Global hotel franchisor Wyndham Hotels and Resorts (NYSE:WH) attempted a dramatic transformation last year when it completed both the acquisition of La Quinta Holdings and a spinoff from parent Wyndham Destinations on successive days (May 31 and June 1, respectively).

So far, the transformation appears to be a success, as La Quinta's roughly 900 franchised mid-scale hotels have helped lift Wyndham's average daily rates (ADR), while Wyndham continues to increase the scale and revenue potential of its original franchised brands.

Below, we'll review fourth-quarter 2018 results, released on Wednesday, for perspective on Wyndham's first few months as a significantly altered organization. (Note that in the discussion that follows, all comparable numbers refer to the prior-year quarter, the fourth quarter of 2017.)

Wyndham: The raw numbers

Metric Q4 2018 Q4 2017 Growth (YOY)
Revenue $527 million $312 million 68.9%
Net income $43 million $92 million (53.2%)
Diluted earnings per share $0.43 $0.92 (53.2%)

Data source: Wyndham Hotels and Resorts. YOY = year over year.  

What happened this quarter?

Swimming pool in tropics with ocean in the background.

Image source: Getty Images.

  • Removing $198 million in incremental revenue from the La Quinta acquisition and the impact of its May 2018 divestiture of its Knights Inn brand, Wyndham achieved underlying (organic) revenue growth of 6% in the fourth quarter, which management attributed to higher license and other fees.
  • Revenue per available room, or RevPAR, increased 8% to $37.54. Removing the La Quinta and Knights Inn transactions, RevPAR increased 2% -- in line with recent industry trends.
  • The company's average royalty rate charged to franchisees of its brands rose 10 basis points to 4.59%.
  • Systemwide room count grew by 11% to 809,900, and by 2% when removing the effects of the La Quinta and Knights Inn transactions.
  • The company increased new construction signings by 28% in the U.S. market -- its highest level of development activity in five years.
  • Wyndham announced that it has reacquired exclusive master franchising rights for its Days Inn brand in China. The Days Inn system in China currently consists of 50 hotels.
  • Wyndham concluded the year with $2.1 billion in debt, the majority of which was incurred to finance the La Quinta acquisition. Total debt is roughly four times 2018 adjusted EBITDA of $507 million, which can be considered a moderate to slightly high amount of leverage.
  • For the full year, Wyndham generated $158 million in free cash flow. The company repurchased $60 million worth of its shares in the fourth quarter. Management pointed out that since the company's spinoff from Wyndham Destinations on June 1, it's repurchased $119 million of its shares, or 2% of its outstanding share count.
  • Wyndham increased its quarterly dividend payment by 16% from $0.25 to $0.29, effective with the first dividend payment of 2019.
  • The significant slump in earnings against the prior-year period seen in the table above is due to a large, one-time tax benefit of $85 million recorded in the fourth quarter of 2017, as a result of U.S. tax legislation.

What management had to say

In Wyndham's earnings conference call, CEO Geoff Ballotti discussed, among other topics, the company's aim to expand in the economy and mid-tier segments of the hotel industry. As it successfully integrates La Quinta, management sees other opportunities to lift its systemwide ADR and build supply in these active areas of the broader hotel market:

Another significant objective of ours is to continue elevating the economy and mid-scale experience, including new prototypes for many of our brands. For our largest U.S. economy brand, we are working with our franchise advisory council to initiate a refresh of Days Inn by Wyndham, requiring our franchisees to invest in the quality of the sleep experience in the overall standards of the economy brand, which focuses on the little things that surprise and delight, and a brand that has moved up to third place from sixth place in the J.D. Power economy guest satisfaction rankings over the past three years. We know from our experience with Super 8's new Innovate brand standard that a thoughtful, cost-effective refresh program could have a very meaningful impact on guest experience, while driving favorable market share and operating margin improvements.

Check out all our earnings call transcripts.

Looking forward

Wyndham provided its outlook for 2019 alongside earnings. Management expects RevPAR growth of 1% to 3%, and room growth of 2% to 4% in 2019. Revenue is expected to land between $2.11 billion and $2.16 billion, which at the midpoint will represent an increase of 14.3%, benefiting comparatively from the La Quinta acquisition. 

Adjusted EBITDA is anticipated to improve by 19% to 22%, from $605 million to $620 million. Finally, adjusted diluted earnings per share are pegged at a band of between $3.05 and $3.17, versus $2.71 in 2018. Again, for the most part, these increases will come courtesy of La Quinta's contribution, yet Wyndham is managing to increase the value of its core business alongside this acquired growth.