WYNDHAM HOTELS & RESORTS, INC. 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 For m 10- K filed with the U.S. Securities andExchange 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. 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 OVERVIEW
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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, 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 with
U.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 under U.S. GAAP and should not be considered as an alternative
to net income or other measures of financial performance or liquidity derived in
accordance with U.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, which may continue for some
time.
Over 99% of our domestic and approximately 98% of our global portfolio remain
open today. We are optimistic about what lies ahead and are encouraged by
medical community indications that the vaccines are working and believe they
will help deliver a multi-year resurgence in leisure travel providing an
opportunity to grow our brands globally. We believe we are uniquely positioned
to continue to drive results for our owners and significant value for our
shareholders.
Nearly 90% of hotels within our U.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
and marketing efforts, our economy and midscale brands have outperformed the
industry's higher-end chain scales throughout the pandemic. While we believe our
hotels will be able to quickly recover once the pandemic abates, the ultimate
timing of any recovery remains uncertain. In the meantime, our results of
operations may continue to be negatively impacted and certain intangible assets,
such as our trademarks, and our franchised and managed goodwill may be exposed
to additional 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.
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OPERATING STATISTICS
The table below presents our operating statistics for the three months ended
March 31, 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 March 31,
2021 2020 % Change
Rooms
United States 486,000 506,800 (4%)
International 311,200 321,500 (3%)
Total rooms 797,200 828,300 (4%)
Three Months Ended March 31,
2021 2020 % Change
RevPAR
United States $ 30.62 $ 33.45 (8%)
International (a) 15.83 18.45 (14%)
Global RevPAR (a) 24.90 27.68 (10%)
______________________(a)Excluding currency effects, international RevPAR decreased 10% and global RevPAR decreased 9%.
Rooms as ofMarch 31, 2021 decreased 4% compared to the prior year primarily reflecting our 2020 strategic termination plan, which resulted in the removal of approximately 26,700 rooms during the second, third and fourth quarters of 2020. Global RevPAR for the three months endedMarch 31, 2021 decreased 10% to$24.90 compared to the prior year due to COVID-19. 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 31% from the comparable 2019 period reflecting a 25% decline in theU.S. and a 45% decline internationally. THREE MONTHS ENDEDMARCH 31, 2021 VS. THREE MONTHS ENDEDMARCH 31, 2020 Three Months Ended March 31, 2021 2020 Change % Change Net revenues $ 303$ 410 $ (107) (26 %) Expenses 240 354 (114) (32 %) Operating income 63 56 7 13 % Interest expense, net 28 25 3 12 % Income before income taxes 35 31 4 13 % Provision for income taxes 11 9 2 22 % Net income $ 24$ 22 $ 2 9 % Net revenues for the three months endedMarch 31, 2021 decreased$107 million , or 26%, compared to the prior-year period, primarily driven by: •$55 million of lower cost-reimbursement revenues in our hotel management business primarily due to lower travel demand from COVID-19 and CorePoint Lodging asset sales in 2020; •$21 million of lower marketing, reservation and loyalty fees, reflecting a 10% decline in RevPAR due to lower travel demand as a result of COVID-19; •$14 million of lower royalty and franchise fees due to the decline in RevPAR; •$13 million of lower management and other fees primarily due to the decline in RevPAR. 23 -------------------------------------------------------------------------------- Table of Contents Total expenses for the three months endedMarch 31, 2021 decreased$114 million , or 32%, compared to the prior-year period, primarily driven by: •$55 million of lower cost reimbursement expenses as discussed above; •$26 million of lower marketing, reservation and loyalty expenses primarily due to cost reductions in response to COVID-19; •$13 million of lower restructuring costs; •$12 million of lower operating expenses and general and administrative costs, primarily due to cost containment initiatives enacted in 2020 in response to COVID-19; and •$8 million of lower transaction-related expenses. Our effective tax rate increased to 31.4% from 29.0% during the three months endedMarch 31, 2021 and 2020, respectively, primarily related to remeasurement of net deferred tax liabilities as a result of changes in certain state tax rates and non-deductible separation costs, partially offset by a reduction in foreign taxes. As a result of these items, net income for the three months endedMarch 31, 2021 , increased$2 million compared to the prior-year period. The table below is a reconciliation of net income to adjusted EBITDA.
Three Months Ended
2021 2020 (a)
Net income $ 24 $ 22
Provision for income taxes 11 9
Depreciation and amortization 24 25
Interest expense, net 28 25
Stock-based compensation expense 5 4
Development advance notes amortization 2 2
Separation-related expenses 2 1
Restructuring costs - 13
Transaction-related expenses, net - 8
Foreign currency impact of highly inflationary countries 1 -
Adjusted EBITDA $ 97 $ 109
______________________(a)Adjusted EBITDA for 2020 has been recasted to conform with the current year presentation.
Following is a discussion of the results of each of our segments and Corporate and Other for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 : Net Revenues Adjusted EBITDA 2021 2020 % Change 2021 2020 (a) % Change Hotel Franchising$ 209 $ 243 (14%)$ 105 $ 110 (5%) Hotel Management 94 167 (44%) 5 17 (71%) Corporate and Other - - n/a (13) (18) n/aTotal Company $ 303 $ 410 (26%)$ 97 $ 109 (11%) ______________________ (a)Adjusted EBITDA for 2020 has been recasted to conform with the current year presentation. Hotel Franchising Three Months Ended March 31, 2021 2020 % Change Total rooms 748,700 769,000 (3%) Global RevPAR (a)$ 24.02 $ 25.90 (7%) ______________________
(a) Excluding currency effects, global RevPAR decreased 6%.
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Net revenues decreased $34 million , or 14%, compared to the first quarter of
2020, primarily driven by the global RevPAR decline which resulted in:
•$21 million of lower marketing, reservation and loyalty revenues; and
•$9 million of lower royalty and franchise fees.
Adjusted EBITDA decreased $5 million , or 5%, compared to the first quarter of
2020, primarily driven by the changes in net revenues discussed above, partially
offset by cost reductions in connection with COVID-19.
Hotel Management
Three Months Ended March 31,
2021 2020 % Change
Total rooms 48,500 59,300 (18%)
Global RevPAR (a) $ 38.17 $ 50.00 (24%)
______________________
(a) Excluding currency effects, global RevPAR decreased 22%.
Net revenues decreased $73 million , or 44%, compared to the prior-year period,
primarily driven by:
•$55 million of lower cost-reimbursement revenues as discussed above, which have
no impact on adjusted EBITDA;
•$9 million of lower owned hotel revenues due to lower travel demand as a result
of COVID-19;
•$4 million of lower termination fees related to CorePoint Lodging asset sales
in 2020; and
•$4 million of lower management fees primarily due to the global RevPAR decline.
Adjusted EBITDA decreased $12 million , or 71%, compared to the prior-year
period, primarily driven by the revenue decreases discussed above, partially
offset by $6 million of lower variable expenses.
Corporate and Other
Adjusted EBITDA increased $5 million compared to the prior-year period, due to
lower general and administrative expenses resulting from cost containment
initiatives enacted in 2020 in response to COVID-19.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial condition
March 31, 2021 December 31, 2020 Change
Total assets $ 4,640 $ 4,644 $ (4)
Total liabilities 3,649 3,681 (32)
Total stockholders' equity 991 963 28
Total assets were consistent at March 31, 2021 and December 31, 2020 . Total
liabilities decreased $32 million from December 31, 2020 to March 31, 2021
primarily due to a decrease in accrued expenses and other current liabilities,
resulting primarily from the timing of payments for incentive compensation.
Total equity increased $28 million from December 31, 2020 to March 31, 2021
primarily due to our net income for the period.
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:
•In March 2020 , we suspended share repurchase activity;
•In April 2020 , we amended our revolving credit facility agreement to waive the
quarterly-tested leverage covenant until April 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;
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•In May 2020 , we decreased our quarterly cash dividend to $0.08 per share; and
•In August 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 we are seeing in the
hospitality industry from the pandemic, which is being aided by the rollout of
vaccination plans throughout the world, 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 which was the maximum allowed under our amended revolving credit
agreement; and
•On April 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 in August 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.
After giving effect to the April 2021 redemption, our current liquidity
approximates $750 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 of March 31, 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
of March 31, 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 an 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 on April 1, 2021 .
As of March 31, 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 $52
million liability as of March 31, 2021 .
The Federal Reserve has established the Alternative Reference Rates Committee to
identify alternative reference rates in the event that U.S. dollar LIBOR ceases
to exist after June 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-month U.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 of March 2021 , our credit rating was Ba1 from Moody's Investors Service and
BB from Standard and Poor's Rating 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 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.
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CASH FLOW
The following table summarizes the changes in cash, cash equivalents and
restricted cash during the three months ended
Three Months Ended March 31,
2021 2020 Change
Cash provided by/(used in)
Operating activities $ 64 $ 17 $ 47
Investing activities (5) (7) 2
Financing activities (21) 647 (668)Effects of changes in exchange rates on cash, cash equivalents and restricted cash
- (2) 2
Net change in cash, cash equivalents and restricted cash
Net cash provided by operating activities increased$47 million compared to the prior-year period primarily due to favorable collections and timing of accounts payable payments. Net cash used in investing activities decreased$2 million compared to the prior-year period, primarily due to lower capital expenditures. In the first quarter 2021, we used$21 million of net cash in financing activities compared to generating$647 million source of net cash in the first quarter of 2020, resulting in a reduction of$668 million in cash generated year-over-year. The largest contributor to this variance is the$734 million of revolving credit facility borrowings inMarch 2020 at the onset of the pandemic out of an abundance of caution. Apart from this borrowing, cash used in financing activities was favorable year-over-year due to of the absence of stock repurchases in 2021 and$15 million of lower dividend payments. 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 three months endedMarch 31, 2021 , we spent$5 million on capital expenditures, primarily related to information technology. During 2021, we anticipate spending approximately$40 million on capital expenditures. In addition, during the three months endedMarch 31, 2021 , we spent$8 million 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. 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 first quarter of 2021, we did not repurchase any stock. As ofMarch 31, 2021 , we had$191 million of remaining availability under our program. 27
-------------------------------------------------------------------------------- Table of Contents Dividend policy We declared cash dividends of$0.16 per share in the first quarter of 2021 ($15 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. 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. 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 2026 and 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 ofMarch 31, 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 is 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 in many cases our select service hotels have performed more favorably than hotels in other chain scales, and we believe we will be among the first to recover once the pandemic abates, the ultimate timing of any recovery remains uncertain. In the meantime, our results of operations may continue to be negatively impacted and we are 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 28
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Table of Contents period. As ofMarch 31, 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.
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