Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

Bill Crow, I cover the hotel stocks and the real estate stocks for Raymond James. Appreciate the terrific attendance today. Really pleased to have Hyatt hotels with us again today. We are joined by -- from Hyatt, Joan Bottarini, Chief Financial Officer of the company. We've got Tara Atwood, Noah Hoppe, both from Investor Relations and strategy from the company. And we're going to run through, I think, a handful of slides, and then we'll get into some Q&A. Joan?

Sounds good. Thanks, Bill, and thanks to Raymond James for inviting us to the conference. It seems like there's a lot more attendance this year than we saw last year, which is great. This beautiful photo here that you see on this slide is a photo of the secrets impression Moxche, which is where we are hosting our first Investor Day post-COVID. So our last Investor Day was in 2019. And this will be in May of this year and it's -- or 57 days away, but who's counting. We're very excited. Okay. So talking about Hyatt, I wanted to start with key investment considerations. Number one, we're a global hospitality company focused on super serving the high-end traveler. Over 40% of our rooms are in luxury lifestyle or resort rooms in our portfolio. And this is important because if you consider our World of Hyatt membership base, these types of properties are aspirational and are very important to that membership base to use their points at these beautiful luxury resort and lifestyle rooms. We have grown our World of Hyatt membership base threefold, a little over threefold since 2017, 5 years ago when we relaunched the program and we have grown over 60% of our World of Hyatt members since 2019. This focus on the high-end traveler also allows us internally to focus operationally and also within our development activities. So it's an organizing strategy for us and has proven to be very successful as it relates to our growth. Second, long-term strategy positioned to continue delivering industry-leading growth. We have delivered net rooms growth rate for the sixth consecutive year, an industry-leading metric. In 2022, we reported 6.7% net rooms growth. And this is an exceptional illustration of the strength of our brands and the attractiveness of our brands to grow our portfolio. And third, we're on a transformation towards an asset-lighter business model. With the acquisition of ALG in 2021, we expanded our ongoing asset disposition commitments by $2 billion. We are 40% through that commitment as of today. So we have $1.3 billion left on a $2 billion commitment that we made. And along with that commitment, we disclosed our expectation that we would be 80% asset-light earnings by the end of 2024. At the end of 2022, we're at 70%, which is a large transformation from where we were when we went public in 2009, which I'll show on a later slide. All of this is leading to exceptional free cash flow. In 2022, we disclosed free cash flow of $473 million which is a record for us, 50% greater than any previous year in our history. Our brands -- and this, by the way, this presentation is posted to our website, so you can reference it after this presentation. Again, focused on the high-end travelers -- all of our brands are represented in our pipeline and reflect a broad array of how we go to market and address what we have understood to be consumer demand, that is why all of our brands are healthy and represented in the pipeline. There are 26 brands on this page. About half of them are legacy Hyatt brands are brands we have created, and about half of them are brands that we've acquired over the last 10 years. At a glance, for those of you who are new to Hyatt, we have almost 1,300 properties and over 300,000 rooms in our portfolio. The distribution of those rooms here by type of contract, by geography and by chain scale, you can see that we have a majority of managed hotels in our system, majority of hotels are in the Americas and almost 70% of our hotels are in the luxury and upper upscale categories. The pipeline has some diversification here. So 580 rooms in our pipeline -- excuse me, 580 hotels in our pipeline, 117,000 rooms. And a little bit more managed, slightly skewed more towards managed. The diversification by geography is a little bit larger internationally. And we have about 60% of our rooms in the pipeline in the luxury and upper upscale segments. Our mix, our rooms revenue mix is skewed towards leisure transient, 45%, and this is -- on the left-hand side here is 2019 numbers. 45% of our rooms revenue in 2019 was coming from leisure transient. One of the things we point out on this slide is that our group rooms revenue, which is the second largest proportion of mix in 2019 and is actually represented by a significant portion of leisure business within the group space. So it was in the group rooms revenue. So as you think about that proportion of total leisure, which is obviously a very important part of the recovery and the resiliency that we've seen around the leisure traveler and the leisure group traveler, we have a very significant and differentiated proportion of a leisure mix. And our expectation at full recovery is that this will grow substantially in the next several months and maybe in a year or 2 at full recovery. I mentioned that we are focused on the high-end traveler. We have 18% of the global share of luxury branded rooms in resort locations, making us the #1 portfolio of luxury branded rooms in resort locations. We have, through our growth strategy, doubled the size of our luxury rooms, tripled the size of our resort rooms and control the size of our luxury rooms through the transactions that we've executed on in the last 5 years. I mentioned our net rooms growth, 6.7% reported in 2022. We had a record number of hotel openings, 120 hotels and 48 of those hotels were conversions. A large part of those would come from a portfolio in Germany and a couple of other places in Europe, the Lender portfolio. The conversions by way of rooms represent about 35% of our total rooms opened in 2022. This has become a growing importance to us and is also a differentiator as we think about our capability to convert luxury lifestyle and resort rooms into our portfolio, which has a significant opportunity globally. Our capital strategy, our transformation, we've made significant progress on our capital strategy. And on the left-hand side here of the chart is our principles around this strategy. We are going to sell real estate and those proceeds will be used as a priority to invest back into the growth of the business in asset-light businesses. We'll also use proceeds to pay down debt, which we did in a significant amount in 2022. And excess will be balanced with shareholder returns as we consider appropriate. And all of that's accelerating towards greater asset-light earnings and our mix that we anticipate again to be 80% asset-light earnings by 2024. Some numbers here, $3.8 billion was the total aggregate amount of proceeds that we realized from asset sales in the last 5 years. And the multiple that we achieved in those sales was 16x. And I mentioned the $2 billion sell-down commitment that we launched in 2021. We're 40% through that commitment and we intend to continue to realize between 13x to 15x multiple on future asset sales. So on the right here is what I described as our asset-light earnings mix at our IPO and how that has significantly transformed over the last 12 years to the end of last year at 70% and our expectation for next year at 80%. Just a quick recap here. 2022, just to mention again the significant cash flow that we generated, 50% greater than any year in our history. We repaid down debt, a significant portion of this debt was issued when we acquired ALG in 2021. So within 12 months, we made a commitment when we bought ALG and acquired new debt that we would sell assets and pay down the debt that we acquired and we did just that. And last year, we also repurchased $369 million of shares. So leveraged our free cash flow and our asset sale proceeds to balance all of the uses of deployment of that under our strategy. We generated over $800 million in fees last year, which is 40% greater than 2019. So that asset-light focus through the platforms that we've acquired and our net rooms growth, organic growth coming from the pipeline is really delivering strong fee growth. And finally, our net rooms growth of 6.7% and our record 117 rooms in our pipeline. So we're signing more contracts than we're opening out of the pipeline, which is a demonstration of strength of our brands and developers attractiveness to our brands. The total of adjusted EBITDA, net deferrals and net finance contracts is $1.065 billion, which is significantly greater, 40% greater than 2019 levels. So a significant amount of earnings generated in 2022. And from a recovery perspective, we have -- this slide here demonstrates where we have come from the first quarter of 2021 into the fourth quarter of 2022, Leisure has been leading the recovery as most of you know, and has been sustained at very high levels. Group for us is back to 2021 as of Q4 and really as of Q3 is virtually there and business transient has been recovering nicely. So it's a tailwind for us in addition to another significant tailwind, I'll mention, which is recovery in Asia Pacific which we reported on our earnings call is surging quite nicely in January. So room for recovery yet from here, a record year in 2022. So very excited about the future and very proud of the execution on our capital strategy as well as our operating performance of all of our managers around the world, frankly, delivering great margins and market share. And we have confidence in continued growth for sure based on what we have in the pipeline and our free cash flow generation and the cash proceeds that we intend to achieve through the remainder of this commitment. So lots of great opportunities ahead of us.

Great. Noah, you want to join us up here for the Q&A. I'm going to go ahead and start a couple of questions. You have made a fairly dramatic emphasis on acquiring leisure assets, growing our leisure and lifestyle portfolio. So maybe you have some unique insight into what the consumer is doing on a real-time basis. And I think that's one of the things that we want to know is, are you seeing any weakness in the either at the high end or the low end that dampened your enthusiasm for the outlook for the year?

Absolutely, we are very enthusiastic based on what we see I mean these categories are largely leisure-based demand-driven. And even in the lifestyle space, which lifestyle resort hotel or a lifestyle urban hotel. They are drawing demand from leisure purpose of visit. And so that surge has been resilient, as I mentioned and shown on the graph, and we continue to see very much attractive and strong demand for our brands. We have -- when we acquired 2 Road Hospitality, which was a collection of brands that hard and soft brands back in 2018, end of 2018, one of the things we did was really position us as having a capability in a different way than we had, had previously. So we acquired the talent on the management team. We acquired some soft brands. So it gave us the opportunity to actually execute on conversions differently because we had some soft brands in the lifestyle space. And we were able to engage with owners who had previously thought, I want to be an independent lifestyle brand. Joining a system is something that they had to consider and say, I see the benefits of joining a system because of scale, but I really want to keep the unique style and characteristics of my lifestyle brand. And because of the way that we integrated and actually helped to fuel the performance of those brands has been a very successful story and has led to future conversions into those brands. Those are actually quite significant portion of our conversion brands. And finally, I would just say that the ability of those of -- in 2 Roads in specifically and Noah will correct me if I mention the wrong thing. But we have the penetration, our World of Hyatt penetration into those brands. So when you think about the group of travelers that we have, the loyal members that we have in the World of Hyatt program and their desire for this luxury lifestyle and resort portfolio, the penetration has gone significantly higher than we had anticipated acquired them. And that's a lower cost channel for our owners, and it's a compelling destination for our guests, our members.

Great. We'll take questions from the audience as well. I've got plenty of them here, but if you have one, raise your hand. Let's talk about business transient travel. You showed it on your slide, I think it was 82% back to historical levels. I think that's something that might surprise Bill Gates, who famously said that we were going to permanently lose half of all business travel forever. But are we at a point where we're going to start to see that level off because I think it's easy to argue that we will see some permanent reduction in business travel. So where are we in that?

Well, I know, Noah has some good data around this. But I'm glad you mentioned this proclamation that was made because it's interesting when you look at our top customers, our top corporate customers and the business that they do with us, some of them are over 2019 levels. And that is tech companies, pharma consulting. So there is a real mix of that equation, and it depends on those corporate clients saying, "I want to get the revenue producing people out on the road", and that's what they're doing. And so I think that's what's evident when we're seeing the business return to travel and some of those big corporate customers actually putting their people back on the road. But Noah has more.

Yes. So we've seen the small and medium enterprises lead the recovery. They're now reaching kind of that mid-90% range relative to 2019 levels. And it's been the large corporate recovery that has I would say, been a little slower, but more methodical and continuously improving. That's a little over 70% recovered at this point. But with each passing month, we just see consistent continued recovery and we'd kind of bucket that as big 4 accounting firms, consultancies and the like. So we feel optimistic about that recovery and kind of the pace and cadence and consistency in which it's coming back. And you saw from the graph, we're only 82% recovered. And as you think about that relative to broader economic expansion, GDP expansion, nonresidential fixed investment, those metrics, which are traditional drivers of business transient demand, those are up double digits, 15%, 17%, 19% relative to 2019 levels. So as we think about where we stand with business transient, we think there is a decent ways to go until we would be stabilized.

So on the margin, are you seeing, for example, tech as a segment of demand start to pull back coincident with the headlines a bit out there about layoffs, et cetera.

No. We haven't noticed any correlation with the headlines relative to the demand or the recovery of demand with respect to business transient I think it's notable, too, is we're benchmarking back to 2019 when we talk about many of these metrics with the layoffs, you also have to contextualize those to 2019. And in many cases, these firms have expanded significantly. So when they're pulling back, they're still not nearly back to 2019 levels. And what that says to us is that's a larger travel pool in general, as you think about demand that's yet to fully be recovered with respect to business transient.

Let's shift to the pipeline for a second because I think nobody has -- none of the big firms, big hospitality companies have the opportunities to grow their units as much as Hyatt does. You have a lot of greenfield opportunities for development. But the skew towards luxury, lifestyle, resort, full service that you pointed out in your slide deck also means the developers are taking a bigger chunk of every deal, right? It's not an insignificant $5 million, $10 million select service assets. So how has the availability and cost of capital impact in that pipeline as far as new incoming deals goes.

Well, it's our developers and owners haven't been immune to the cost increases particularly on the debt side. But we also have a very healthy pipeline within our Hyatt Place, the upscale segment, our Hyatt Place and Hyatt House categories and brand within that category. And so those sponsors, developers are looking at options and working hard to develop -- inform their capital base with local and regional banks. On the larger side, that is a underwriting challenge with the larger national banks that bigger projects are undergoing. But remember, there's not a significant amount of full service under development right now. It's -- as you think about the growth, we have a significant amount of growth outside the U.S., particularly on the full service side. It's not that we don't have properties under development in the U.S., but it's -- there's quite a diverse landscape and you saw that a significant portion of our pipeline is outside of the U.S. So that capital formation is a different equation. And the sponsors are differently capitalized in parts of the world. So it's an equation that we are doing what we can on the relationship side, whether it's banking relationships and we are all very conscious that the operating fundamentals are really strong. So this is a good time to be a hotel owner and to have your real estate or you have your asset up and operational. So we're very much motivated in the same way to get these hotels open.

Let's look outside the U.S. for a second and think about what's going on in Europe. It wasn't quite the winter of recession that was anticipated. And China as well, I want to touch on those 2 areas. You mentioned the escalation and demand that you're seeing within China. I think it's inter truck China travel. Can you just give us a few more details on that. Are you starting to see, for example, Chinese travelers leaving the country and starting to do destinations to Hong Kong and Singapore and some other areas? Or what do you see in there?

You're absolutely right, Bill, that the -- in China, most of the business we saw and we nearly recovered to 2019 levels in January incredible surge when the restrictions were removed, and that coming from domestic travel, primarily domestic travel. So we don't see any indication of significant inbound or outbound. And in fact, what we stand is that there's quite a bit of logistical challenges, whether it's airline capacity and/or Visa availability and getting through that backlog. So it's going to take some time to get that inbound, outbound flowing like it would have been on a stabilized basis. And it's really -- and as you think about the tailwinds for us, -- it's -- this is a really important part of the equation because inbound into China is that international traveler is a business traveler, it's a high-paying traveler. So it will add even more to fueling the performance in the country. We also have grown by 30% in the region since 2019. So we've got that -- when we're looking at these numbers, we're doing it on a comparable basis. So we've got hotels that are ramping within the system as well. And then outbound from China to other parts of the region is also an area that has a lot of room to grow as, again, all of these logistical limitations are free.

And broadly speaking, in Europe, any change in the demand side of things or the sensitivity to rate or anything that you're seeing?

Nothing that we're seeing. We were up in the fourth quarter, 16% in Europe. Very strong results, particularly in our luxury portfolio there in Western Europe markets particularly strong. And rates were very high. So there's still demand to fill in. Rates were in the 20s in the fourth quarter in Europe.

Yes. Europe has been a great recovery story and growth story, and it's kind of sustained at these elevated levels for several quarters now.

Okay. I don't -- I can't think of a peer that's done more M&A over the last 5 years than Hyatt has and growing through acquisition of brands or ALG. It's been very active. And of course, selling assets gives you that capital to do that. So how do we think about M&A going forward? There are still a lot of brands out there that are orphaned or too small to really sustaining over the long term as we continue to see market share flowing into a handful of big companies. So how do you think about that? And how do you think about your exposure to select service and whether that -- is that going to be an organic growth or when you look to kind of grow your footprint there through M&A activity?

Well, definitely part of our capital strategy was to leverage the balance sheet to be able to realize those proceeds and have that capital to invest. And that's exactly what we've done, while also returning a significant -- $2 billion in that last 5 years to shareholders as well. So that was part of the strategy to grow. And as we think about candidates, we think about the -- which all of them that we acquired Miraval, 2 Roads, ALG have complementary customer base to our existing base. They have a compelling opportunity and attractiveness for our World of Hyatt members. They have an embedded growth platform, and we've been able to actually grow those platforms since we've acquired them, greater than what we acquired. So there's certain attributes there that we have put through a filter so that we can amplify the network effect of our value creation story and so that is how we think about the acquisitions. We just had a tuck-in with 2 Roads being a 12 -- we acquired 12 management contracts....

[indiscernible]

Sorry [indiscernible], thank you and 24 signed management contracts. So we've got very much these types of opportunities that we consider and they will have to go through the criteria and strategic rationale to be able to amplify again that network effect as we move forward.

And as far as the future of the select service portfolio, you've got Hyatt House and Hyatt Place, Hyatt House more of an extended stay but it's certainly a much smaller portion of your overall portfolio than, say, Marriott or Hilton or Intercon, some of the other brand families out there. So how are you thinking about growth there? Because it is important to get younger guests into the Hyatt system, right, that will eventually move into the Park Hyatts of the world. So how are you thinking about that growth going forward?

So in earnest, the development engine for Hyatt Place and Hyatt House started after the great financial crisis. So really, it's been 10 good years of building that brand -- those brands. And we're now at....

Over 600 hotels.

Over 600 hotels. So when you think about the maturity of our development program and where we are now. We've done an exceptional job of building those brands. And there's a lot of white space for those brands. in the U.S., their global brands in the U.S. and globally. So our development teams are very focused on that and...

And they're growing quickly. They're 40% of our pipeline. So you can see 30% of our existing base, 40% of our pipeline. So I think they've got a long runway ahead.

So if you're at the point where your growth is going to come organic through the pipeline through growing fees, do you have a commitment to returning capital to shareholders? I mean, certainly, we've heard of actual -- Marriott, Hilton provide these $2 billion numbers out there. Your seems more fluid with opportunities that you might see out there. Can you talk about what your commitment is to returning capital.

We have made a stated commitment, but we have -- it has been part of our practice, $2 billion in the last 5 years, almost $370 million in 2022 alone. So as we have cash -- excess cash available, we will balance that with the ability to invest in the business.

Great. I think we are out of time. If you got a minute or 2, you want to add anything, I mean, you've clearly gained market share on Wall Street. Are you gaining market share on Main Street as well?

We are gaining market share on Main Street, our growth story is very compelling. Our brands are very attractive and the conversion opportunities are compelling for us too. And our transformation story speaks for itself. What we've been able -- the value creation that we have executed on here in the last 5 years is extraordinary when you think about what we sold those assets, what multiple we sold those assets for and the investments that we've made. We're very proud of it. And thank you for your time.

Great. Joan, thank you. Noah Thanks.

Thanks everyone.