WASHINGTON HOTEL CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥12.06B
• Operating Income: ¥2.00B
• Net Income: ¥1.70B
• Earnings per Unit (EPU): ¥141.73

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Unit Information

Distribution Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: A strong recovery quarter with sharp profit expansion, but cash conversion lagged and leverage remains elevated. Revenue rose 19.0% YoY to 120.57, while operating income surged 132.9% YoY to 20.02 and net income rose 129.8% YoY to 17.03. Operating margin is approximately 16.6% (20.02/120.57), implying substantial operating leverage. Based on YoY growth math, operating margin likely expanded by about 810 bps (from ~8.5% to ~16.6%). Net margin is 14.1%, up roughly 680 bps YoY (from ~7.3%), aided by strong operating gains and a favorable effective tax rate (-16.0%). ROE is a solid 15.7%, driven by a 14.1% net margin, 0.364x asset turnover, and 3.05x financial leverage. EBITDA reached 25.55 for a 21.2% margin, supporting interest coverage of 9.84x (robust versus the >5x benchmark). Cash generation lagged earnings: operating cash flow was 11.63 versus net income of 17.03 (OCF/NI of 0.68x), a quality flag. With capex of 6.99, implied FCF is about 4.64 (subject to unreported investing items), suggesting growth and maintenance needs are being funded but leave a modest residual. The balance sheet shows adequate liquidity (current ratio 166.3%) but high leverage (D/E 2.22x) and significant long-term borrowings (136.13), which elevate financial risk if demand softens. ROIC of 10.3% exceeds typical 7–8% targets, indicating value creation above cost of capital this period. There are internal inconsistencies in the reported gross profit and profit-before-tax lines versus other items, so some margins may be misstated; however, the direction of improvement is clear. Shareholder returns appear conservative (calculated payout ~14.3%) with small buybacks (0.71), consistent with balance sheet repair. Forward look: tailwinds from tourism recovery and pricing (ADR) underpin earnings, but OCF shortfall vs NI and leverage necessitate disciplined working capital and capex execution. Key watch items are cash conversion, debt paydown trajectory, and sustainability of occupancy/ADR. Overall, results confirm a cyclical upswing with improving returns, tempered by cash quality and leverage risks.

Profitability Analysis

ROE (15.7%) = Net Profit Margin (14.1%) × Asset Turnover (0.364x) × Financial Leverage (3.05x). The largest driver of YoY improvement is margin expansion: operating income +132.9% vs revenue +19.0% implies operating margin rose from ~8.5% to ~16.6% (+~812 bps). Business drivers likely include higher occupancy and ADR, operating efficiency, and cost discipline, leveraging a largely fixed cost base typical of hotels. Financing leverage (3.05x) magnifies equity returns; asset turnover at 0.364x is modest for an asset-heavy hotel model but consistent with mid-recovery throughput. The negative effective tax rate (-16.0%) contributed to net margin; this appears non-recurring (tax credits/deferred tax effects), and thus not a sustainable driver. Sustainability: core operating margin gains tied to demand/pricing and cost control are partly sustainable if macro/inbound trends hold; tax tailwinds and extraordinary items are not. Watch for signs of deleveraging to stabilize ROE as margins normalize. A cautionary trend: cash conversion (OCF/NI 0.68x) lagging earnings suggests accrual pressure or working capital build; ensure SG&A growth stays below revenue growth (detail not disclosed but implied operating leverage is favorable).

Growth Assessment

Top-line growth of 19.0% YoY reflects continued recovery in lodging demand and likely ADR improvements. Operating profit growth of 132.9% YoY signals powerful operating leverage as utilization improves against a largely fixed cost base. Net income growth of 129.8% is amplified by a favorable tax effect and improved financing efficiency (interest coverage 9.84x). Revenue sustainability depends on occupancy and ADR resilience, particularly from inbound tourism and corporate travel; seasonality and macro sensitivity remain high. Profit quality is mixed: EBITDA margin at 21.2% is healthy, but OCF/NI at 0.68x indicates cash realization lagging accounting profit. With capex of 6.99, the business continues to invest; implied FCF (~4.64) is positive but modest relative to leverage. Near-term outlook: if demand trends persist, margins can remain elevated; however, reinvestment for refurbishments and inflationary labor/utility costs may cap incremental margins. Focus on yield management, direct booking mix, and energy cost initiatives to sustain profitability.

Financial Health

Liquidity is solid: current ratio 166.3% and quick ratio 166.3%, with cash and deposits of 59.66 versus current liabilities of 47.99. No immediate maturity mismatch is evident; short-term loans of 10.00 are well covered by cash. Solvency is the weak point: D/E is 2.22x (warning >2.0), with long-term loans of 136.13 and total liabilities of 240.99 against equity of 108.67. Debt/EBITDA is 5.72x, within tolerable range (<6.0x benchmark) but leaves limited cushion if EBITDA softens. Interest coverage at 9.84x is comfortable currently. Noncurrent liabilities (193.00) dominate, implying refinancing risk over time rather than immediate liquidity stress. Off-balance sheet obligations are not disclosed; given the sector, watch for lease/guarantee commitments that could effectively raise leverage.

Cash Flow Quality

OCF/NI is 0.68x (<0.8), a potential earnings quality flag indicating working capital build or accrual-driven earnings. With OCF of 11.63 and capex of 6.99, implied FCF is about 4.64, but full investing cash flows are unreported; this estimate may omit asset sales or other investments. Financing cash flow was -6.97, reflecting debt service and buybacks (0.71), suggesting some deleveraging or distribution while maintaining liquidity. No clear signs of working capital manipulation can be confirmed due to limited disclosure; receivables are 14.42 but no prior-period comparison is provided. Sustainability: to support dividends, buybacks, and capex, OCF needs to more consistently track NI; focus on receivable collections and inventory/advance management where applicable.

Dividend Sustainability

The calculated payout ratio is 14.3%, indicating a conservative distribution policy. DPS and total dividends are not disclosed, but low payout combined with positive implied FCF (~4.64) suggests current dividends are likely covered by operating cash flow. Given leverage (D/E 2.22x), prioritizing debt reduction may take precedence over higher payouts. Coverage sensitivity is high to cash conversion; if OCF/NI remains below 0.8x, headroom for increased distributions will be limited. Policy outlook likely remains balanced toward reinvestment and deleveraging, with incremental returns aligned to visibility on sustained cash generation.

Risk Assessment

Business Risks:

• Demand volatility in lodging (occupancy and ADR sensitivity to macro/inbound tourism).
• Cost inflation for labor and utilities potentially compressing margins.
• Renovation/refurbishment capex cycles that can disrupt availability and require cash outlays.
• Competitive pricing pressure from domestic peers and alternative accommodations.

Financial Risks:

• High leverage (D/E 2.22x) increases sensitivity to earnings downturns.
• Refinancing risk given large noncurrent liabilities (193.00) and long-term loans (136.13).
• Cash conversion risk (OCF/NI 0.68x), potentially straining FCF in weaker quarters.
• Interest rate risk on floating-rate debt impacting interest coverage.

Key Concerns:

• Internal inconsistencies in reported cost of sales/gross profit and profit-before-tax figures may obscure true margin profile.
• Negative effective tax rate (-16.0%) appears non-recurring, inflating net margin.
• Limited disclosure on SG&A breakdown and investing cash flows reduces visibility on cost structure and FCF durability.
• Potential off-balance lease or guarantee obligations typical in the sector are not disclosed.

Investment Implications

Key Takeaways:

• Earnings rebound is strong with significant margin expansion and ROE at 15.7%.
• Liquidity is adequate, but capital structure is leveraged (D/E 2.22x).
• Cash conversion lags earnings (OCF/NI 0.68x), tempering the quality of the print.
• ROIC at 10.3% exceeds typical targets, indicating value creation this period.
• Dividend burden appears light (payout ~14%), enabling focus on deleveraging and reinvestment.

Metrics to Watch:

• OCF/NI ratio (target ≥1.0) and working capital turns (especially receivables).
• Occupancy, ADR, and RevPAR trends to gauge sustainability of operating margin.
• Net debt/EBITDA and interest coverage as rates and earnings move.
• Capex cadence versus maintenance needs and FCF trajectory.
• Effective tax rate normalization and its impact on net margin.

Relative Positioning: Within domestic hotel operators, Washington Hotel shows above-peer margin recovery and ROIC momentum but carries higher-than-ideal leverage; sustaining ADR/occupancy and improving cash conversion are pivotal to maintain its advantageous return profile while de-risking the balance sheet.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis