Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

We'll go ahead and get started. I'm Bill Crow. I cover the lodging and real estate investment trust for Raymond James. Appreciate your attendance. This morning, if I ask you which lodging company had the greatest unit growth over each in the past several years. The answer would be Hyatt. If you ask me which company has the greatest opportunity for unit growth globally over the next 10 years, the answer is going to be Hyatt. This is a company whose brands have continued to garner increases in their fair share through the years, and we're really happy to have them at our conference, I guess, just a second year that you've -- since Joan has joined the company. Joan Bottarini is the Chief Financial Officer, and we appreciate her attendance. Joan, why don't you take it away, and we'll come back with some Q&A towards the end.

Terrific. Well, thank you, Bill, for the invitation to be here. I've actually been with Hyatt for 21 years. So at this conference for 2, yes, it's going to be in person here at this conference and thanks to Raymond James for putting it on. It was a great experience in 2020. And has been great so far. So nice to see you all this morning. We were actually -- my colleagues and I were at the Hyatt Regency -- we stayed at the Hyatt Regency Orlando last night. And what is also great to see is the pent-up demand for travel actually experiencing it like we have through the airports in Chicago and in Orlando. And I'm happy to report that the Hyatt Regency Orlando is looking at some sellout nights over these couple of weeks and a ton of group activity in the city of Orlando, which you're all obviously experiencing. So I just -- as Bill mentioned, I just have a couple of remarks I wanted to go through for our -- for your benefit today, just a few points that I want to make. And I want to start with some attributes, key investment considerations for Hyatt. We are a global hospitality company. We operate in over 60 countries, and we have been in operation for over 60 years. And we are focused on the high-end traveler in each segment that we serve. We have a long-term growth strategy that is very well positioned. As Bill pointed out, we had industry-leading growth rate in 2021, and that has been actually a record for a couple of years, and lots of potential for growth going into the future. We are distributed globally. We are in most major cities around the world, the largest populous cities with a few exceptions. But we are also underpenetrated. And so that speaks to the significant potential and platform we have for growth going into the future. We are progressing towards an asset-lighter business model. We've been on this course officially since we launched our first asset sale disposition commitment in 2017. We have sold $3 billion of assets, realized proceeds of $3 billion and have reinvested those proceeds back into the company, into growth of the company, major acquisitions over the last 4 years, Two Roads Hospitality. And ALG, which was last year, we closed in November of last year. So lots of progress on our asset sale disposition. We also expanded our commitment by $2 billion in August of last year. Through 2024, we expect to sell another $2 billion of assets. And finally, I mentioned ALG. We acquired the -- or executed on the largest acquisition in our history with ALG and that served to double our resort platform and significantly expand our leisure mix. On to our brands, we have a very, very healthy collection of brands that really resonate with the development community. I just wanted to share with you this slide, which illustrates the segments that we serve, as I mentioned, that we operate at the high end of each segment. So you can see here on the right, the proportion of our existing portfolio in each of the brand categories: luxury, upper upscale and upscale categories. We've now added the luxury all-inclusive brand categories to our brand chart. These are all healthy brands that have a solid pipeline as a proportion of their existing base. A little bit more on our presence around the world. and by type and category of contract. So we have about 2/3 of our portfolio is managed including our own portfolio that you see here and about 1/3 -- a little over 1/3 is franchised. Diversification by geography, 2/3 of our hotels are in the Americas and the remaining are internationally in EME, Southwest Asia, Asia Pacific. And by category, I just shared with you by brand category, full-service hotels represents almost 2/3, all-inclusive, the 13% grew from 2% actually before the ALG acquisition. We were in this space. but we have grown that segment materially with that acquisition and about a little less than 1/3 of our hotels in the select service segment. And I wanted to share how the pipeline is diversifying us even further and particularly by segment. So I just mentioned that 2/3 of our portfolio is in the Americas, you can see that 2/3 of our pipeline is in international markets. So we're growing significantly internationally. The managed franchise mix is similar to our existing base and a little bit more in the pipeline in the full -- in the select service category whereas in the previous slide, our existing base is about 27% select service. We're growing select service globally as 46% of our pipeline. 2021 was a significant year of transformation for us. We had acquired Apple Leisure Group, ALG, which I mentioned earlier. This is completely on strategy for us. ALG serves the high-end traveler in each brand that they operate. It effectively doubled our resort offerings and increased our presence in Europe by over 60%. It's an asset-light platform, which furthers our asset-light transformation and importantly, has an embedded growth platform. So both of the acquisitions that we have made since 2017, Two Roads Hospitality and Apple Leisure Group, both had a healthy pipeline and growth that we acquired into the future. We also, as I mentioned, completed our asset sale disposition commitment in 2021 with the realization of $630 million of proceeds from asset sales and the growth in the year was exceptionally strong, 12% pipeline growth. This includes ALG 19.5% net rooms growth but our Legacy Hyatt growth was 6.1%. So strong results for the legacy Hyatt organic growth. And with the addition of ALG gets us to almost 20% year-over-year. Doing all of this, we have retained a lean operating base as it relates to our SG&A. We have the $74 million savings that shown here reflects a 20% reduction on pre-COVID levels adjusted for inflation. So we intend to stay leaner. We captured many savings over the course of COVID, and we intend to retain most of those or a portion of those into the future. Some operating metrics that I wanted to share, you can see the significant progression over the course of 2021 between RevPAR, fees and margins. The important takeaway here for margins is that our owned margins at 24.8% actually exceeded 2019 levels. So a phenomenal job by our operating teams with respect to operating margins at the property level. This was in owned metrics, but our managed hotels did a phenomenal job as well. On the left-hand side, you see here the progression in EBITDA. We had some structural items in the fourth quarter, where third quarter and fourth quarter looks somewhat similar, but we had some structural items between the sales of real estate and some costs related to the ALG acquisition actually transitioning. Those costs are embedded in the fourth quarter. And also, we had some incremental onetime incentive comp expenses in the fourth quarter. Despite those structural items, we -- our core business in the fourth quarter grew very strong, 13% growth in fees. And I mentioned the margin performance at our owned properties. Our own properties, despite the asset sales actually grew from third quarter to fourth quarter by $6 million. One note here that you'll see around the ALG adjusted EBITDA. If you had a chance to listen to our fourth quarter earnings call or saw the supplemental package that we posted. There's some information in there about the accounting for ALG and the considerations that need to be provided to the accounting adjustments that are required and the full economic value of the business that we acquired. So we reported $4 million of adjusted EBITDA in the fourth quarter for the 2 months that we owned ALG, and we realized $40 million of cash flow. So once you add together adjusted EBITDA, net deferrals and net finance contracts, you get much more closer to the economic value generated by the business and the cash flow generated by the business. So I will stop there. There is a lot of reference on our website for you to go to, if you'd like to learn more, and we can certainly talk about it in Q&A session as well. So great core operating metrics. And ALG, we mentioned on our earnings call that they exceeded our expectation in 2021 by 50%, our underwriting expectations, a ton of momentum in the business and really just demonstrating the pent-up demand for leisure, particularly for these assets in Mexico and the Caribbean. Segments are growing steadily, led by Leisure. This has been widely reported was actually leading our recovery in the first quarter but grew to over 2019 levels through the course of the year, followed by group at 60% in the fourth quarter and business transient at 44%. All of these metrics are actually demonstrating their -- all of these segments are demonstrating very strong pent-up demand right now as we're seeing booking activity grow again in the early part of this year. Our mix. So one new piece of information that we shared, we have reported that on a stabilized basis, our mix between these segments pre-COVID 45% of our business was leisure travel, 25% business transient and 30% group. With the acquisition of ALG, we expanded our leisure transient to 52%, 21% business transient and 27% group. The new statistic that we provided here is that if you just aggregate our group business, actually 20% of our group business is coming from leisure groups, social groups. So an important factor is that we actually get closer to 60% of our mix being from leisure purpose of visit when you add the leisure transient and the leisure group mix that we have. We talked about growth already, 99 hotels, organic hotels opening under Hyatt brands in 2021. And this included 17 conversions, 17% of the total. We've been tracking actually at around 20% for the last couple of years, just a great demonstration of the attractiveness of our brands to owners who want to convert to a different brand and join a brand family. So good results as many of you probably already know, that conversions add to earnings much more quickly than the organic growth, which takes some time to ramp. So it's a great proof point of both the brand attractiveness for owners and the translation to earnings. And a slide here, I mentioned Two Roads and ALG. Our growth over the past 4 years, we've gone from 186,000 rooms to 285,000 rooms in part through organic net rooms growth, but through the acquisition of Two Roads and ALG as well has really transformed our profile, and we have a much larger base of luxury lifestyle and resort offerings as a result. And here is yet another great statistic that we love to share. We've doubled our luxury rooms over this period, tripled our lifestyle rooms and tripled our resort rooms. We now have -- our portfolio is comprised of 40% luxury lifestyle or resort rooms or a combination thereof. And this has really been our World of Hyatt members have really taken notice. Our World of Hyatt program has also tripled over this period of time. We've created more occasions for stay and have increased the benefits for our members over the course of this period, and they're excited for all of these great opportunities to travel and deepen their relationship with World of Hyatt and our brands. Pipeline. Pipeline is very strong and the highest it's ever been, including the embedded pipeline I mentioned earlier for Two Roads and ALG. We're now at 113,000 rooms at the end of 2021. We have industry-leading pipeline as a percentage of our existing hotels, which is 40% or existing rooms at 40%, and this is a very strong, healthy pipeline with 40% of the rooms actually under construction today. And finally, our capital strategy that I mentioned earlier, just wanted to point out the tenets of this strategy. I mentioned we started this transformation in 2017 to monetize additional owned assets, and our priorities that we communicated were to provide funds to reinvest in the company. Now we have to repay some debt because the timing of the ALG acquisition required us to take on some debt. And we will do that with proceeds that we earn from ongoing asset sales and then turn to shareholder returns. And all of this serves to accelerate our profile towards greater fee-based earnings. We -- at the IPO in 2009, which is -- that is the date here on the right-hand side on the bar chart, we had 1/3 of our earnings coming from managed and fee-based earnings. And over this period of time, we expect to transform to 80% of our earnings coming from fee-based earnings. After the final $2 billion of -- or excuse me, the current $2 billion of asset sale commitment and reaching stabilization over the next couple of years, including all of our net rooms growth. So just to conclude, I just wanted to go through the segments we serve, our growth strategy and the proof points there, industry-leading growth. Our progress towards asset-light transformation and how important ALG is to our business mix and to our strategy overall. So with that, maybe Bill we'll ...

Great. We do have time for a few questions. I'm going to lead it off if you don't mind. And Joan, you mentioned at the very end there a commitment to shareholder return of capital. Could you maybe talk about the timing of the debt repayment and maybe when you'll be back in the market looking to acquire shares?

Sure. I -- so I mentioned previously that the commitments that we made were to -- when we -- when we launched our asset sell-down commitment, we said the first thing we were going to do was to reinvest in the company. And that was in 2017. And in 2018, we took asset sale proceeds and bought Two Roads. It was less than $500 million. The remaining because there wasn't opportunities for us to invest at the same level as the proceeds we were generating were returned to shareholders. So that is a practice that we have demonstrated since we launched the commitment. And the ALG opportunity came in 2021, which was a very -- actually opportune time as you think about the trajectory of leisure demand and the timing of our acquisition. But at the time, we didn't have enough cash on hand and couldn't quickly monetize assets to pay for it. So we took on some incremental debt and we are committed to our investment-grade balance sheet profile. And so we're going to have to pay down that debt and then turn to the option of shareholder returns after that.

Okay. So dependent on the pace of the asset sales, I guess, is...

Dependent on the pace of the asset sales, yes.

Terrific. Couple of headlines on CNBC this morning, they were quoting Marriott and Pebblebrook talking about current fundamentals in this very uncertain global environment. And I was wondering, we all know January got off to a slow start with Omicron. What have you seen since January, Maybe we'll stick to domestic here from a demand perspective?

It's extraordinary, the pent-up demand that keeps coming back every time we see a pullback. And this time, it was Omicron which was not as impactful as maybe previous events over the last year, but it has come back strong. Leisure demand is strong, coming from the U.S. into Mexico and the Caribbean and domestically. Business transient, we saw growing momentum over the course of 2021. And it's steady, but it continues to grow, and we continue to see good bookings on that front as well. And group is really actually quite remarkable as well. We saw -- we did see in January, late December, January, some cancellations, there was a pullback. They were primarily short term, January and February and 60% of those cancellations rebooked for later in the year. So it was temporary, and we understand our corporate clients want to get back -- they want to get back to meeting and they want to be together. So it's just -- it's evident in the data that we're seeing and the bookings that we're experiencing.

There's a question over here.

And just following on about [indiscernible] potential structural changes based on [indiscernible] in your industry. [indiscernible] businesses as usual as it goes to prepandemic with all the changes [indiscernible].

So good question. Let me just rephrase it so that everybody can hear it. But the question was there's been a lot of talk about structural changes to travel and to the hotel industry coming out of COVID. And what are you seeing from that perspective, whether there's a change in length of stay, whether you believe. And I'll throw this one in there, whether you believe there's a permanent impairment to business travel as some have talked about. I think that kind of captures the essence.

Yes. And so what I would say is permanent, no. I don't think there's permanent changes as it relates to the demand for travel and getting back to a sort of stabilized healthy use of our assets and demand across the portfolio. When -- I pulled up this slide again, because what we expect and we're seeing is actually a shift in the use of and the way in which we're going to market, in particular hotels and maybe shifting within a particular hotel, actually Hyatt Regency Orlando typically is a 70% group hotel. In the last 2 years, they were reaching occupancies that were close -- at certain times, close to pre-COVID levels with 50% transient, leisure transient guests. So there's some shifts there on a product and a market basis, and it's really where the demand is coming, is the important thing for our operators. But also what we believe is if you look at the business transient, the green part here of the chart, and the portion of group that is corporate there could be some shifts there, too, between the length of stay of the normal business transient guest. Are you going to go to San Francisco for a night? Maybe not. But are you going to gather your team together so you can be together and have that cultural integration that so many are seeking now as we emerge and return to the road. So the shift between those 2 actually could be quite interesting to watch. Again, pent-up demand, we're seeing that there's every reasonability that we'll get back to the stabilized levels overall.

Any questions from the audience?

Why is 80-20 [indiscernible].

80-20 is where we expect to be with the next tranche of our asset sale down program in a quantum and a time line that we believe we can execute on. Our strategy is to sell into strength. We've been able to realize fantastic values for the assets that we've sold. And we've done that on an accelerated basis relative to what we've committed to. That results in 80% in our modeling, is at the right mix. We'll keep you posted over time. All of the brand companies have some level of asset ownership, and we expect we will too, whether it's somewhere between 80% and less than 100% over time. We'll keep you posted.

Yes, go ahead.

[indiscernible]

The question is what kind of assets are being sold in this tranche? Are they all the trophy assets that you can sell in any given market seemingly or are these a cross section of your portfolio?

So actually, if you looked at the -- what we execute the $3 billion that we sold in the 4 years, it was quite a mix of some very high multiple assets, some in the lower double digit. So it was a mix. Our portfolio that remains and will be -- that we will turn to for the $2 billion is also a mix. There's leisure assets included in our own portfolio. There are convention business hotels. There are luxury high-value assets in urban markets. So it is a mix, and our goal and our strategy has always been to sell into strength. So where can we maximize the greatest value for these assets? No assets -- there's no sacred cows, so to speak. So we just announced 2 that we are under contract for 2 assets, $270 million. We'll obviously make an announcement when those close. But we're already on the path to the $2 billion commitment.

Just wondering given the cost of [indiscernible] certain assets that don't seem to actually have any [indiscernible].

So yes, and in that strategy of actually selling into strength that may actually be an outcome that we turn to. I would say there's still a buyer marketplace that is using their balance sheet to actually buy assets. they're less sensitive to what's happening in the financing environment. So that's another factor that is the consideration.

Yes, I mean, you're right. The path -- the last year, 1.5 years, we've seen a lot of activity in the resort area of the Sunbelt markets. That's where the strength of transactions have occurred. We're starting to see more in urban markets, which would be I'm guessing a number of the assets you might like to sell. So it is spreading a little bit across the different quality types and tiers. I wanted to add just before we go, I wanted to ask about what you're seeing in Europe given the 800-pound gorilla in the room, I know Marriott, Hilton and Hyatt all have some exposure in Russia and that area. And I'm not going to ask you necessarily about Russia, but are you seeing the impact on reservations or cancellations from the war activity across other parts of Europe?

We haven't seen -- we're watching this extremely closely, as you can imagine. We haven't seen any material impacts. We've been talking about this need to get even more granular as time progresses. If you think about the pent-up demand that comes after each -- when the virus surges and post those cases diminishing, there's pent-up demand, but it's not an even line and even slope. So as we see pent-up demand in Europe and growing into the early parts of this year, and we're looking at what -- how that slope should curve. And if there's impact directly from this, it's difficult to ascertain and there's nothing material to report. So that's where we are now, again, watching it very closely.

Perfect. We are out of time. If you'll join me in thanking Joan and her team for presentation.

Thank you so much, Bill.

Thank you very much.