OF OPERATIONS Discussed below are our key operating statistics, combined 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 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), 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 withU.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 underU.S. GAAP and should not be considered as an alternative to net income or other measures of financial performance or liquidity derived in accordance withU.S. GAAP. Our presentation of adjusted EBITDA may not be comparable to similarly-titled measures used by other companies. During the first quarter of 2021, we modified the definition of adjusted EBITDA to exclude the amortization of development advance notes to reflect how our chief operating decision maker reviews operating performance beginning in 2021. We have applied the modified definition of adjusted EBITDA to all periods presented. 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. COVID-19 During 2020, the hotel industry experienced a sharp decline in travel demand due to the coronavirus pandemic, ("COVID-19") and the related government preventative and protective actions to slow the spread of the virus, including travel restrictions. We and the entire industry experienced significant revenue losses in 2020 as a result of steep RevPAR declines. Over 99% of our domestic and over 98% of our global portfolio are currently open. Nearly 90% of hotels within ourU.S. system are located along highways and in suburban and small metro areas. Our portfolio generates approximately 70% of bookings from leisure customers and 30% from business travel. Our business customers are substantially comprised of truckers, contractors, construction workers, healthcare workers, emergency crews and others who must travel for work and do not have the ability to conduct their work remotely. These travelers are looking for well-known and high quality brands they can depend on for quality and enhanced safety measures. Less than 5% of our bookings come from corporate business travel or group business. As a result of the strength of leisure demand, these traveling everyday workers and our continued investment in sales 24 -------------------------------------------------------------------------------- Table of Contents and marketing efforts, our economy and midscale brands have outperformed the industry's higher-end chain scales throughout the pandemic. As a result of the easing of the various governmental restrictions, coupled with the favorable impact the vaccines are having on reducing the spread of COVID-19, we are seeing a strong recovery in our business, especially in our economy and midscale brands. Inthe United States , leisure travel demand appears to be in recovery as occupancy levels during the second quarter reached 95% of their pre-pandemic levels in 2019. Internationally, recovery of travel demand is more challenging as multiple countries sustained prolonged periods of total lockdowns and/or relocked-down following a reopening due to variant surges. Should there be a resurgence of COVID-19, our results of operations may be negatively impacted and certain intangible assets, such as our trademarks, and our franchised and managed goodwill may be exposed to impairments. For further discussion on the effect of COVID-19 on our financial condition and liquidity, see the section below Financial Condition, Liquidity and Capital Resources. OPERATING STATISTICS The table below presents our operating statistics for the three and six months endedJune 30, 2021 and 2020. "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. 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 June 30, 2021 2020 % Change Rooms United States 484,800 502,000 (3%) International 313,200 310,900 1% Total rooms 798,000 812,900 (2%) Three Months Ended June 30, 2021 2020 % Change RevPAR United States$ 48.37 $ 23.19 109% International (a) 18.84 7.96 137% Global RevPAR (a) 36.92 17.31 113% Six Months Ended June 30, 2021 2020 % Change RevPAR United States$ 39.53 $ 28.33 40% International (b) 17.35 13.20 31% Global RevPAR (b) 30.94 22.50 38% ______________________ (a)Excluding currency effects, international RevPAR increased 119% and global RevPAR increased 110%. (b)Excluding currency effects, international RevPAR increased 24% and global RevPAR increased 36%. Rooms as ofJune 30, 2021 decreased 2% compared to the prior year primarily reflecting our 2020 strategic termination plan, which resulted in the removal of approximately 17,700 rooms during the third and fourth quarters of 2020. Global RevPAR for the three months endedJune 30, 2021 increased 113% to$36.92 compared to the prior year due to the ongoing recovery in travel demand. Global and international RevPAR began to lap the onset of the COVID-19 pandemic inJanuary 2021 while theU.S. began to lap its onset inMarch 2021 . As such, comparisons to 2019 may be more meaningful when evaluating trends as such highlight the impact of COVID-19 from pre-pandemic levels. On this basis, global RevPAR declined 17% reflecting a 5% decline in theU.S. and a 44% decline internationally. The 5% decline in theU.S. represents continued sequential improvement compared to a decline of 25% in the first quarter of 2021. Importantly, RevPAR in theU.S. for our economy brands exceeded 2019 levels by 4%. The 44% decline internationally improved sequentially from a decline of 45% in the first quarter of 2021 as conditions inChina continued to recover, down only 7% compared to 2019 levels, an improvement from down 25% in the first quarter. 25
--------------------------------------------------------------------------------
Table of Contents THREE MONTHS ENDEDJUNE 30, 2021 VS. THREE MONTHS ENDEDJUNE 30, 2020 Three Months Ended June 30, 2021 2020 Change % Change
Revenues
Fee-related and other revenues $ 321
$ 129 67 % Cost reimbursement revenues 85 66 19 29 % Net revenues 406 258 148 57 % Expenses Marketing, reservation and loyalty expense 105 85 20 24 % Cost reimbursement expense 85 66 19 29 % Other expenses 83 301 (218) (72 %) Total expenses 273 452 (179) (40 %) Operating income/(loss) 133 (194) 327 n/a Interest expense, net 22 28 (6) (21 %) Early extinguishment of debt 18 - 18 n/a Income/(loss) before income taxes 93 (222) 315 n/a Provision for/(benefit from) income taxes 25 (48) 73 n/a Net income/(loss) $ 68$ (174) $ 242 n/a Net revenues for the three months endedJune 30, 2021 increased$148 million , or 57%, compared to the prior-year period, primarily driven by: •$61 million of higher royalty and franchise fees primarily due to the ongoing recovery of travel demand and its impact on RevPAR; •$37 million of higher marketing, reservation and loyalty fees, primarily reflecting an increase in RevPAR; •$24 million of higher management and other fees primarily due to the ongoing recovery in travel demand; and •$19 million of higher cost-reimbursement revenues in our hotel management business primarily due to the ongoing recovery of travel demand, partially offset by CorePoint Lodging asset sales. Total expenses for the three months endedJune 30, 2021 decreased$179 million , or 40%, compared to the prior-year period, primarily driven by: • a$206 million decrease in impairment charges due to the absence of impairments in 2021; •$16 million of lower restructuring charges; •$5 million of lower transaction-related expenses; partially offset by •$20 million of higher marketing, reservation and loyalty expenses primarily due to ongoing recovery of travel demand; •$19 million of higher cost reimbursement expenses as discussed above; and •$8 million of higher operating expenses costs, primarily due to the ongoing recovery of travel demand. Interest expense, net for the three months endedJune 30, 2021 decreased$6 million , or 21%, compared to the prior-year period as a result of the redemption of our$500 million senior notes inApril 2021 discussed below. Early extinguishment of debt was$18 million in the three months endedJune 30, 2021 as a result of the redemption of our$500 million notes. Our effective tax rate increased to a 26.9% tax provision on pre-tax income from a 21.6% tax benefit on pre-tax loss during the three months endedJune 30, 2021 and 2020, respectively, primarily related to goodwill impairment charges that are nondeductible for tax purposes in 2020 and the absence in 2021 of nonrecurring foreign and state tax benefits. As a result of these items, net income for the three months endedJune 30, 2021 , increased$242 million compared to the prior-year period. 26
--------------------------------------------------------------------------------
Table of Contents The table below is a reconciliation of net income/(loss) to adjusted EBITDA. Three Months Ended June 30, 2021 2020 (a) Net income/(loss) $ 68$ (174) Provision for/(benefit from) income taxes 25 (48) Depreciation and amortization 24 25 Interest expense, net 22 28 Early extinguishment of debt 18 - Stock-based compensation expense 8 5 Development advance notes amortization 2 2 Separation-related expenses 1 - Impairments, net - 206 Restructuring costs - 16 Transaction-related expenses, net - 5 Adjusted EBITDA $ 168 $ 66
______________________
(a)Adjusted EBITDA for 2020 has been recasted to conform with the current year presentation. Amounts may not foot due to rounding.
Following is a discussion of the results of each of our segments and Corporate and Other for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 : Net Revenues Adjusted EBITDA 2021 2020 % Change 2021 2020 (a) % Change Hotel Franchising$ 283 $ 182 55%$ 166 $ 86 93% Hotel Management 123 76 62% 16 (4) n/a Corporate and Other - - n/a (14) (16) n/aTotal Company $ 406 $ 258 57%$ 168 $ 66 155% ______________________ (a)Adjusted EBITDA for 2020 has been recasted to conform with the current year presentation. Hotel Franchising Three Months Ended June 30, 2021 2020 % Change Total rooms 752,500 754,700 -% Global RevPAR (a)$ 35.69 $ 17.05 109% ______________________ (a) Excluding currency effects, global RevPAR increased 106%. Net revenues increased$101 million , or 55%, compared to the second quarter of 2020, primarily driven by the ongoing recovery of travel demand and its impact on global RevPAR which resulted in: •$56 million of higher royalty and franchise fees; and •$37 million of higher marketing, reservation and loyalty revenues. Adjusted EBITDA increased$80 million , or 93%, compared to the second quarter of 2020, primarily driven by the changes in net revenues discussed above, and a$20 million favorable impact from marketing revenues exceeding marketing expenses due to timing. Such favorability was partially offset by$3 million of higher operating and general and administrative expenses driven by higher volume-related expenses, which were principally offset by expense reductions associated with our restructuring initiatives enacted in 2020. 27 --------------------------------------------------------------------------------
Table of ContentsHotel Management Three Months Ended June 30, 2021 2020 % Change Total rooms 45,500 58,200 (22%) Global RevPAR (a)$ 56.08 $ 20.67 171% ______________________ (a) Excluding currency effects, global RevPAR increased 169%. Net revenues increased$47 million , or 62%, compared to the prior-year period, primarily driven by: •$19 million of higher owned hotel revenues due to ongoing recovery of travel demand; •$19 million of higher cost-reimbursement revenues as discussed above, which have no impact on adjusted EBITDA; and •$5 million of higher management fees primarily due to the increase global RevPAR. Adjusted EBITDA increased$20 million , compared to the prior-year period primarily driven by the revenue increases discussed above (excluding cost reimbursements), partially offset by$8 million of higher volume-related expenses primarily associated with the recovery of travel demand at our owned hotels. Corporate and Other Adjusted EBITDA was favorable by$2 million compared to the prior-year period, due to lower general and administrative expenses. SIX MONTHS ENDEDJUNE 30, 2021 VS. SIX MONTHS ENDEDJUNE 30, 2020 Six Months Ended June 30, 2021 2020 Change % Change
Revenues
Fee-related and other revenues $ 554
$ 79 17 % Cost reimbursement revenues 155 192 (37) (19 %) Net revenues 709 667 42 6 % Expenses Marketing, reservation and loyalty expense 198 204 (6) (3 %) Cost reimbursement expense 155 192 (37) (19 %) Other expenses 159 409 (250) (61 %) Total expenses 512 805 (293) (36 %) Operating income/(loss) 197 (138) 335 n/a Interest expense, net 51 54 (3) (6 %) Early extinguishment of debt 18 - 18 n/a Income/(loss) before income taxes 128 (192) 320 n/a Provision for/(benefit from) income taxes 35 (40) 75 n/a Net income/(loss) $ 93$ (152) $ 245 n/a Net revenues for the six months endedJune 30, 2021 increased$42 million , or 6%, compared to the prior-year period, primarily driven by: •$46 million of higher royalty and franchise fees primarily reflecting a 38% increase in RevPAR due to the ongoing recovery in travel demand; •$16 million of higher marketing, reservation and loyalty fees primarily due to the RevPAR increase; and •$12 million of higher management and other fees due to the ongoing recovery in travel demand; partially offset by •$37 million of lower cost-reimbursement revenues in our hotel management business as a result of CorePoint Lodging asset sales. 28 -------------------------------------------------------------------------------- Table of Contents Total expenses for the six months endedJune 30, 2021 , decreased$293 million , or 36%, compared to the prior-year period, primarily driven by: • a$206 million decrease in impairment charges due to the absence of impairments in 2021; •$37 million of lower cost reimbursement expenses as discussed above; •$29 million of lower restructuring charges; •$13 million of lower transaction-related expenses; and •$6 million of lower marketing, reservation and loyalty expenses primarily due to cost containment initiatives enacted in 2020 in response to COVID-19. Early extinguishment of debt was$18 million in the six months endedJune 30, 2021 as a result of the redemption of our$500 million notes. Our effective tax rate increased to a 27.3% tax provision on pre-tax income from a 20.8% tax benefit on pre-tax loss during the six months endedJune 30, 2021 and 2020, respectively, primarily related to goodwill impairment charges that are nondeductible for tax purposes in 2020 and the absence in 2021 of nonrecurring foreign and state tax benefits. As a result of these items, net income for the six months endedJune 30, 2021 , increased$245 million compared to the prior-year period. The table below is a reconciliation of net income/(loss) to adjusted EBITDA. Six Months Ended June 30, 2021 2020 (a) Net income/(loss) $ 93$ (152) Provision for/(benefit from) income taxes 35 (40) Depreciation and amortization 47 49 Interest expense, net 51 54 Early extinguishment of debt 18 - Stock-based compensation expense 13 9 Development advance notes amortization 4 4 Separation-related expenses 3 1 Impairments, net - 206 Restructuring costs - 29 Transaction-related expenses, net - 13 Foreign currency impact of highly inflationary countries 1 1 Adjusted EBITDA $ 265$ 175 ______________________
(a)Adjusted EBITDA for 2020 has been recasted to conform with the current year presentation. Amounts may not foot due to rounding.
Following is a discussion of the results of each of our segments and Corporate
and Other for the six months ended
Net Revenues
Adjusted EBITDA
2021 2020 % Change 2021 2020 (a) % Change Hotel Franchising$ 492 $ 425 16%$ 271 $ 196 38% Hotel Management 217 242 (10%) 22 13 69% Corporate and Other - - n/a (28) (34) n/aTotal Company $ 709 $ 667 6%$ 265 $ 175 51% ______________________
(a)Adjusted EBITDA for 2020 has been recasted to conform with the current year presentation.
29 --------------------------------------------------------------------------------
Table of ContentsHotel Franchising Six Months Ended June 30, 2021 2020 % Change Total rooms 752,500 754,700 -% Global RevPAR (a)$ 29.89 $ 21.47 39% ______________________ (a) Excluding currency effects, global RevPAR increased 37%. Net revenues for the six months endedJune 30, 2021 increased$67 million , or 16%, compared to the prior-year period, primarily driven by the ongoing recovery of travel demand and its impact on global RevPAR which resulted in: •$46 million of higher royalty and franchise fees; and •$17 million of higher marketing, reservation and loyalty revenues. Adjusted EBITDA for the six months endedJune 30, 2021 increased$75 million , or 38%, compared to the prior-year period, primarily driven by the changes in net revenues discussed above and a$25 million favorable impact from marketing revenues exceeding marketing expenses due to timing.Hotel Management Six Months Ended June 30, 2021 2020 % Change Total rooms 45,500 58,200 (22%) Global RevPAR (a)$ 47.04 $ 35.63 32% ______________________ (a) Excluding currency effects, global RevPAR increased 31%. Net revenues for the six months endedJune 30, 2021 decreased$25 million , or 10%, compared to the prior-year period, primarily driven by: •$37 million of lower cost-reimbursement revenues as discussed above, which have no impact on adjusted EBITDA; partially offset by •$11 million of higher owned hotel revenues due to ongoing recovery of travel demand. Adjusted EBITDA for the six months endedJune 30, 2021 increased$9 million , or 69%, compared to the prior-year period, primarily driven by the higher owned hotel revenues discussed above, partially offset by higher volume-related expenses. Corporate and Other Adjusted EBITDA for the six months endedJune 30, 2021 was favorable by$6 million compared to the prior-year period, primarily due to lower general and administrative costs. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Financial condition June 30, 2021 December 31, 2020 Change Total assets$ 4,241 $ 4,644$ (403) Total liabilities 3,181 3,681 (500) Total stockholders' equity 1,060 963 97 Total assets decreased$403 million fromJune 30, 2021 andDecember 31, 2020 primarily due to a reduction in cash as a result of the redemption of our$500 million 2026 senior notes. Total liabilities decreased$500 million fromDecember 31, 2020 toJune 30, 2021 primarily due to senior notes redemption discussed above. Total equity increased$97 million fromDecember 31, 2020 toJune 30, 2021 primarily due to our net income for the period. 30 -------------------------------------------------------------------------------- Table of Contents Liquidity 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 shareholders, but also to create additional value for our stockholders in the form of share repurchases. However, due to the negative impact that COVID-19 was having on the travel industry, in 2020 we took a number of preventative steps to conserve our liquidity and strengthen our balance sheet: •InMarch 2020 , we suspended share repurchase activity; •InApril 2020 , we amended our revolving credit facility agreement to waive the quarterly-tested leverage covenant untilApril 1, 2021 . The covenant was also modified for the second, third and potentially fourth quarters of 2021 to use a form of annualized EBITDA, as defined in the credit agreement, rather than the last twelve months EBITDA, as previously required; •InMay 2020 , we decreased our quarterly cash dividend to$0.08 per share; and •InAugust 2020 , we issued$500 million of senior unsecured notes, which mature in 2028 and bear interest at a rate of 4.375% per year, for net proceeds of$492 million , which were used to repay a portion of the then outstanding borrowings under our revolving credit facility. As a result of our confidence in the continued recovery of travel demand, we have taken the following actions in 2021: •In the first quarter of 2021, we increased our quarterly cash dividend to$0.16 per share; •OnApril 15, 2021 , we redeemed all$500 million of our outstanding 5.375% senior notes due in 2026, primarily from cash on hand. We expect this redemption to reduce our annual cash interest expense by approximately$27 million . Coupled with the issuance of 4.375% senior notes inAugust 2020 , this redemption effectively returns our balance sheet to pre-pandemic debt and liquidity levels while extending$500 million of maturity by approximately 2.5 years at a 100 basis point or 19% lower interest rate; and •InJuly 2021 , we announced the Board's approval of an increase in the quarterly cash dividend to$0.24 per share. As ofJune 30, 2021 our liquidity approximates$840 million . 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 ofJune 30, 2021 , we were in compliance with the financial covenants of our credit agreement and expect to remain in such compliance with no additional waivers or amendments required. As ofJune 30, 2021 , we had a term loan with an aggregate principal amount of$1.6 billion maturing 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$15 million was 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%. The 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. During the amendment period as discussed above, the revolving credit facility was subject to an interest rate per annum equal to, at our option, either a base rate plus a margin of 1.25% or LIBOR plus a margin of 2.25% with the LIBOR rate subject to a 0.50% floor. The amendment period expired onApril 1, 2021 . As ofJune 30, 2021 ,$1.1 billion of our$1.6 billion term loan is hedged with pay-fixed/receive-variable interest rate swaps hedging of our term loan interest rate exposure. The aggregate fair value of these interest rate swaps was a$47 million liability as ofJune 30, 2021 . TheFederal Reserve has established the Alternative Reference Rates Committee to identify alternative reference rates in the event thatU.S. dollar LIBOR ceases to exist afterJune 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-monthU.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.The International Swaps and Derivatives Association issued 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 ofJune 2021 , our credit rating was Ba1 from Moody's Investors Service and BB from Standard and Poor'sRating 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 31
-------------------------------------------------------------------------------- Table of Contents 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. Our industry has seen a significant decline in travel demand due to COVID-19 and if the effects of COVID-19 persist for a prolonged duration, our credit ratings, financial performance and access to credit markets may be negatively impacted. We may not be able to obtain future borrowings on terms as favorable as our existing terms or at all. 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 six months ended
Six
Months Ended
2021 2020 Change Cash provided by/(used in) Operating activities$ 180 $ (40) $ 220 Investing activities (18) (19) 1 Financing activities (552) 630 (1,182)
Effects of changes in exchange rates on cash, cash equivalents and restricted cash
- (1) 1
Net change in cash, cash equivalents and restricted cash
Net cash provided by operating activities increased$220 million compared to the prior-year period primarily due to higher cash generated from net income and favorable working capital as a result of the ongoing recovery in travel demand from COVID-19. Net cash used in investing activities decreased$1 million compared to the prior-year period, primarily due to lower capital expenditures. In the first half of 2021, we used$552 million of net cash in financing activities compared to generating$630 million of net cash in the first half of 2020, resulting in a reduction of$1,182 million in cash generated year-over-year. The largest contributor to this cash reduction is the absence of$734 million of revolving credit facility borrowings inMarch 2020 at the onset of the pandemic out of an abundance of caution and the use of$513 million of cash inApril 2021 for the redemption of our 2026 senior notes. In addition, cash used in financing activities reflects the absence of stock repurchases in 2021 compared to$50 million in 2020. Capital deployment Our first priority is to invest in the business. This includes investing in select technology improvements across our business that further our strategic objectives, deploying capital to increase our system size, 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 shareholder return in the form of stock repurchases. During the six months endedJune 30, 2021 , we spent$17 million on capital expenditures, primarily related to information technology. During 2021, we anticipate spending approximately$40 million on capital expenditures. In addition, during the six months endedJune 30, 2021 , we spent$16 million , net of repayments on development advance notes. During 2021, we anticipate spending approximately$40 million on development advances. We may also provide other forms of financial support. We expect all our cash needs to be funded from cash on hand and cash generated through operations, and/or availability under our revolving credit facility. 32
-------------------------------------------------------------------------------- Table of Contents Stock repurchase program InMay 2018 , our Board approved a share repurchase plan pursuant to which we were authorized to purchase up to$300 million of our common stock. InAugust 2019 , the Board increased the capacity of the program by another$300 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. During the second quarter of 2021, we did not repurchase any stock. As ofJune 30, 2021 , we had$191 million of remaining availability under our program. Dividend policy We declared cash dividends of$0.16 per share in the first and second quarters of 2021 ($30 million in aggregate), which reflects an increase of 100% when compared to the payments made during the second, third and fourth quarters of 2020 (post onset of the pandemic). Due to the adverse impact on the global economy and travel demand resulting from COVID-19, our Board approved a reduction in the quarterly cash dividend from$0.32 per share to$0.08 per share, beginning with the dividend that was declared by the Board during the second quarter of 2020. OnFebruary 10, 2021 , the Company announced the Board's approval of an increase in the quarterly cash dividend to$0.16 per share and inJuly 2021 , we announced the Board's approval of an additional increase in the quarterly cash dividend to$0.24 per share. 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 the impact of COVID-19 on travel demand, 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 ofJune 30, 2021 , our annualized first-lien leverage ratio was 2.2 times. InApril 2020 , we completed an amendment to our revolving credit facility agreement to waive the quarterly-tested leverage covenant untilApril 1, 2021 . The covenant was also modified for the second, third and potentially fourth quarters of 2021 to use a form of annualized EBITDA, as defined in the credit agreement, rather than the last twelve months EBITDA, as previously required. 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. As ofJune 30, 2021 , we were in compliance with the financial covenants described above. 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, prior to 2020 and the impacts of COVID-19, 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 provided by operating activities tends to be lower in the first half of the year and substantially higher in the second half of the year. However, given the impact of COVID-19, the historical seasonality of our business was not relevant to 2020 operating results. Our second quarter was the most severely impacted and as such, we had higher revenues and cash flows in the third and fourth quarters. While we believe 33
-------------------------------------------------------------------------------- Table of Contents in many cases our select service hotels have performed more favorably than hotels in other chain scales, and are recovering more quickly as the pandemic abates, the ultimate timing of a full recovery remains uncertain. We believe during 2021 that our revenues will return to the historic seasonality of our business and that our cash provided by operating activities will be generated more consistently throughout the year. If there is a resurgence of COVID-19, our results of operations may be negatively impacted and we may be unable to predict when our operations will resume the normal hotel industry seasonality. 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 ofJune 30, 2021 , the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to approximately$6 million in 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 11 - 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 withU.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 2020 Consolidated and Combined Financial Statements included in our most recent Annual Report on Form 10-K filed with the U.S. Securities andExchange Commission (the "SEC") and any subsequent reports filed with theSEC , which includes a description of our critical accounting policies that involve subjective and complex judgments that could potentially affect reported results.
© Edgar Online, source