Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

All right. We are jumping right back into things, and I'm once again thrilled to be joined by Mark Hoplamazian, Chief Executive Officer of Hyatt Hotels, which continues to balance an asset sell-down strategy, M&A integration and growing the core. Mark, thanks for being here.

Thanks, Stephen.

So from a strategy standpoint, since we last spoke at this forum last year, you completed your $1.5 billion asset sell-down.

Yes.

You also expanded your commitment to another $2 billion, acquired Apple Leisure Group, reinstated a buyback authorization, saw a comparable RevPAR growth in the Americas, turned positive versus 2019. As we now pivot from recovery to potentially sustain growth, talk to us about what the key priorities are for 2022 and beyond?

Well, we've been on a 5-year journey, both with respect to how we are deepening our relationships with the high-end customer base that we serve because by way of reminder for those of you who don't know, Hyatt does not participate in mid-scale and below. So we tend to serve the upper echelon of travelers. And our strategy has been to extend and expand offerings to that high-end customer base. So we bought Miraval. We bought Two Roads Hospitality. We bought Apple Leisure Group. And the key to each of them was a customer base that we felt that we could serve, and that we could extend new experiences to the existing customer base that we've got. So that's been a big part of that. Over the period of time, we've grown by 50% in total, and we've doubled the number of luxury rooms, tripled the number of resorts and tripled the number of lifestyle rooms that we've got. So we've really transformed the portfolio to the point where we're now 30% luxury in terms of total property count; 40% luxury and leisure or lifestyle, one of those categories; and at least in the first quarter, we were about 60% of our revenue base was leisure, up from pre-pandemic times, which was somewhere between 35% and 40%. So it's a significant shift. So I would say that, that strategy has been the core of what we've been doing and executing against for the last 5 years. And over that period of time, we've also sold down $3.8 billion worth of real estate, and that's continued. We sold over $800 million this year against the $2 billion commitment. So I think the combination of getting deeper and broader within the high-end customer base and really surrounding that base of customers, both on the corporate side and the leisure side, expanding leisure and then transforming the balance sheet is really what we're going to continue to do. We are making tremendous progress with bringing the best of Apple Leisure Group and Hyatt together. We just turned on the 50-plus properties into the World of Hyatt. I think it was May 9 was the date that the flip was switched or switch was flipped rather. That's what I meant to say. And so we're really thrilled to be able to expose so many of our World of Hyatt members to all-inclusive, luxury all-inclusive.

So with this growth shift in kind of the mix of properties as well, what are you then hearing from owners in terms of feedback of what they want? Or how have they even responded to that shift in terms of -- thinking about development and helping bolster your own pipeline?

Yes. I mean, first and foremost, owners was shocked and surprised. They want performance. And I feel like we really continuously sort of rediscovered and reinvented the business during the downturn, primarily because we, like many companies in our sector, had to rediscover demand because we were down 95% in revenues in April of 2020. And everyone around the world sort of decided, well, nothing that we've got, our revenue management algorithms, our sales and marketing activities, nothing was applicable any longer. So we just have to rediscover, and we've clustered resources. We have collapsed sort of department structures. We have fundamentally changed food and beverage outlets across most of our hotels. And on the hiring side, we've also, over the last 8 months or so, really adopted this incredibly different mindset of taking a fresh look at that, too. We've fundamentally changed the whole hiring process, really shortened it and accelerated it. We've gone to much more flexible scheduling because scheduling in our industry is an anachronistic. It's been around for 40 years or something. But you don't need to start a housekeeping shift at 7:30 with a standup and then release. You can actually create staggered schedules to accommodate housekeepers who need to be there to see their kids off to school or whatever. And third, we're bringing opportunity with young people who are out of school and out of work into the workforce. So I would say we've been really in the process of kind of not really reinventing but just evolving our business dramatically. Developers now are really focused on capital formation because construction lending in the United States has been really tough. So I would say they want to see the performance. They want to see us producing the revenue base, but also managing differently to be accommodative of what's going on with the realities are. In the -- right now, and it's gotten -- I think it's changed a lot over the last couple of months as a matter of fact, because advance rates and events rates are under pressure and rates are rising. So the combination of those things is going to make new shovels in the ground a little bit more challenging.

Is that true across the globe, are you seeing pockets where it's maybe better than others?

It's actually more sustained in Asia and in Europe than it is in the United States. I think in the United States, we've had -- we have maintained our industry-leading growth rate because while our signings with respect to select-service hotels has come down, and openings have slowed, the full service and luxury leisure and lifestyle has grown. And so that's how we really filled in to maintain the growth rate that we're at. So I would say that the starts -- construction starts is most significant, most significantly under pressure in the United States.

How does managing most of your properties create competitive advantage? And then as you look forward, should we anticipate a shift more towards franchising over time?

Yes. So you might remember that this past year, we really amped up our franchise group. We created a -- one big investment we made last year was really to staff up a much more significant franchising group because it's going to be a part of our future, for sure. 100% of Apple Leisure Group's properties are operated. They're managed by AMResorts. And so our composition from a managed versus franchise perspective has grown. And we will continue to manage our all-inclusive resorts. We have a -- the all-inclusive business is a different business and requires different skill sets. Distribution looks different. Food and beverage planning and programming is completely different; entertainment and on property activities, very different. The one thing that's not different is the spirit and the sense of care demonstrated by the colleagues. So that, we feel like we're completely aligned on. But reason why we bought the company and maintained the management team in whole is because we recognize these differences are material. This is not something that you can just sort of repurpose a few people who are in our management business and then have them go run that business. It doesn't work that way.

Now you referenced some of the pressure on the development side, you've already put out expectations for 6% net rooms growth, what's the building blocks to get there? And how could that be impacted by what we're seeing in the market now?

Yes. I mean, I think the things that could be the impacts on the downside are, supply chain continues to be an issue. And to the extent that any of the projects run into any additional financing requirements than forming capital could be an issue. We have seen more significant supply chain constraints come to life in China. When you lock down the biggest city, city of 26 million people, it has a huge reverberation throughout the country. So I would say we're seeing some impact there. That's on the downside. On the upside, our volume of deals has been really, really high. We have significant -- we only report fully executed hotels in our pipeline. So we have 113,000 rooms, about 40% of our existing base. But the level of activity above that, which filters down to eventually getting fully executed and in our opinion, something that's going to get financed is actually grown significantly. So we've maintained that pipeline even as we've been opening new hotels. So we're actually progressing well this year on signings, and the hopper above us is actually getting filled quite well. So I think our view is that, that will balance out. And I do think that with a couple of things are happening, supply and demand, right? So with a slowdown in new starts, especially in select-service, let's say, performance will obviously be impacted by that positively for hotel owners as demand continues to expand, and I think that will induce development. I have no -- I'm not in the business of predicting interest rates. In fact, I have a bit of a joke that I'm not going to tell on stage, but about the idiocy of trying to predict interest rates. So I don't -- what's that?

Nobody here does that.

Yes. So I'm not going to do that. They're laughing because they've heard the joke. No, so I have no idea what's going to happen with interest rates. What I do know is that in the foreseeable future with the Fed shrinking their balance sheet by almost $100 billion a month and already announced that they've got a 50 bps hike in both of the -- 2 of the upcoming meetings. We know that we're going to be under pressure during that period of time. I hope that the -- whatever the intended effect of that, whatever the intended impact of that is seen and then we can normalize thereafter. And that's what I'm hoping for, I guess, I would say.

Makes sense. Now how has the pipeline changed now versus pre-pandemic, both as we think about the composition across geography, but then also different brands?

Yes. I think the biggest change has been that our lifestyle brands have grown enormously. And the pipeline for our lifestyle brands has grown enormously. So Joie de Vivre, or JdV by Hyatt now is what we call it, Thompson, Destination Height Centric, these are all brands that are in the lifestyle category, and that's where we've seen the most activity, including in the United States. The Thompson brand has had a lot of openings and a lot of signings. So it's got tremendous momentum. So I would say, brand-wise, there's been a relatively higher level of activity on the lifestyle front. Apple Leisure Group has a robust pipeline. They are as conservative as we are in terms of reporting what true pipeline is. So when we bought the company, they had 100 -- over 100 resorts open in 25 -- that were official pipeline hotels and another 40 that were in the hopper in various stages of LOI and so forth. But quite a few of them were actually signed. They just didn't include them in the pipeline because they didn't consider them fully financed yet. So there's continued demand for expansion and there's room to grow in the Americas. There's a lot of room to grow in Europe. So I think the all-inclusive growth is going to be sustained at a high level. I think right now, our belief is that net room's growth for all-inclusive this year will be in the double digits. So that's the second thing that's different. And I think the third thing that's different is that the total composition of select-service -- U.S. select-service has come down as a proportion of the total. So not dramatically, but it's contracted somewhat. So those are the key changes in terms of the composition of the pipeline.

Now one follow-up on that, how does that maybe impact your franchise fees, royalty rates, I should say, managed fees that you would potentially get from these assets relative to the existing base to translate one to one?

It's a really interesting question, which I can't give you a mathematical answer to because I haven't done the math. But I mean, by -- almost by definition, if you've got a bigger pipeline and the composition is relatively lighter, a bit lighter on lower-rated franchised hotels than by virtue of that you're going to end up with higher fee-based per key. Do I think it's material? Probably not because these are composition changes over 113,000 rooms. And so I think that's the answer.

Maybe turning back to Apple Leisure Group, I think you're 8 months in roughly the acquisition.

Yes.

How would you say the integration has progressed and the business has performed relative to your expectations? And help maybe the audience who are less familiar with Apple Leisure Group, just understand how you think about the growth of that business going forward and the sustainability of the EBITDA or free cash flow, however you want to define it?

Yes. So first of all, the most important thing is that culturally -- I described the fact that we -- one of the first things that we looked at was the customer base. We saw the consistency and the congruence of our customer base and their customer base from a demographic perspective. The second thing I would say is the culture of the company is -- couldn't be closer to Hyatt's. It's a warm, engaging relationship-based culture. It's relationship-based internally and relationship-based with owners. And they have -- over 80% of their properties are owned by owners who own multiple resort hotels. And that speaks volumes. So to me, I think the integration has gone very smoothly, and that's really been the core reason why. In terms of the prospects and relative to our underwriting, we are tracking well ahead of our underwriting. And whatever we thought we were going to do next year is already in our rearview mirror relative to our outlook for this year. So I think the performance of the business itself, really from sort of the time we signed, which was mid-August, has just been really remarkably strong. That's both actual and realized traffic in the resorts. Rate realization has gone up significantly. When you look into the summer ahead, their bookings are tracking something like 30% ahead of where they were in 2019, and development continues to be significant. So we think it will be accretive to our growth rate really for as far in the future as I can look. And a lot of these hotels, they're large hotels. So they span in size from sort of 350 to 800 rooms. And so they take a while to be built. So if you look over the next 5 years, I think it's going to continue to sustain very high growth rates and pull our growth rate up. The good news is, I think, as a format, more Americans are discovering it and liking it. Take some of the transactional elements out of the hotel stay, especially when you're on holiday, especially if you have kids. I mean being able to actually turn your kids loose and say, the water park is over there, and by the way, if you feel like another ice cream cone, there's the ice cream place over there, and there's the pizza place over there. Have fun, and we'll see later. And also, when you're sitting by the pool and a colleague comes by and says, "Can I get you something." You're not sitting and thinking, do I really want to get my key card and sign a piece of paper and wait for that? You're saying, "Yes, I'll have another beer or a glass of water or something, and it's done. And the person is not sitting there saying, I've got to go through the transactional stuff. It removes that. Finally, the way that the business is programmed it allows you to operate with more visibility into your occupancies because the booking curve is pretty long. And it means that you have less waste. So it's more efficient, effective and environmentally sensitive and , but it's also higher margin. So these resorts run at a significantly higher margin than EP Resort would. So across the board, we feel really good about it.

That's great. As a follow-up on the Unlimited Vacation Club side, can you just talk to kind of what that business is? And how you think about forecasting that into the future, at least how investors should conceptualize UVC relative to either other leisure options, timeshare because we continue to get questions on how to think about that business? .

Okay. So maybe I'll just take 1 second and say that the Apple Leisure Group has really got 2 components to it. One is the resorts in UVC, and the other is ALG vacations, which is a large tour operator platform. So that maybe separately. UVC is a paid-for membership to a club -- a vacation club. And your -- it entitles you to benefit which include free rooms and discounted room bookings as well as a different guest journey when you get to the property. You have a separate check-in area, the recognition is very different, and you've got also room selection priority. So it's a very -- and the value is derived from your utilization of your membership. And it's grown significantly. We have over, I think, something approximating 120,000 members now. And I would think about the forecasting of that business, I would cover 2 topics. The first is the accounting by virtue of the fact that you have to take 100% of the expenses into account at the front end and amortize your revenue base much -- by the way, the revenue base is cash that you receive upfront for the membership. You have to amortize that over the life of the membership. It's a huge mismatch in terms of what the actual economics are. So we track cash. And so what we report out with respect to net deferrals and finance contract changes is how the bank group for Apple Leisure Group counted earnings because they were tracking cash. So we look at it and say the way we evaluate the business is cash based. It's the actual value cash money that we're putting in our pockets. That's accounting and assessment there. In terms of growth, when we underwrote the business, we did not assume any hockey stick change in either capture rate or conversion rate. So all we're doing is reflecting the opening of all of these new resorts. And when you open a new resort, if you have the same capture and the same conversion embedded, which is proving out, by the way. So we're tracking this carefully when we're opening new resorts, where are these new members coming from? They track in line with capturing conversion, and that's how we forecast it. So to put it really simply, if you think that the AMR collection is going to grow in the high single digit, low double-digit range over the next number of years, UVC membership should grow in the same vein. What's interesting also is about 2/3 of the memberships that are signed up in any given period are brand new members and the other 1/3 are upgrades. People who came in at this tier, but want to upgrade and pay more membership fee, get more benefits. So I think -- and that relationship is maintained. So we look at the dynamics. We look at the -- we did not assume any hockey sticks that we thought it would -- those activity metrics would maintain themselves and that we would just grow UVC membership base with the expansion of AMR resorts.

And then sticking with ALG, maybe moving to the Destination Management side, how do you think about the progression from that business? And...

Yes. It's been stunning to watch. I mean that business, ALG Vacations, it's this is a little atypical for a hotel company to be talking about, but it's a distribution platform. It's got a B2B and the B2C element, to the B2B is really working with travel agents and advisers, and the B2C is primarily through a website called BeachBound and then another one called CheapCaribbean.com, which is a bit of a misnumber. We have an internal debate because it's neither cheap nor Caribbean. So we've got a bit of an issue there in terms of branding, but BeachBound is what we're really leaning into. And it's the largest tour operator in the United States. And they have -- in 2019 terms, they handled over 3 million passengers. So to give you a size and scale, with a revenue base in that same range of about $3 billion. A low-margin business because you're really -- you're getting paid for the packaging. But when Alejandro Reynal, who is here as the CEO of the company, came in, he actually identified with the CEO, the President of ALGV, a large number of topics on which they could actually optimize that business. Mix, so serving low-rated markets in which you can't make too much money out the door. So you're actually bringing your top line down, but significantly increasing your margins and flow-through. Second, so much of the business was manual process intensive. They have, I would say, mechanize is the wrong word. They've applied machine learning and some measure of AI, but a lot of it is processes that are now automated. So fair changes, for example. If you've got thousands of itineraries that you're managing, a fair change or a schedule change to actually have that cascade through, if that took you 48 hours to process and was manually intensive as supposed to being able to do it in 5 minutes. That's a huge gargantuan change. So there are many new elements that have factored in. Now it's taken them 2 years to do this work. But what we saw in the first quarter is that all of that work is now showing up. And it's happening at a time when volumes are increasing. So I think -- I don't think the business is on its way to having, by far, its record year ever. And the margins continue to grow because all that work that I just described is continuing to unfold.

That's great. I'm going to change topics, switching to the assets all down. I guess in this environment of uncertainty from the debt markets, rising rates, how will that potentially impact the timing or the magnitude of the asset sell-downs as you look at what's remaining?

It's a great question and something that we're thinking about and talking about. First, I'm thrilled that we were able to do $800 million plus....

Right out of the gate.

Right out of the gate, so that we got a lot of great deals done at really great valuations. I think it's going to kind of depend on which segments and what types of properties we're talking about because I think the first buyer universe is probably going to get impacted as PE because so much of you know this so much based on precise underwriting with exactly a specific amount of leverage loan-to-value at...

A lot of CMBS, which...

A lot of CMBS, which -- and the recent CMBS deals that have been priced have gapped out at pricing. So that uncertainty is not healthy for PE underwriting. So I think we need to think differently about which assets we're taking out next I think this will all normalize. But I think in the near term, we're paying attention to how the market is behaving and with whom we are -- to whom we're looking, which probably means more family office money, more sovereign money and more opportunity fund money. Some of the players in our universe, as you've seen, have provided seller financing something that we've done in the past. I'm not suggesting that we're going to turn to that as a principal vehicle, but it's possible. So we're paying a lot of attention to it. I think it's -- right now, it's sort of like, there's some uncertainty and there's been volatility. And I think that causes people to say, I'm not sure I really want to make a hard commitment yet. We are just entering the market with a couple of additional assets. So I think we'll see. Meanwhile, we've got 2 major redevelopment projects, 1 in London and 1 in New York that we've already signed up. And a lot of entitlements have to be put into place in permits and so forth to close those deals. Both of them would close, though, within the time frame that we've given ourselves. So I'm not worried at all about completing and completing at great valuations. And I do think that we will find our way into really innovative deals that we can do as we look forward. I do think that the immediate future is going to be somewhat disruptive, though.

So if I'm hearing you correctly, it just sounds like there's flexibility there.

Yes.

Beside which potential owners and which types of assets you want to match to that.

Correct.

With only about a minute left here, I want to shift to capital allocation. So you'll be selling down assets still.

Yes.

You just collected $800 million. Apple Leisure Group doing well. Seems like a lot of free cash flow coming in as the recovery unfolds. Your leverage levels are fairly low relative to peers. What are you going to do with the capital that you're getting in the door? Or what's the right way to think through your priorities?

Yes. Well, we are committed to paying down debt that we took on. We structured the debt so that we could start repaying it this fall. And we do -- we are still split-rated, although S&P recently changed its outlook to positive from negative. So we have always been committed to being investment grade. So I think you can count on us getting back there. And we did also state that we are going to be back in the market repurchasing stock. So right now, I would say the priorities remain: first, what else is out there that would be interesting for us to grow the company by way of investment, that hasn't changed; Secondly, I do -- we do want to bring the debt levels down a bit just to make sure that the -- that we end up firmly back in the investment grade category across all of the rating agencies. We're investment grade with 2 of the 3; And the third will be return of capital to shareholders and very immediate future or in the immediate period, it's been through share repurchase. And we will evaluate turning the dividend back on, but we haven't taken that step yet.

Do -- does the change in interest rates impact how you think about the right leverage ratio as you're having those conversations?

No. I think we want to maintain a total leverage ratio that just leaves us in...

Investment-grade.

Investment-grade, exactly. Yes.

Awesome. Well, that's about it for us for this session. Thank you, Mark and the Hyatt team for joining us today. Next up, we will have a little break before our lunch speakers. So join us in about 15 minutes. Thanks, everybody. Thank you, Mark.

Thanks.