Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Hyatt to acquire Apple Leisure Group. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Noah Hoppe, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Rene, and good morning, everyone. I'd like to welcome all of you to the investor conference call to discuss Hyatt's proposed acquisition of Apple Leisure Group. Joining me on today's call are Mark Hoplamazian, Hyatt's President and Chief Executive Officer; and Joan Bottarini, Hyatt's Chief Financial Officer. Before we get started, I want to remind you that our discussions this morning as well as information in the related press release and investor presentation will include forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K, quarterly reports on Form 10-Q and other SEC filings. These risks could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the press release and investor presentation made available earlier today, along with the comments on the call, are made only as of today and will not be updated as actual events unfold. This call is being recorded. And following today's prepared remarks, there will be a Q&A session. An investor presentation detailing the acquisition is available under the Investor Relations link on our website at hyatt.com. In addition, an archive of this call will be available on in our website for 90 days. And with that, let me turn the call over to Mark.

Thank you, Noah. Good morning, everyone, and we're thrilled to talk to you about 2 exciting announcements today. First, Hyatt's agreement to acquire Apple Leisure Group, including its AMResorts hotel and management platform. And second, a new asset sale commitments. We'll start with the exciting transaction news. The acquisition of Apple Leisure Group, I'm going to refer to the group as ALG from now on, does 3 important things for Hyatt. First, it accelerates our transformation into an asset-light company. The asset-light earnings with ALG's AMResorts and Unlimited Vacation Club businesses, combined with the reduction of earnings from our owned and leased hotels from additional asset sales, we expect to reach an 80-20 mix of earnings from fees versus owned properties by 2024. Second, it accelerates our net rooms growth into the future. We will immediately double our resort representation on a global basis, and with ALG's embedded and prospective growth, we expect to increase the rate of growth into the future with a global leadership position in luxury resorts serving high-end leisure guests. Third, it substantially expands our presence in new markets, especially in Europe, where this transaction will increase Hyatt's hotel count by 60%, that's over 70% in room count, and this will support faster growth across the rest of the continent. ALG is fundamentally an asset-light business with no hotel ownership, aligning perfectly with our strategic goals. Moreover, AMResorts has a demonstrated track record of significant growth and a robust pipeline. AMResorts' luxury brands and large resort footprint in key destination markets will significantly expand our resort offerings, and we believe will position us to be the preferred brand for high-end leisure travelers now and well into the future. The combined brand portfolio provides compelling development opportunities for hotel developers and owners around the world. As a result of this acquisition, we expect to increase our system-wide leisure room night revenue mix to over 50%. As to our second announcement, we expect to complete by the end of this year, over $3 billion of asset sales from the time of our first asset sale announcement in 2017. And looking forward, we are increasing our asset sale commitment by an additional $2 billion by the end of 2024. Let's turn to Slide 4. This slide shows the key elements of our strategy that we laid out in our Investor Day in 2019. In short, this transaction is fully aligned with our long-term strategy. First, driving industry-leading growth by adding significant embedded and prospective growth. And this is not just for AMR's existing pipeline but also because of the growth platform it represents. We expect to achieve even higher net rooms growth into the future than the industry-leading levels we have been delivering. Second, investing in asset-light platforms transforms our earnings profile with a focus on fee-based earnings. Third, expanding our customer base while prioritizing compelling, personalized customer experiences and expanding to complementary or adjacent customer segments. ALG is on brand with Hyatt, and we see a tremendous opportunity with an expanding network effect across a bigger and broader portfolio. I'll now turn it over to Joan to provide additional detail on the transaction overview. Joan, over to you.

Thank you, Mark. Turning to Slide 5. I'd like to give some color on the acquisition. Transaction reflects enterprise value of $2.7 billion on a debt-free, cash-free basis. This represents a low double-digit multiple on full year 2023 estimated ALG management EBITDA, which also reflects ALG's significant and ongoing expansion of the resorts. Through this process, we've gotten to know ALG's CEO, Alejandro Reynal and his team very well. They are excellent operators, and there are very few teams that understand resorts and the all-inclusive segment in particular as well as they do. We're very excited and looking forward to welcoming the team into the Hyatt family. In terms of financing the transaction, we expect to fund more than 80% of the purchase with a combination of $1 billion of cash on hand and new debt financing, and the remainder was approximately $500 million from equity financing. We have secured a $1.7 billion financing commitment from JPMorgan. Cash proceeds from the new $2 billion asset sale commitment are expected to be used to pay down debt over the next 2 to 3 years, including debt incurred to fund the acquisition. One thing I would emphasize here is that we are committed to maintaining an investment-grade profile and to continue managing the balance sheet prudently now and into the future. We expect the transaction to close in the fourth quarter of this fiscal year, subject to customary closing conditions and applicable regulatory approvals. Mark, back to you.

Thanks, Joan. Turning to Slide 6. For those of you who are not familiar with Apple Leisure Group, ALG consists of 3 businesses: AMResorts is a branded resort management business; Unlimited Vacation Club, which is [indiscernible] tied to the AMResorts' management business, is a fee-based membership program; and ALG Vacations is a travel distribution platform, operating a range of established B2C and B2B travel brands. In 2019, ALG delivered total revenue of $1.2 billion and $168 million in ALG management EBITDA. While the 2019 results would imply a multiple of about 16x, there are a few factors to keep in mind. First, the AMR Collection hotel footprint is now 50% larger than it was at the end of 2019. Second, ALG's 2019 results were negatively impacted from lower inbound travel for the Dominican Republic due to lingering fears at that time from crime-related issues that occurred in that market in 2019. Third, in 2019, ALG was integrating the technology platforms of Apple Vacations and Mark Travel, a business acquired at the end of 2018, and that caused disruptions in the booking volumes handled by the Vacations business. So if you look at the multiple on 2018 earnings, for example, it would be about 14.5x. And as Joan noted, looking at our expectations for 2023 based on the recovery in travel and ALG's executed pipeline, the transaction price represents a low double-digit multiple of 2023 ALG management EBITDA. I'm going to now provide an overview of the businesses within ALG. I'd like to start with the resorts business. AMResorts is a branded management company that provides sales, marketing and brand management services for resorts targeting high-end leisure guests. AMResorts will operate 102 properties with over 33,000 rooms in 10 countries under the AMR Collections' 6 meeting resort brands. This is the largest portfolio of luxury all-inclusive resorts in the America. Looking at the brands, each one is distinct with a differentiated target demographic. This brand approach allows ALG to target customer segments that have different desires and needs and at different price points. The range of brands also allows ALG to build customer loyalty over the long term, with different options that appeal to guests as they fit, as they -- the experiences they see change over time. AMResorts was founded in 2001 and the portfolio has grown from 9 resorts in 2007 to an expected 102 resorts at the end of 2021, with over 24 fully executed and financed deals for new hotels and over 40 in advanced stages of negotiation. Looking down this list, the portfolio, which is focused on the high-end traveler, is a very strong fit with Hyatt customer base. Turning to next page. The Unlimited Vacation Club or UVC is an exclusive travel membership program that provides its more than 110,000 active members preferred rate for vacations booked at AMR Collection properties, as well as a defined number of free nights and other benefits. UVC is a program that delivers value to its members and hotel owners and drives direct bookings and repeat business from guests that are loyal to the AMR Collection. Concurrent with the growth of the AMR Collection itself, UVC has also seen tremendous growth with an 18% per annum compounded membership growth over the past 5 years. The Vacations business is one of the largest tour operator and packager -- packaging companies in North America for leisure travels in Mexico and the Caribbean, with 4 travel distribution brands serving B2B customers, 2 B2C online brands and white label programs for Southwest Airlines and United Airlines. Another dimension of the Vacations offering is ALG Amstar, a leading destination management company in Mexico and Caribbean. Finally, Trisept Solutions is the proprietary packaging software that enables the core business of Vacations. Moving to Slide 10. I'd like to walk you through the strategic rationale and key benefits of this transaction. First, this acquisition and our increased asset sale commitment significantly accelerate our asset-light transformation. Second, it further accelerates our growth platform, increasing our already industry-leading net rooms growth rate. Third, it meaningfully expands our footprint in luxury. Fourth, they expand our share of wallet by providing increased choice for guests by serving more occasions of travel for our high-end guests and customer base. And last, critically, it enhances benefits for others. Turning to Slide 11. In late 2017, we announced our original asset sales commitment. And since then, we have sold -- we expect to have sold over $3 billion in assets by the end of this year. We estimated that we would sell hotels at a valuation range of 13x to 15x EBITDA. We expect to complete the over $3 billion of asset sales at an average multiple of 17.4x. We're very pleased with this outcome and expect to reach the goal well before our commitment deadline. With our new $2 billion commitment in addition to this acquisition, we expect to reach 80% fee-based earnings upon completion of this additional sell down. Turning to Slide 12. This combination accelerates Hyatt's already industry-leading net room storage rate. We have the ability to build on the strong relationships and resources established with its developer and owner base. The fact that many of their owners have multiple properties in the AMR Collection is a testament to the great work their team has done and the value they have delivered. Similarly, we've got a great opportunity to expose our hotels around the world to the AMR Collection and discover new opportunities of growth. And the ALG owners will now have an in-the-family exposure to Hyatt's total brand portfolio. In particular, we see incredible opportunity with luxury resorts in Southern Europe, a region where branded resorts are only 2% of total rooms versus 10% for Mexico and the Caribbean; and in all-inclusive resorts in new markets in Europe, the Middle East and Asia, regions where this concept has not yet satisfied growing demand. Additionally, AMResorts hotels are expected to generate $2.3 billion in chain revenue in 2023, representing a step change increase in total chain revenue up from $1.5 billion in 2019. This provides significant resources that can be invested in value-additive marketing and technology. And we are exposing a large growing customer base to enjoy expanded choice across the Hyatt system. Turning to the next slide. We're confident that with our integrated travel platform, we will be able to expand our footprint and capture the growth we see ahead of us. Experience-related spending is growing very strongly. There is increasing attractiveness in luxury leisure travel, and we're confident that as part of Hyatt, we can identify compelling ways to elevate engagement with our guests. We are very bullish on leisure travel. It's proven its resiliency and durability. In past market contractions, leisure travel has recovered more quickly than business travel. We're excited about luxury, in particular, because we expect the global luxury travel market to grow at about 11% from 2021 to 2027. And as a result of this acquisition, the combined portfolio places Hyatt as a leader in this segment. Turning to Slide 14. You can see the strategic benefit from a geographic expansion resulting from this combination. We are expanding our footprint in key markets where Hyatt previously had smaller presence, especially in Europe. Our European footprint will increase by 60%, with significant growth in popular resort destinations in Spain, particularly the Balearic Islands and Canary Islands, as well as Greece. Aside from expanding our geographic presence, AMResorts opens the door to millions of additional guests to be served. In 2019, over 12 million guests stayed at AMResorts properties, which is expected to grow materially in the coming years. And this list does not specify the other markets in the Middle East and Asia that represent future chapters of growth. Turning to Slide 15. The future growth story is extremely compelling. As you can see, the AMResorts' portfolio has grown at a 15% compounded annual growth rate since 2017 and increased its room count by approximately 50% since 2019. In other words, it went from less than 70 resorts at the end of 2019 to over 100 resorts by the end of 2021. Similarly, the number of Hyatt rooms has grown 41% since 2017. There's a great deal of embedded and prospective growth represented by 24 fully executed deals for future growth and 40 deals in advanced stages of negotiation, sustaining AMResorts' remarkable track record of growth into the future. Turning to Slide 16. We're excited to bring highly passionate travelers closer to both Hyatt and AMR to create a wider customer base. As the part of -- as part of the integration following the closing of the acquisition, we will explore ways in which World of Hyatt and Unlimited Vacation Club can bring added value and unique membership benefit to their combined member base. We believe that there will be significant value in bringing our brands together and providing our guests with an expanded set of choices to explore more brands, experiences and places. Turning to the next slide. We see the real value this combination can deliver to owners. This value comes from a range of opportunities, including enabling further innovation and digital capabilities that can be scaled across a larger hotel base, driving more direct bookings and leveraging shared support functions and global contact and service centers to better serve guests and increase efficiency. We also see great benefits through the combined talent and expertise that across the combined organization, with great opportunities to share the collective experience of our traditional resort and all-inclusive operators. And last, we see the opportunity to better leverage vendor relationships to the benefit of all of our hotel owners. So in conclusion, you can tell, we're very excited to welcome Apple Leisure Group and all its team members into the Hyatt family, and we're very excited about the value this combination delivers by meaningfully advancing our asset-light strategy, accelerating our net rooms growth into the future, expanding our presence in luxury leisure travel and strengthening our relationship with guests and owners. The future is very bright for a soon-to-be expanded Hyatt, and we are grateful for our gobal Hyatt family who put our purpose at the center of everything that they do, caring for people so they can be their best. With that, let's turn to Q&A. Rene, you may open the line for questions.

[Operator Instructions] Your first question comes from Stephen Grambling from Goldman Sachs.

I guess maybe could you dig a little bit more into the economic model for each of the ALG segments, including maybe how margins compare and how similar or different contract terms are? And maybe even within the travel component, will the Hyatt portfolio be immediately accessible or leveraged with that -- with those agencies?

Thank you, Stephen. So we sort of look at the combined AMResorts and UVC units as a singular business line. They are highly integrated. And that business line has a -- the hotel management piece of that business line is similar to ours in terms of the actual mechanics of the business, that is management fees associated with managing the hotels. And then separately, what we would describe as reimbursement for chain resources. So the actual model is similar but the integration of UVC and the -- and that business is very extensive. Together, they represent a bit over 70% of the total earnings of the business at large, and the remainder is the ALG Vacations business. With respect to the Vacations business, it is a high volume and low margin business, which is, I think, typical for travel distribution platforms such as ALG Vacations. And it turns out that actually Hyatt already -- a number of Hyatt properties are already represented in a number of the ALG Vacations platforms. And for example, the B2C platform, which has a -- it's called Beach Bound, has a number of Hyatt Resorts already represented on the platform. And we think that there are a couple of major areas of opportunity there. First, Concept Solutions is a proprietary platform for packaging. Packaging sounds trivial, but it's actually very complex because if you're combining air and ground elements of a vacation, meaning the grounding hotel, and then you include transportation and excursions and you integrate those to deliver an integrated package, it's actually quite sophisticated. And with the Mark Travel acquisition, the company gained a very powerful platform for packaging, something that we recognize as something that can be leveraged for other high-branded resorts and hotels. So that's one dimension. The second dimension is that the Amstar business, which is the destination management company, is a business that is very experienced in working with providers of experiences, on-the-ground experiences, in different markets around Mexico and the Caribbean and in Europe. Amstar is really focused on the Americas, but they have several D&C relationships in Europe. And we see that as an opportunity to bring those experiences more into the opportunity set for Hyatt travelers to other Hyatt Resorts. So these are a couple of ways in which we see immediate opportunities. And over time, the ALG Vacations business has been quite strategic to the AMResorts expansion. So we appreciate that about it as well.

That's helpful. And if I can sneak one other one in. As we look at the next $2 billion in hotel sales, how would you think about the potential valuation or nuances of that portfolio relative to the $1.5 billion that you will be completing at this 17.4x. Is there any differences in tax implications as well?

Yes. So first of all, I'm thrilled to report that we now have signed one of the 2 deals that I mentioned on the last earnings call. So that relates to $350 million of the $500 million of sales. We expect to close that in the next several weeks. And we are confident that we will be able to complete the other asset sale as well. So our outlook for the next $2 billion, this is going to sound very familiar to you because it's the same thing we said in the last month, which is we are expecting to sell those assets at 13 to 15x, and we expect that the tax exposure could be around 15%, in that range. So we absolutely cherish our track record of underpromising and overdelivering. So stay tuned.

Congrats on the deal.

Thank you.

Your next question comes from Chad Beynon from Macquarie.

When we think about the recent recovery, particularly in the Americas region, can you kind of help us think about how the AMResorts have been tracking against maybe visitation into those areas or any other type of RPI metrics that will kind of help us understand how we should think about their place in the market and then also how fast the recovery should be?

Yes. A couple of things that I would say. First of all, ALG -- the AMResorts, AMR Collection hotels have been performing in similar vein to what we've talked about in relation to our own resorts. So 2021 has been remarkable increasing momentum over the last 4 or 5 months. And we are seeing they are benefiting from the surge in leisure demand the same way that we are. The booking volume through ALG Vacations has likewise increased at very rapid rates over the last several months and exceeding now 2019 activity levels in many cases. So while we do expect potential short-term slowdown in bookings, that is in relation to the season because the booking levels will come down in September and October and then rise again in November and December as we had into the festive season and into the first quarter including spring break, that's a normal seasonal change. We also understand that the delta variant might have other short-term impacts. And I think that it's fair to say that the AMResorts' current activity base is holding up. So they're not seeing a significant falloff in current, meaning in this month's activity. So we're really encouraged to see the durability of their business base and their customer base.

Okay. Great. And then, Mark, could you just elaborate a little bit more if a customer moves towards a direct booking versus through the tour operator, which now you own, are the fees to Hyatt widely different? And are there any items that would keep a customer from booking direct? You mentioned that that's part of the strategy. I'm just trying to understand how you benefit from that given that you will own the tour operator.

Yes. So I think it's important for me to set the stage with respect to ALG Vacations. First of all, I just recognize that 30% of ALG Vacations -- ALG Vacations' volume is for U.S. destinations. And by extension, you know that you -- I'll say that AMResorts operates nothing in the U.S. So really, all of that 30% is in relation to other volume into other resorts. And as I mentioned earlier, some of that is in the Hyatt -- existing Hyatt resorts on some of their platforms. Of the 70% that is outside the U.S., that's primarily Mexico and the Caribbean, about 20% or 25% of that volume goes to AMResorts, which means that a majority -- the vast majority of all of the volume of ALG Vacations is actually with respect to third-party resorts. So it's still very large. I mean in 2019, I think ALG Vacations booked travel for 3.1 million passengers. So it is a massive platform, and they have an incredible reach and a great brand reputation. So the way we look at the strategy going forward is, I think ALG Vacations provides remarkable capabilities for bookings into resorts and especially has been focused on ALG resorts in the past. And so I think at the way in which ALG Vacations can actually provide extra support in shoulder seasons and the like, is really been very valuable. But it's also true that the way we look at all of this is through the lens of the owner. So we're looking at the opportunity to extend and make it more effective and efficient, the total distribution cost. This is a journey that we at Hyatt have been on for years, and we have really focused on increasing our direct channel. And our digital -- our own digital channel has been growing at a very fast pace this year, exceeding the growth rate and the volumes of our OTAs. And so ALG management has also focused on direct channel expansion as well. So they're on the same journey. We see the strategic value of ALG Vacations, but just as you know, the base of revenue and activity in ALG Vacations is a majority of that is with respect to non-AMResorts hotels.

Congrats on the announcement.

Thank you.