Hyatt Hotels Corporation
Q2 2015 Earnings Call Transcript

Published: 4 Aug 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2015 Hyatt Hotels Corporation's Earnings Conference Call. My name is Amy, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Atish Shah, Senior Vice President, Interim Chief Financial Officer. Please proceed.

[Atish Shah:]

Thank you, Amy. Good morning, everyone, and thank you for joining us for Hyatt's second quarter 2015 earnings call. Here with me in Chicago is Mark Hoplamazian, Hyatt's President and Chief Executive Officer. Mark is going to start by discussing the progress we're making towards our long-term strategic goals, and then I will come back to provide detail on our financial performance during the quarter. Then we will take your questions. Before we get started, let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our Annual Report on Form 10-K and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued earlier this morning along with the comments on this call are made only as of today, August 4, 2015, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks on our website at hyatt.com under the Press Release section of our Investor Relations' link and in this morning's release. An archive of this call will be available on our website for 90 days per the information included in this morning's release. And with that, I'll turn it over to Mark to get us started.

[Mark S. Hoplamazian:]

Thanks, Atish. Good morning and welcome to Hyatt's second quarter 2015 earnings call. This morning, I'd like to first talk about our continued progress against the long-term strategy that we described at our 2014 Investor Meeting and how our second quarter results demonstrate that progress. Following that, I'm going to discuss one of the key strengths of our strategy, multiple earnings tools, with specific emphasis on our owned and leased hotel portfolio. And after that, I'll turn it back to Atish to discuss the results from the quarter. As you can see from the results that we announced this morning, our underlying business continues to perform very well, and we remain on track with our long-term strategy. We realized strong comparable system-wide revenue growth coupled with attractive and expanding margins, the result of our devotion to quality and to being the preferred choice for our owners, our guests, and our colleagues. As we grow preference, the long-term value of our business grows. With that in mind, here are some important metrics from the second quarter. Our U.S. hotels enjoyed another strong quarter of performance with RevPAR growth above 7% for both comparable full service and select service hotels. We posted strong results in key markets, such as San Francisco, San Diego, Hawaii and Atlanta. Markets in which we have large group hotels, such as Chicago, Washington, D.C. and Orlando also performed well. Globally, RevPAR was up nearly 6% for comparable hotels when adjusting for currency. Overall, fee revenue increased almost 9%, partially from the conversion of some of our owned hotels to managed or franchised properties. With our quarterly performance as a backdrop, I'd like to revisit one of the key strengths of our long-term strategy. That is, how our multiple earnings tools help drive Hyatt's long-term growth. By way of reminder, there are three earnings tools that we leverage in the execution of our strategy

[Atish Shah:]

Thanks, Mark. Our core results in the second quarter demonstrate our progress on the long-term strategy that Mark just described. We achieved industry-leading results across many key performance metrics. Let me start first with our overall RevPAR results around the world. On a system-wide basis globally, comparable RevPAR grew 5.6% in constant dollars. This was led by the United States, with flattish performance elsewhere in the world. In the U.S., we saw continued strong growth with our comparable full service hotel RevPAR increasing 7.5%, comparable select service hotel RevPAR increased 7.2%. With occupancy rates at record highs, the vast majority of this growth was driven by ADR increases. This has helped us generate strong margin growth for the U.S. chain and our owners. Outside of the United States, the results were more moderate. In the Asia Pacific region, RevPAR increased 2.2% on a constant dollar basis. As one would expect, results varied across the sub-regions. Northeast and Southeast Asia saw relative strong growth in the mid single-digit percentage range. However, Australia and the Pacific region showed flat RevPAR growth, as did Greater China. Moving on to the EAME and Southwest Asia region, our results were also relatively flat on a constant dollar basis. The majority of Europe experienced low single-digit percentage range RevPAR growth. Offsetting this was a RevPAR decline in the low-teens percentage range at our hotels in the Middle East. The timing of Ramadan, as well as new hotel supply in Dubai, led to the decrease. At our owned and leased hotels, RevPAR grew 4.8% in constant dollars. Owned and leased hotels in Amsterdam, Berlin, Atlanta, Chicago and several markets in California all posted RevPAR growth in excess of 10%. On the flip side, a handful of our hotels experienced RevPAR declines. New hotel supply negatively impacted results in markets such as Paris, New York City and Aruba. In Baltimore, civil unrest led to group cancellations; and in Seoul, MERS caused a fall-off in results in June. The aggregate negative impact of these declines was less than $5 million to adjusted EBITDA. As we look forward, we expect that these market-specific dynamics may linger for some time, but expect them to be offset by continued strong performance at owned and leased hotels in many key cities and markets. Overall, as Mark discussed, the strength of location, brand and quality of the hotels bodes well for strong portfolio performance. Let's now talk a little bit more about Manhattan. While the market continues to be challenging due to new hotel supply, we are holding our own at the two hotels in our owned and leased comparable set. During the quarter, one hotel showed a slight RevPAR increase and one showed a slight RevPAR decline. Between the two, adjusted EBITDA was flat. Park Hyatt New York, which is not yet in the comparable set, continues to ramp up nicely. If we look across all of our comparable managed and franchised hotels in New York City, our weighted market share increased during the quarter. So again, relative to the market, we continue to do well. Consistent with our expectation going into the year, we continue to forecast a slight RevPAR increase across our comparable hotels in New York City. This reflects strong back-half booking activity, an easier comparison in the fourth quarter, and continued ramp at hotels that have been opened over the last couple of years. I will also add that we had a great quarter from a market share perspective. We gained share on a global basis, with particular strength in the United States and Asia Pacific markets. Our hotels are benefiting from higher levels of group business, resonance for our brands and fresh or recently renovated product in many of our key locations. And as Mark mentioned, our business model of owning, managing and franchising has allowed us to grow our system in varied and beneficial ways since our IPO. The network effects of our platform and brands have increased over the last 5.5 years. In our view, this is contributing to the share increases that we have been seeing. Now let me turn to how these chain results impacted our reported financials in the second quarter. Our adjusted EBITDA for the quarter was $210 million. This includes a negative impact from two items. First, net dispositions since the second quarter last year were a $25 million drag on the year-over-year adjusted EBITDA comparison. And second, the stronger U.S. dollar further impacted our adjusted EBITDA by $8 million. Without these two items, we would have shown an adjusted EBITDA growth rate in the mid single-digit percentage range. Let me move on to pro rata share of adjusted EBITDA associated with our unconsolidated hospitality ventures. This declined approximately $6 million versus last year. Approximately $3 million of the decline was due to the dispositions that I mentioned. We saw an additional $3 million decline, primarily related to the true-up of certain expenses at one joint venture. Fee revenue was up approximately $9 million, or 9%, as compared to the same quarter in 2014. Excluding the impact of foreign exchange, fee revenue would have increased about 14%. While fee growth continues to be strong, we have significant room for future upside in incentive management fees. For example, during the quarter, about 40% of hotels in the Americas paid incentive fees and 70% of the hotels outside the Americas paid incentive fees. These percentages are still about 10 points to 15 points below prior peak levels. Turning now to adjusted selling, general and administrative expenses, these expenses were favorable by approximately $2 million versus the same period last year. Our adjusted SG&A expenses benefited from the sale of our vacation ownership business, offset by higher professional fees, timing of sales and marketing expenses, and a nonrecurring item that helped the second quarter of 2014. Let me now talk briefly about a few items of note below adjusted EBITDA items that impacted our net income. In the second quarter, we had $23 million in equity losses related to our unconsolidated hospitality ventures. This is a big swing, as during the second quarter of 2014, we had income of about $23 million. This income was driven largely by the sale of a hotel that resulted in a gain of approximately $20 million, and we noted this as a special item last year. This year's second quarter loss was driven by two of our unconsolidated foreign joint ventures in which we incurred approximately $28 million of losses, the majority of which were noncash. About 40% of the losses relate to the impact of a stronger U.S. dollar as one venture has a U.S. dollar denominated loan. The rest of the losses were due to a combination of items at another venture, some operational but most non-operational. As we look forward, we expect continued volatility in the results of our unconsolidated ventures, including potential currency-related impacts. We continue to recognize these unconsolidated ventures as integral to our strategy and over time they help us grow the value of our business. As to taxes, our effective rate in the quarter was higher than it was in prior quarters. This is partially due to reported losses that were not deductible. On a full year basis, we expect our effective tax rate to be in the low to mid 40% range. Now turning to our balance sheet, we continue to be in a strong position. We continue to have significant liquidity available with over $900 million of cash and short-term investments, including approximately $200 million of restricted cash. We also retain undrawn borrowing availability of approximately $1.5 billion under our revolving credit facility. As to return of capital to shareholders, we repurchased approximately $157 million of common stock in the second quarter and approximately $25 million of common stock in July, bringing the year-to-date repurchase total to nearly $370 million as of July 31. By way of reminder, at our March 2014 Investor Meeting, we illustrated that we could generate $1.2 billion of cash available for new investments or return of capital to shareholders by the end of 2016. Through July of this year, we have returned over $800 million to shareholders through repurchases, so we are well on our way to hitting that goal. Last week, our Board of Directors authorized an additional $400 million of repurchase capacity, so we now have approximately $475 million available in our share repurchase authorization. And consistent with prior quarters, our repurchases may include both Class A and Class B shares. That concludes my prepared remarks. And with that, I'll turn it over to Amy for the question-and-answer session.

[Operator:]

Your first question comes from the line of Joe Greff with JPMorgan. Joe, your line is open.

[Unknown Speaker:]

(25

[Mark S. Hoplamazian:]

Sorry about that. Was the first question – for some reason, we had an audio issue on our side. The first question related to pipeline. Is that right?

[Unknown Speaker:]

Yeah. Just that pipeline came in flat looking at where it was at the end of the first quarter, and most others were up sequentially, so just kind of looking for more some incremental color on kind of what's going on in the pipeline.

[Mark S. Hoplamazian:]

Okay. So the pipeline has continued to expand over the last year on a – net of the openings, we're maintaining the total base of executed contracts. So it's not that the pipeline is static. We continue to open at a faster pace and we're replacing those openings with new deals. In terms of environment, what's going on in the environment, more broadly, I would say that the demand and pace and activity on the select service front, Hyatt Place and Hyatt House, is extremely high everywhere. So if you look at our total pipeline, something on the order of 50% of the pipeline – I'm sorry, 40% of the pipeline is select service hotels around the world, and almost half of that is outside of the U.S. So the demand for Hyatt Place and Hyatt House in markets around the world is expanding rapidly. And this is a particularly important strategy for us because we recognize that as more and more people in what we call the commercial class or what you may call, in U.S. context, the middle class are coming in to travel in different places, especially India and China. So Hyatt Place and Hyatt House will be the brand that we lead with in a lot of markets in those countries. With respect to overall full service development activity, we've seen a clear slowdown in India in terms of development activity. While India had a very strong quarter and is progressing well this year, on a comparative basis, this is now two years into a relatively slow period economically, and the development environment has been challenging for a lot of local developers. So the activity base in India has definitely slowed, and our focus on Hyatt Place and Hyatt House continues to be high there. The pace in China is relatively stable, both in terms of construction activity and new opportunities. We are really focusing more attention now on Hyatt Place and Hyatt House expansion, but the overall development activity I would say has been pretty stable. And in the U.S., it's very selective. There are a few markets in which there will be interesting group related projects that we're pursuing right now and resort opportunities and, very importantly, I think Hyatt Centric, which we've opened our first two new hotels in, there's a tremendous amount of interest in Hyatt Centric. We've identified ourselves a number of sites around the country, over a dozen, that we're pursuing to secure and entitle. But beyond that, we're talking to developers – a couple of developers about multi-product, multi-property transactions, and the demand for the Hyatt Centric brand around the world has been high. And I think that brand category is going to represent a good opportunity for additional full service, transient-focused growth for us.

[Atish Shah:]

Was there a second part to your question? If not, we'll just take the next question, please.

[Operator:]

Your next question comes from the line of Patrick Scholes with SunTrust. Patrick, your line is open.

[Patrick Scholes:]

Can you give us a little bit of color on your expectations for the impact of foreign exchange by quarter for the rest of the year?

[Atish Shah:]

Yeah. Sure. So the impact of foreign exchange is roughly the same as what we expected it to be when we started the year, so nearly $25 million on a full year basis. As we indicated, the impact in the second quarter was $8 million. In the third quarter we expect it to be approximately $7 million, and in the last quarter of the year, the fourth quarter, we expect it to be about $5 million. Any other questions, Pat?

[Patrick Scholes:]

No. I'm all set. Thank you.

[Atish Shah:]

Okay. Great. We'll take our next question, please.

[Operator:]

Your next question comes from the line of Smedes Rose from Citi. Smedes, your line is open.

[Smedes Rose:]

I wanted to ask you, you mentioned in your opening remarks that you thought the value of your owned real estate was – I think you said $7.5 billion. Could you talk about what you're using to calculate that? Is that on a trailing cap rate? Are you looking at replacement costs? Is that on forward cap rates? How are you coming up to that number?

[Mark S. Hoplamazian:]

We looked at the valuation of our portfolio in March of 2014 when we presented at the Investor Day, and what we did was updated that analysis and we added a couple of hotels that we've acquired since then at their purchase price. And so the expansion of earnings and the evolution of the market has yielded an increase in value. And so our belief right now in using a comparable or similar approach that we did in March of last year is that the portfolio has maintained or grown value, even though it's a smaller portfolio today, very different mix than it was in March of 2014 obviously.

[Atish Shah:]

Yeah. The only thing I would add, our methodology at that time which we included in the pack from March of 2014, we did look at cap rate based on asset type and location, and we utilized comparable hotels that either we had transacted on or that we had observed in the marketplace. So that was the general approach to that illustrative valuation.

[Smedes Rose:]

Okay. And I wanted to ask, is there any way to provide some guidance for these equity losses and equity earnings that are, obviously – I mean, there seem to be the huge swing between kind of consensus forecast and then your reported numbers, because, obviously, enormous differences here. I mean, is this mostly related to your Playa investments? I'm just trying to get a sense of where this is going to go for the year.

[Atish Shah:]

Yeah. I mean, in the past, this had been much more moderate, these swings from quarter-to-quarter had been in the couple few million dollar range. They've been higher this year, and, frankly, a big piece of that is currency because of these, in some cases, U.S. dollar denominated loans at our joint ventures. And we do expect future currency impacts at some of these JVs, so it's really – it's a hard one to give an exact number on.

[Smedes Rose:]

How about a rough number?

[Atish Shah:]

Well, we have been sort of in the plus or minus a few million dollar per quarter range on this equity earnings and losses line item, and it's hard to project because we don't know how currency is going to move and impact the numbers. We do anticipate in this coming quarter to have a $20 million loss due to a sale of a joint venture interest. That's a translation loss. It's noncash, so similar to the loss we experienced this quarter, and it will be most likely special items. So that gives you some sense of sort of what lies ahead, but we'll try to provide more information as we move forward.

[Smedes Rose:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Rich Hightower with Evercore ISI. Rich, your line is open.

[Richard Allen Hightower:]

Good morning, guys. Just a couple of questions, follow-ups on the owned and leased portfolio. I appreciate the color in the prepared comments. But as I look at your owned and leased portfolio today, you still have a lot of what I would consider to be non-core assets relative to the high-quality assets you referenced in the comments. Should we assume that you guys would look to sell many of those, just given the capital availability window that we see at this point in the cycle and your sort of historical activity on that front?

[Mark S. Hoplamazian:]

Thanks for that. We had been in the market over time with different hotels and we did not end up transacting on about five hotels that we thought we would last year and we do have in mind that ultimately they're available for recycling. What we're also doing is paying attention to opportunities for redeployment of capital. And so I would say that we are much more planful at this point about how those – that that deal activity actually begins to match up. So I would say that we will continue to be in the market on the buy side and the sell side as we are today. We have not transacted anything in the first half of this year, but we remain active on both sides of the equation.

[Richard Allen Hightower:]

Okay. And just in Manhattan, can you tell us what portion of overall owned and leased EBITDA Manhattan represents today and maybe where you expect it to be at (36

[Mark S. Hoplamazian:]

We posted that in our fourth quarter earnings release in terms of concentration.

[Richard Allen Hightower:]

Okay. And is it still consistent?

[Atish Shah:]

It's roughly consistent, yeah. It's about 8%, 9% of owned and leased EBITDA.

[Richard Allen Hightower:]

Okay. Thank you.

[Atish Shah:]

Yeah.

[Operator:]

Your next question comes from the line of Bill Crow with Raymond James. Bill, your line is open.

[Bill A. Crow:]

Hey. Thank you. Good morning. A simple question, I'm surprised we're still asking it, but any status update on the CFO search that seems to have gone on for an awfully long time?

[Mark S. Hoplamazian:]

Thanks for that. We are continuing the search process. We've been in discussions with a number of candidates as we were before. We obviously appointed Atish as the Interim CFO and that's actually been working very well, and we continue to have good coverage of all of our needs on the finance front at this point. But the search does continue and we'll provide an update when we've got something more to report.

[Bill A. Crow:]

Okay. Thank you.

[Atish Shah:]

We'll take...

[Operator:]

Your next question comes from the line of Joe Greff with JPMorgan. Joe, your line is open.

[Unknown Speaker:]

Hi, guys. It's Brent (37

[Mark S. Hoplamazian:]

We don't really comment specifically on anything that we may be involved in. So we've been active in the past and I think our concentration right now is to execute on the strategy that we have in place that we outlined last year. So anything that we would do outside of the asset recycling and our growth plan would be incremental to our current strategy.

[Unknown Speaker:]

Okay. Thanks for that. I guess, if I may. You guys gave some pace information for 2016. I was wondering any other color you can tell us about kind of how 2016 is shaping up on the group side? How much is on the books at this point or anything like that?

[Mark S. Hoplamazian:]

Yeah. Right now, it's a bit over 50% of the business on the books, which is about where we would expect it to be. The mix continues to evolve as between corporate and association business. What's interesting is, in the quarter, for the quarter and in the quarter for the year activity continues to be very high and I think that that is a good sign of sort of short-term demand, but also booking curve has moved out and I think we're definitely seeing more movement towards securing dates in the future. And the interesting other profile issue is that pace for 2017 is also increasing rather nicely at this point. Now, there's only a little over a third of the business on the books for 2017, so it's not like we can declare that as a definitive indicator for 2017, but right now all indications are positive.

[Unknown Speaker:]

Got it. Thanks a lot.

[Mark S. Hoplamazian:]

You're welcome.

[Atish Shah:]

We'll take the next question, please.

[Operator:]

Your next question comes from the line of Smedes Rose with Citi. Smedes, your line is open.

[Smedes Rose:]

Hi. I'm sorry if I missed this, but could you break out the A shares versus the B shares on your buyback for the second quarter and also for year-to-date if you have it?

[Atish Shah:]

Yeah, sure. In the second quarter, it was about 60% A shares, 40% B shares. So in terms of dollars, the $157 million that we spent on share repurchases, $97 million was for A shares and $60 million was for B shares. In the first quarter, we had about $50 million of B shares and about $143 million of A shares. So that made up the $187 million.

[Smedes Rose:]

Okay. Okay. Thanks a lot.

[Atish Shah:]

Okay.

[Operator:]

This concludes our question-and-answer session. I would now like to turn the call back over to Mr. Atish Shah for closing remarks.

[Mark S. Hoplamazian:]

Thanks, Amy. Look, we believe we're making really good progress on our long-term strategy and we are well-positioned to benefit from the increased presence that we've got around the world in opening new hotels and the network effect that Atish mentioned. Obviously, asset recycling is adding to that and our brands are clearly punching above their weight when you look at our share progression during the quarter. So our long-term goal remains clear, which is to drive preference for the brands among our colleagues, our guests, and our owners in order to create long-term value, and that's what we remain focused on. So thanks for joining us this morning, and we look forward to talking with you again soon. Bye for now.

[Operator:]

This concludes today's conference call. You may now disconnect.