Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

Hi, everyone. Next up on our agenda, we have Hyatt with President and Chief Executive Officer, Mark Hoplamazian. Mark, thank you for joining us, as always.

Great to be with you, Stephen. Thanks for having me.

Now last year at this time, it seemed like we were seeing cases come down, and it was giving us a little bit of a hope. This year, cases are down even further, but we're also seeing the vaccine allowing some return to normal. I think there's a phrase that's never let a good crisis go to waste. So how has the experience changed how you think about positioning Hyatt going forward?

A lot has changed over the last year. And I think we've ended up responding to the needs of the business in different ways. First, I would focus on what we've done for owners. We actually maintained higher level of services through how we support our chain over the course of last year. You might remember that we took a $45 million charge at the end of the year, in part to reflect that maintenance of higher level of services provided to hotels, but we didn't believe that we would seek reimbursement in the future from our owners. Even though, contractually, that was possible, we just didn't think it was practically a good idea. And we've restructured actually how we actually charge for our services. We actually did that in the summer of last year. And so we are better aligned with our owners as we look forward and will also benefit more from what I would describe as outcomes-driven expenditures, especially in digital, where we can own incremental fees if we deliver incremental room nights and revenues for our owners. So first and foremost, I would say we had a sharp focus on owners and what we could do to help support them. Secondly, with respect to operating hotels, this also feeds into taking care of our owners. We realized that we simply couldn't maintain normal staffing when we had such lumpy occupancy over time. So we clustered a lot of positions. We looked to really developing a cross-functional approach to how hotels would be managed. So we had a lot of our colleagues learning new positions and doing multiple positions, and that's actually unlocked some really interesting opportunities for us going forward. So we're paying attention to that, and I think we will retain some of that going forward. And then third, I would say that we leaned into and really spent heavily around digital -- expansion of digital tools and capabilities, including check-in and digital key, but also ordering. I think the whole F&B experience is very labor intensive -- has been labor intensive, but the ability now to order through your phone sitting at your table and pay in the same manner is not just more efficient and with a higher level of productivity of our own colleagues, but it's a better colleague experience. You don't feel terrible about having to run around and get someone their check and then bring their credit card back to them, but it's also a dramatically better guest experience. So I think in many of these dimensions, the digital expansion is going to improve and enhance the guest experience over time and yield long-term margin benefits for owners, which we estimate to be in the range of 100 to 300 basis points over time. So we're excited about all of that. We also need to pay attention to the workload of our colleagues, and we're desperately trying to hire more people at this point, not so successfully at the moment. But we think that, that might be more temporary, but that's one of the key issues right now. But those are the things that we've adapted to over time.

That's helpful. Maybe -- go ahead.

That's it.

Okay. I guess moving to -- sticking with the learnings, I guess, on the capital structure side, does the experience change how you evaluate the right leverage levels and liquidity?

Well, I'll tell you one thing. We've always historically had a conservative balance sheet, and this served us extraordinarily well. We raised about $1 billion -- almost $1.7 billion in new liquidity last year. The last tranche of that was $750 million of floating rate notes that begin to be prepayable this coming September. We did that purposely because we thought it was more of an insurance policy than it was a known need for capital. We have $250 million of maturities coming due at the end of the summer. So we will be deleveraging. We know that we will repay that $250 million, and -- but I think our balance sheet has served us extremely well. And I think over time, we want to maintain that investment-grade status, which we have maintained throughout this process, throughout the pandemic. And I've always said from the very beginning when I joined Hyatt, we have to remember that we're in a cyclical business, and we can never forget that we're in a cyclical business. So that has really informed how we think about capital structure decisions over time.

And I guess as we think about the move to asset light, which you'd announced at your Analyst Day a few years ago and even before that, does this performance of various segments, whether you look at owned versus managed versus franchise, also, how you think about the appropriate mix of each of these going forward?

Yes. Look, we're on path to meet our sell-down requirement or -- sorry, commitment by March of next year, $1.5 billion incremental to where we were in 2019. And we just made some announcements this morning. We sold the Hyatt Regency Lost Pines for $275 million. And by the way, that's a valuation that is above where we would have marked it -- where we did mark it before the pandemic. A lot of that value came from a buyer who looked at the development opportunities on property to do a lot of residential, and that will unlock more value over time. And that's an investment we would not make because we're in the business of going asset lighter, not asset heavier. We also purchased the Ventana Big Sur, which was a unique opportunity to control that asset. That contract was terminable and the sellers have decided they wanted to sell the property. And I think moving decisively and with a lot of integrity in terms of our reputation historically on closing, we were able to arrive at a deal with the sellers and we moved very quickly to get it closed because we didn't really want it to hit the market. We want to retain that hotel for the long term as part of the Alila representation on the West Coast. Really unique property. We purchased it at low double-digit kind of EBITDA multiple for 2021 earnings. Of course, this is a very robust year, let me say, for drive-to resorts like that one. It's running at a very high rate, over $1,500, and it's the highest RevPAR hotel in our whole system. So I think it's got -- and also has the benefit of not having any future competition able to be built in that market because Big Sur is impossible a little bit. So it's got some very unique attributes, but we moved very quickly, and I think our reputation and ability to write a check mattered a lot to the sellers. And so we're excited about that. We think it happens to be an asset class that is in great demand right now. So we suspect that we will have some inbound interest in that asset, now that it's -- now that people know that we own it. So we'll see how that goes. But I think the way we look at it, there are -- there's high demand for assets in these destination resort locations. I think the asset market for business-oriented and group-oriented hotels will really recover next year -- over the course of next year. So I think I look at this as sort of in waves of activity, and I think we're extremely well positioned with a great asset base to be able to tap all of that. In terms of mix, we've never set a specific goal, but by the end of selling down to the $1.5 billion commitment that we've got by March of 2022, we expect that we'll end up at a 70-30 split, 70% of earnings from management franchise and 30% from owned and leased by the time demand fully recovers to, say, 2019 levels. We've added a lot of management and franchised -- managed and franchised hotels, and we continue to do that. We just launched a new franchise organization to expand the pace of franchise activity at Hyatt. So we see that as really continuing to grow as a proportion of our earnings base. And I think that the recovery in the asset market will open up some interesting and new opportunities for us to continue down that path as well.

And one more on the learnings before we jump into kind of recovery expectations and longer-term thoughts, but do you have any thoughts on shifting the focus towards certain types of travel such as business versus leisure? I mean you did this acquisition, you referenced though that urban could come back next year in terms of valuation, but is there any shift in terms of wanting to more aggressively go after any of these segments? And if you could discuss any of the partnerships, particularly on the group side?

Yes. So first, I would say, we -- if you not just listen to what we say, but watch what we do, we've already made some decisions. We launched, some years ago now, it was 2014, that we got into the all-inclusive business with Playa Hotels and Resorts through the Ziva and Zilara brands. And that was really a deliberate move to try to get better representation for resorts in Mexico and the Caribbean. That served us really, really well. We like the segment a lot. And Ziva and Zilara hotels are operating at very, very high levels with respect to TripAdvisor ratings and rankings and also financial performance with now more than 50% of all of their traffic coming through Hyatt channels. So we've already proven the distribution works and displaces much higher channels of distribution for those kinds of properties. Secondly, we bought Two Roads at the end of 2018, their mix of customer purpose of visit was 75% leisure and 25% business. And the kinds of hotels that they had in the portfolio were really designed for leisure experiences, whether that was destination experiences that you would see in Alila Hotels or Destination Hotels or urban from Thompson to the JdV portfolio. So -- and all of those brands are clicking on all cylinders right now. We bought that as a growth vehicle, and I'm trilled to tell you that our -- we've opened a lot of hotels in those brands because it came with a pipeline. And our pipeline today is bigger than it was when we started. So it's over 6,000 rooms right now for those brands, and we're really seeing that blossom. So I would say if you look at what we've done, we've focused on more leisure and more vacation opportunities. We will continue to focus on that, and it complements an already strong and well-distributed group representation in really every major market in the United States -- every major group market in the United States. Of course, there's some left that we would like to have some more representation in. So we're looking carefully at that, but it won't be through us building hotels. It will be with us partnering in some way, shape or form with others and really trying to maintain a managed or franchised sort of approach to that. In the case of a major convention hotel, almost certainly managed. So I would say that the segmentation is -- has elevated. So we're -- if we were in a normalized environment, we would be running maybe 40% to 45% leisure purpose of visit across the world. Right now, that number is over 75% because of the circumstances. But I think that if that were to increase over time, that would be a good thing, in our opinion, and we're working on making sure that we pay attention to that.

That's great. Pivoting towards the recovery expectations, and you've kind of alluded to this a little bit, but how are you thinking about the path to recovery across different segments? I know you touched on this on the last call, and it's a little bit of a crystal ball exercise, but maybe you can tie in what you're seeing in different markets around the world that might help inform what a recovery looks like?

Yes. So first, I would say that this has got -- broken record for all of us in this industry, but leisure is leading the way, continues to. The bookings that we see into the end of the third and into the fourth quarter of this year, so say, September through December, transient bookings are running well ahead of where they were in 2019. I'm not saying -- I wouldn't say that, therefore, the whole business will be running ahead of 2019. On the contrary, I think we still will be lagging in group and in business transient travel. But it's great to see that, first of all, the advance bookings are actually increasing. We went from about 75% of all of our stays being booked within 4 days of travel that was true in the first quarter of this year to now, the -- that number has gone from 4 days to 10 days and growing. So I think that there's more advance purchase, which reflects confidence in being able to take the trips and also -- maybe also concerned about being able to get a reservation if you're going to a really popular resort. So we think leisure is going to continue to be an engine that drives us forward. I personally believe that September will be an inflection point for business travel, both meetings and business transient, because we already see a lot of companies announcing that they're requiring their own employees to come back to work. Apple made an announcement this past week. Deloitte made an announcement that they were bringing people back to the office and starting to travel again. That was a specific mandate that they referenced. So I think the mindset is shifting really rapidly. And I think we're going to see an inflection point in the fall. Do I think we'll exit 2021 at a rate of business activity in group and meetings as well as business transient that we saw in 2019? No, definitely not. But the momentum will be positive. And I think we'll go into 2022 with positive momentum in those arenas, and we are seeing encouraging signs with respect to group bookings into the fourth quarter. I'd say 2022 is more about associations booking to get date ranges that they would like and the like, but most of the business that we're seeing right now for 2021 is corporate. And so it's beginning. And stay tuned because we know from past experience through this pandemic that things change pretty rapidly. So we don't see any negative signs at this point, but it's hard to really predict much into the future on how positive it's going to be into the fourth quarter.

Well, I guess on that front, I said in our opening remarks at the conference yesterday that people should probably be supporting the space and enjoying the summer, but at $1,500 a night, certainly, people have to be booking sooner rather than later for some of these properties and maybe even looking at next year. If you look at China as a road map, maybe you can touch on what has been similar or different to the trajectory that you're seeing in the U.S. as cases come down as we parse out those? Especially as we look at maybe the business side of demand in -- business and group side, are those also seeing a recovery? Are they giving you any kind of confidence that there will be some pent-up demand there?

Yes. So if you look at where we stand in the U.S., for example, we're sort of tracking at maybe 35% of the 2019 levels on the business travel front, both group and transient. In China, that number is over 80% relative to 2019 levels and growing. So we've seen really great demand over the course of 2020, principally driven by leisure, but we had group business as well. Companies were still doing product launches and fashion launches and car launches and things like that and getting together and spending a lot of money on the experience of it and -- especially around food and beverage planning and programming. That's continued into 2021. Now we hit a massive pot hole in -- at the end of January for 1.5 months when the country shut down, that was really painful. But we predicted and said on the last earnings call that what we've seen is a faster recovery rate post these shutdowns because people know that once the government declares it's safe to go that you can travel safely and they instantaneously spring back, and that's precisely what we saw. So I'm really encouraged by what I see. The overall Chinese -- our business in China overall, across the -- our hotels there, is approaching where we were in 2019 without international inbound travel, which is really remarkable because that's higher-rated business. And for us, at least, it runs depending on the hotel, but on average, somewhere between 15% and 20% of our total -- excuse me, occupancy. So if you took 1/5 of your volume out at very high rates and you're still running at levels that approach 2019 levels, you can imagine just how much the demand is retained there. So I do think that this is a good example because while the profile of the pandemic and the management of the pandemic in China looks nothing like it does -- it did in the United States, I will tell you that getting to over 62% of Americans having at least 1 vaccination shot and growing, although more slowly now, is very encouraging. And I think we get -- we start to approach a point probably late this year, where the mentality and the mindset is similar to what you see in China. In China, they've crushed the virus and there's no incidence of it. That's actually how they've managed it. And in the U.S., we're getting to a point where the mindset of being fully vaccinated and therefore being fully mobile is going to mimic what we've seen in China. So that's one of the reasons why I believe that there is a lesson to be taken from this and that it undergirds some of my confidence about the return of business travel over time.

And then one very quick follow-up on that. On the international inbound to China, does that -- is that true for business and for leisure, so you would generally think that business demand going -- you would see an equivalent amount of your business is driven by -- business travel demand is driven by inbound?

Yes. I would say it's probably more intensive for business travel than leisure. It does affect leisure, but it's more focused on business travel and -- in terms of purpose of visit for inbound international.

Right. So that's even more impressive. You had an announcement out this morning, you referenced, I want to make sure we get into the development side. You increased your target from over 5% to 6%. So talk us about the announcement today. What has been changing in the construction and development pipeline as you look around the globe?

Well, so the announcement about our net rooms growth outlook was really principally driven by the deal that we struck with SVC to retain 17 hotels under our management. They made a significant commitment of $50 million to renovate those properties, which had been a long time coming, I think. We sat down with them, and -- we've been in business with them for 16 years. So we sat down with them and said, "Look, this deal that we had historically doesn't really work for us, and it doesn't really work for you because it didn't trigger the needed capital investment," and we structured something new which really does work dramatically better than the old structure. And so we're really excited about the ability to retain these and what will be completely refreshed properties going forward. So I think -- and that represented about 90 basis points of headwind that we had embedded in our prior outlook because we didn't know if we were going to strike a deal with them or not. So now putting that to bed allows us to say, well, let's actually update for the outlook for the year because that headwind is no longer with us. In terms of development activity, conversion activity still remains at a high level. Someone recently asked me about how can everyone be doing more conversions, it sounds to me like there's a zero-sum game going on. And my answer to them is, pay attention to the fact that a lot of the conversions are from either much smaller brand organizations, not across the major companies, as well as independent hotels that had a really tough time over this past year making ends meet. So I think that, that is partly the reason for so much conversion activity. We had 25% of our net rooms growth last year that was driven by conversions. We're running at the same rate this year or thereabouts. So that's really helping us a lot, which is important because the select service pipeline activity is really slowed and remains slow at this point, and it's really principally driven by capital formation and availability of debt for construction. So we've been very proactively working with some banks to see how we can facilitate getting some construction lending going so we can spur some more development. I also would just point out that factor costs, lumber and steel and actually all inputs, have gone up a lot. I also don't think that that's a permanent situation. I think once supply chain constraints get opened up, we'll start to see a normalization of those markets sometime later this year. That's our prediction. So I think the combination of more capital being available, which will matter because I think banks are starting to understand that there is a higher level of confidence they can have in a continuous recovery curve going forward, and that's actually the key time lock some more money made available for construction.

It's interesting that you're highlighting this financing issue on the select service side, where it seems like most of those, I would imagine, are not in the luxury or upper upscale segment and therefore, probably have been seeing a little bit better RevPAR trends at least as we look at the STR data. I know that pre-pandemic, there were some kind of hiccups in the select service space in your portfolio due to, I think, it was the food offering and some other factors. How are you thinking about how the pandemic changes the competitive landscape in select service? And then also, how are you thinking about positioning yourself to be the select service brands of choice?

Yes. We've done -- so when we got into this business 14 years ago, we actually sat down and said, "Okay, so how will we actually establish our presence here?" And part of it was through share shift of existing -- from existing offerings to Hyatt Place and Hyatt House. And when we studied that, we recognized that we have to be vigilant and really paying attention to evolving preferences over time, otherwise, we'll be the ones who get disintermediated by the next subsequent brand [ in the market ]. So we've evolved the development profile of Hyatt Place and Hyatt House to be less space intensive. So we've reduced the average square feet per fee over time. And we did that. We did another iteration of that about in 2018-19 time frame. The second thing we've done is continuously explored how we can actually deliver breakfast in a differentiated way with a better quality product, which has been really hard to do during the pandemic when everything got individually wrapped and you couldn't really serve hot food and things like that. So it's been a tough road for the pandemic. But coming out of it, we are very open-minded about thinking differently about what we're offering and how we're offering it in order to make it a financial positive for the owner, but also a positive for the guest. So those are the things that we've been focusing on. And of course, we've always been -- within the range of select service offerings, we've always been more towards the higher-rated and more lifestyle in terms of the style and design than some of our competitors, and I think that positioning has worked well as we see preferences evolve over time. And we've also opened up a lot of flexibility for local developers to really express the local markets in public spaces instead of planting a never-ending number of prototypes in urban -- vibrant urban markets, for example. So those are some of the things that we've done to really pay attention to that. We've also formed a new franchise group. We're investing behind expanding our franchise capabilities because we see a lot more growth that's available to Hyatt through franchising, but we needed to really beef up our ability to support that and also ensure that we are supporting a high-quality and consistent Hyatt experience in our franchise hotels. So that's really why we leaned into that this year. And I think that, that will also help support our franchise developers and owners.

And before we wrap things up, on the franchise development side, is that specific to any individual market? Do you anticipate that you'll be concentrated in certain areas versus others?

I would say in order of size and opportunity would be the U.S., Europe and South America. I would say Asia is trailing all of that by a wide margin because it's just not a very penetrated franchise market. We do have some franchise arrangements in China. Our joint venture with Homeinns is essentially a franchise where Homeinns is actually providing management for the brand that we launched with them called UrCove by Hyatt, which is an upper mid-scale brand. We also have another arrangement, strategic arrangement with a group in Chengdu called Minyoun Hospitality, and they are managing -- developing and managing Hyatt Places and Hyatt Houses. It's not exclusive across all the markets in China, but we have a significant number, I think, if memory serves, 17 hotels with them either open or under development. So really encouraged to see the activity there, but we did a lot of diligence on those organizations and really satisfied ourselves that they can deliver what we think is important for a Hyatt experience.

To sneak one last one in. We haven't touched base too much on the owned segment. How has your perspective on the margins in this segment evolved over the past year? And how are we thinking about what a recovery looks like in the contribution from owned assets?

Okay. I'll just start with the bottom line, which is I am blown away by how we've evolved what we thought would be a breakeven level at 40% to 45% occupancy to something that looks like half of that level, which is shocking. And a lot of that had to do with incredible ingenuity at the local level, real serious focus on honing in on how we can still deliver a baseline of food and beverage options without opening outlets. That's been hard fought and really hard to manage, but is working so far with respect to the guest experience, but also massively accretive in terms of flow through and ability to actually get -- lower the breakeven level and expand margins over time with some of the evolution. I mentioned earlier about some of the things that we did in favor of owners, including clustering. We did that extensively through our portfolio and also the digital tools that we expanded into. I think the key -- one of the keys that we are focusing on is making our overall food and beverage -- approach to food and beverage more and more profitable by way of really reengineering and rethinking how we do what we do at some very base levels. And when you shut things down, shutting banqueting down pretty much entirely across the portfolio, our own portfolio, and shutting down so many outlets really forces you to start from scratch. And so we're going to build back better and make sure -- build back differently, I would say, and make sure that we are driving some of the efficiencies that we've already discovered, but I've just been blown away. A lot of the evolution of our overall earnings profile and importantly, our cash utilization profile has come from outperformance of our owned and leased portfolio relative to what we would have expected.

I think that's an excellent point to wrap things up. So Mark, thank you so much for all the time, as always. Look forward to seeing you, hopefully in-person soon, sooner than next year at this conference, as things open back up.

Thanks so much, Stephen. Take care, and good luck for the rest of your conference.

Thank you.