Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

All right. Good morning. It's 9:20. I'm very excited to have with us from Hyatt Hotels, Joan Bottarini, Chief Financial Officer. And in the front row is Noah Hoppe, who's Senior Vice President of Financial Planning and Investor Relations. I thought before we talk about sort of how your business is running right now, maybe we could start off with a relatively easy topic. And just maybe you could highlight for us what Hyatt strategic priorities are for this year and beyond, it's obviously been a busy last couple of years and a productive last couple of years. So if you could highlight those, that maybe would be a great way for us to get started.

Sure. Sounds good. Can everybody hear me all right? Okay. Good. Joe, thank you for inviting us to the conference and to JPMorgan for inviting us to the conference. This is our first time at your conference, so excited to be here. And I love to talk about Hyatt. Thank you, everybody, for joining this morning. So we are -- for those of you who are not familiar, we're a global hospitality company with almost 1,300 properties, over 300,000 rooms and we operate in 75 countries. We operate and serve the high end of each -- we serve the high-end customer in each segment that we operate. Over 40% of our rooms are luxury resort or lifestyle hotels. So what that does for us and for our members is it creates an extremely compelling and differentiated platform for our World of Hyatt members. We've grown our World of Hyatt membership base in the last 5 years from 10 million members to 36 million members reported at the end of 2022. So we are -- one of our strategic priorities is actually enhancing the World of Hyatt program and enhancing our network so that we have deeper engagement with those members. Another priority is our growth strategy. Last year, we reported 6.7% net rooms growth, and that was the sixth consecutive year of industry-leading rooms growth for Hyatt. So really, really strong results on the growth side and really driven by the performance of all of our brands. We also reported an expansion of our pipeline. We have a record number of rooms in our pipeline, 117,000 rooms reported at the end of 2022. And -- that just bears a great indication of our growth rate going forward into the future. And lastly, I'll comment in this introduction on our transformation to an asset-lighter business model. We have been on a transformation in the last 5 years when we first announced our sell-down of real estate. And in those 5 years, we have sold real estate and realized $3.8 billion of proceeds over those last 5 years at over a 16x multiple. We've invested those proceeds into asset-light platforms. And those platforms generated earnings in 2022 of a high single-digit multiple. So when you think about the value creation of this strategy, where we're selling assets at greater than 16x and investing at a high single-digit multiple is an extraordinary value creation story. And what that has led to is significant free cash flow for us. We reported $473 million of free cash flow in 2022, and that was 50% greater than any previous year in our history. So this transformation to asset-light, the reduction of capital requirements from our owned real estate has really transformed our free cash flow and has led us to a 70% fee-based earnings mix at the end of 2022. And presently, we have about [indiscernible] left on our current disposition commitment. And by the end, our commitment is through the end of 2024, we will realize proceeds, the $1.3 billion of proceeds, and we expect to be at an 80% asset-light mix. So that -- we're very proud of the performance of our brands. We're proud of the enhanced network effect we've created for a World of Hyatt members. Our growth strategy has delivered outstanding results and the transformation to asset-light has just been tremendous.

Great. That's helpful. And maybe then we can start off in terms of current demand trends coming out of a very strong impressive 4Q across the board for you and the industry as well. Can you talk about how things presently look? And maybe you can talk about it in sort of geographical terms?

Sure. Well, maybe I'll start by segment first -- the leisure demand, as all of you know that are following the industry has been leading this recovery and has been exceptionally strong. And the momentum has not let up. So we...

Are you sure because we walk around Las Vegas, it looks like leisure is falling off the cliff?

Yes, it's really exciting to see, right? It's really exciting to see all the demand real time. So yes, leisure has been exceptionally strong. We had -- in January, our RevPAR growth was 65% over last year and our net package RevPAR which is coming from our all-inclusive resorts was 42%. So these are easier comps that we're comparing to in the first quarter, but really the demand levels are -- continue to be strong. Group returned back -- our group revenue returned back to 2019 levels in the fourth quarter. And what's really exceptional about that number is that our rates were up 15% on the group side in the fourth quarter. So there's still room to grow as it relates to group demand into the future. And there's some room to grow too with business transient. I mean we're seeing growing momentum quarter-over-quarter over last year -- over the course of last year, and we ended the year at about 82% of 2019 levels. So we have some more room to grow with business transient. So that's a little bit about where we are by segment. Geography, the U.S. reported in the fourth quarter 6% RevPAR growth. They've been leading the recovery. The surge in demand has just been exceptional. And Europe has been a great story as well. We had -- in our EAME/Southwest Asia region, we had 20% RevPAR growth in the fourth quarter. Some of that was driven by the Middle East and the World Cup. But Europe itself was up 16% in the fourth quarter. So we're seeing exceptional demand on the leisure side and also business recovery building momentum. Asia Pacific, has some room to grow with the restrictions being lifted in December, we saw in the month of January, the surge in demand in -- particularly in Greater China returning back to 2019 levels. And frankly, we've seen this several times over the course of the pandemic when restrictions were raised and lifted in China. They -- the surge on travel came back swiftly and this time is no exception. So we reported on our fourth quarter earnings call, which was in the middle of February, that February occupancy rates exceeded actually the U.S. So we're seeing great demand primarily virtually all of the demand coming from domestic business within China, which also speaks to the tailwinds that we anticipate in the coming months and quarters. When international travel starts to return more fully and some of the restrictions in China, not restrictions, but rather the backlog of Visas and Passport, so things that the government needs to get through and airline capacity. So once those things return over the coming months and quarters, we anticipate significant tailwinds for us in Asia Pacific.

Great. And can you remind us group as a percentage of total room nights sold, I guess, maybe in a normalized year is generally within what range?

About 30% in a normalized year. And it's because of all of the expansion that we've made on the leisure side, we have grown our leisure business, so that mix has contracted just a bit. One thing to remember, though, our group revenue is also -- there's about 20% of our group revenue is social groups and so leisure group revenue. So when you think about the demand drivers within group, it is corporations, associations and then we also have fair amount of social groups as well.

The one comment you made about in the fourth quarter group RevPAR was at 2019 pre-pandemic levels, and that was [ rated ]. How much of this year's group is group bookings from prior years where pricing was lower than the current -- what the current market is for? I mean, I think the 4Q number is even more impressive in that context and a chunk of that group was booked at ADR from years ago. And so maybe another way of answering it too is how much of in the quarter, for the quarter will contribute to group this year, where that gives you the ability to price at currently strong pricing levels?

Sure. So a couple of things to provide some context to that. Our group pace for this year over last year is over 20%. So healthy group momentum going into 2023. A significant portion of those bookings that we're experiencing are corporate bookings. And those are -- right now, what we're seeing is a little bit more short term, and they're also highly rated. Corporate bookings are highly rated and have a -- also the benefit of nonroom revenue associated with those group bookings. So it's highly attractive business for us, and it just shows the strength of corporations actually interested in getting their people together and returning to those meetings and/or events for their teams. Group rate incorporated into that -- for 2023 on the books is a little over 5% for this year. So some of the current bookings because what we're finding our corporate group customers are telling us that they want to meet on this day and it's nonnegotiable, and they're willing to actually pay for those dates that they're committed to. So we are able to actually drive group rates on this corporate business.

Great. I mean this is a question that I will admit to you is maybe difficult to answer. And a lot of it is so driven by the macro, which can be viewed differently depending on what's going on in the world. But how do you view the sustainability of what's currently strong trends, whether it's looking at leisure demand and pricing, whether it's on the group side or I guess, business transient might be harder by the definition of it transient? How do you sort of measure sustainability in general?

Well, a couple of things. What you just described as being difficult to answer. I think there's what we see today, what we're experiencing today, and it's very encouraging as far as demand, as far as rates that we're able to yield. So there's -- what we have to consider into that equation is that it's in some cases, short term, right? The business transient is about a 30-day window. Leisure transient can be between 30 and 60 days and group is longer than that. So while we see encouraging trends, we're watching it very closely, and we're making sure that if we see anything, we will respond and collectively respond.

Right. I'm assuming you're not seeing anything in group attrition, not seeing anything in no shows, not seeing in any weakness in leisure, if you are seeing that you'd be the anomaly at this conference?

We are not seeing any of that. In fact, it's the opposite when you look at those other metrics that you're talking about, which is cancellations are very low and the booking pace has been strong. So that's where we are now. When you think about our 10% to 15% guidance for RevPAR. One of the things we did comment on in the earnings call was that the second half of the year is expected to be in the mid-single digits. First half of the year is expected to be in the mid-20% range growth. That's partially because of comps to 2022. So we do think that we do expect that we will experience a lower growth rate in the second half, but we anticipate that the rates or the average daily rates that we're able to yield at the properties will be sustainable. And then we'll end the year maybe a little bit below. Our current estimates there will still be a little bit below occupancy levels in 2019. So still room for us to grow into the future.

Got it. Can we talk about Apple Leisure? Your timing and buying a leisure business was very strong. And then once you had under control, you certainly have executed on strong growth. Maybe for a lot of people in this room, maybe you can highlight the different pieces of the business? I think sometimes people try to equate it with maybe like a timeshare type of business, which it's not. People are trying to think of it as an asset-light business, which it is, but maybe a little bit differently than the asset-light business of your legacy management franchise business. So maybe you can talk about those businesses and then maybe from here and making this question even longer necessarily. So maybe from here, you can talk about what the opportunities are in terms of further integration into Hyatt and the interconnectivity to the other businesses?

Sure. I'm just taking a note here for that long question so that I can remember. Yes. So it is -- the platform, the ALG platform is asset-light fee-based business. There is the management company, which is what we have in the Hyatt legacy business of resorts that we manage for fees. The second business, the membership club is a paid membership club. So we receive paid fees for the membership club, which is exclusive to the ALG properties in Latin America and the Caribbean and has about 130,000 members and has had an exceptional growth rate. So our focus on sales and expansion of that has yielded great results for both us and our owners and the members in the program. The ALGV or ALG Vacations business is a distribution management platform, commission-based fees. So it's a tour operator, one of the largest tour operators in the U.S. And they -- Vacations actually has a service that they provide, the tour operator service works with travel agencies and also has some channels that are direct B2C to consumer. So all 3 businesses are asset-light, fee-based businesses. And as we think about revenue synergies and opportunities within the Hyatt system, we have rolled out World of Hyatt to the ALG properties in Latin America and the Caribbean in May of 2022. By the fourth quarter of 2022, our penetration of World of Hyatt members into those properties was 17%. It's an exceptional result and is growing momentum, we anticipate into the future that is exactly what we anticipated when we acquired the platform. We saw that there was a complementary customer base here between the luxury all-inclusive resorts in Latin America and the Caribbean and our high-end customer base, and that's exactly what we're experiencing. So this overlap is yielding a better distribution channel mix for the ALG properties and is expanding the attractiveness of the World of Hyatt program. We're also -- the membership club that I mentioned earlier, they are also being introduced to the World Hyatt program. So there's this overlap here and revenue synergies and really deepening our engagement with both of those, the World of Hyatt program and the membership club. I'll just -- I'll make another comment. It's a little bit longer answer to your long question. And a couple of other areas where there's been great opportunities and results for us. So when you think about this expertise that we acquired with ALG, the luxury all-inclusive platform and all of the developers that are -- that are building those resorts. And the, call it, the fragmented all-inclusive market globally, we see a lot of opportunities to have expansion of that platform, and we've actually realized that. We entered into an agreement last year in Bulgaria with a current Hyatt legacy owner who had an all-inclusive platform and said, "I recognize the benefits of the Hyatt platform through my existing hotel. Now that Hyatt has this expertise with the management team that's joined the company, I'm going to extend my relationship and convert 5 hotels in Bulgaria to all-inclusive resorts." That was a conversion that we announced last year. Another revenue synergy opportunity is the [indiscernible] portfolio, that we announced in the fourth quarter of last year. That portfolio was a conversion of a little over 5,000 rooms. And the reason why it was so attractive to us is that it allowed us to enter Germany in a whole different way and expand over across a network of over 30 hotels. And that customer base is actually the #1 and #2 customer base into the ALG resorts in the Balearic Islands and the Canary Islands. So as we think about the combination of Hyatt legacy brands and development teams, ownership and the ALG platform, all of those things too, the capabilities, development teams and ownership groups we're seeing now this network effect to strengthening and really building out an even greater platform and working to grow our net rooms and also create compelling opportunities for our membership base. The last thing I would comment on, and I know you're going to join us for our Investor Day on May 11, you will find that there is a wonderful at the property, at the Secrets Moxche and Playa del Carmen where we're having the Investor Day, there is wonderful group meeting space. And the capabilities that Hyatt brings, so with 30% of our revenue base being group revenue, we have an engine, a very sophisticated sales -- global sales force engine that is working to figure out how we can expand group sales within the all-inclusive portfolio. So you will experience that and others as well at our Investor Day, but that's another opportunity on the revenue side that we're seeing some good early results, and we expect to yield even greater results in the future.

And when you think about the 3 broad segments in ALG, I owned is really, really tiny. How do you think about the growth rate -- sustainable growth rate in the management and franchise business within ALG because it's an opportunity for you, as you mentioned before, with getting the benefit from your rewards program from World of Hyatt. And then also what you said before, a big percentage or a percentage of your pipeline is related to ALG management franchised hotels. And given the relatively small base hotels, it should spit at a pretty good relative growth rate. So when you combine those things, do you have sort of like a medium-term sort of algorithm or growth algorithm for that business because that business is, whatever, 40% of your total adjusted economic EBITDA?

And you're talking about rooms growth within the management platform. The opportunities are extensive. We have the most expertise in the luxury all-inclusive platform in the world. So when there are other smaller, all-inclusive brands that are looking to join a platform. They recognize the expertise that we have, and they recognize the network effect of the ALG platform. So the resorts, as I mentioned, the membership club has exclusivity to those resorts. And as we build more resorts and bring more resorts into the portfolio, those membership -- those members in the membership club are experiencing new resorts. They're some of the first members and guests that join new resorts. So as you think about the compelling opportunity for an owner who's maybe thinking about a conversion or a ground up, they see that 15% of my revenue is coming from the membership club, and 20% of my revenue is going to come from ALGV, the vacations platform. So there is already a distribution channel within the ALG network that is quite compelling and from a cost distribution perspective and the network that the system provides for new owners. So we're seeing opportunities, both in Latin America and the Caribbean and in Europe to expand our relationship with existing owners on a conversion basis and ground-up development.

Great. Maybe we could switch over to the legacy Hyatt business. And obviously, you mentioned before, footprint growth there has been leading the league for a number of years now. What are the drivers for the sustainability of that? What geographies, what segments, what brands will be driving that? And how critical is China within that footprint growth?

Yes. It's the -- I would tell you that all of our brands are represented largely in proportion in some cases, to the existing footprint. We are seeing, though, significant growth in luxury lifestyle and resort properties in our pipeline and interest in those given our expertise and the expansion of that network. China is almost 40% of our pipeline. And we have a very strong ownership base, both in existing hotels and owners that own existing hotels. And that ownership base is actually expanding their relationship with Hyatt into the pipeline, very, very strong ownership base. And so we have seen some based on what's been reported through China and the inability, frankly, to move projects along in the last couple of years, we've seen some slippage there, but it is now picking back up, and we -- this is just a temporary matter for us. So as we look at going into the future, we're very, very much confident in the long term of our pipeline, particularly in China and around the world.

To me, it's been somewhat surprising that you and others in the industry haven't seen any impact from higher interest rates in pipeline signings or development. When you look at -- in general, not for you, but for the industry or for you, if you want to answer, what geographies or what development, whether it's by geography or chain-scale segment are most sensitive to interest rates? Is it full-service urban? Is it limited service, U.S.? Is it internationally? How do you think that might be impacted?

Yes. I would -- so about 2/3 of our pipeline is international. And there are -- the challenge is with respect to interest rates vary by market, but they are not as pronounced as they are in the U.S. And it's really on the full-service select service construction financing. That has been a real challenge for some of our owners, but they're working through it, and they're really motivated because they look at the operating fundamentals right now. And so if their properties are not getting open, they're missing out. It's a really compelling operating performance profile. And so they are very motivated. And we believe as soon as, again, temporary as soon as we get some relief here will be able to -- they will be able to secure the financing. And some of them are, some of them are creative ways of figuring out how to do that.

Part of Hyatt's longer-term growth profile included the benefits from -- in hindsight, very strong. Tuck-in acquisitions, not that ALG was a tuck-in acquisition, a $2.7 billion transaction. But like Dream Hotel, Two Roads wasn't the same scale as ALG. How do you think about M&A from here? And then I'll answer -- I'll leave it there and then I'll follow up with you.

Okay. Well, I'll start with the quick answer to that is asset-light. And complementary customer base or adjacent customer base that is going to increase our network effect and build out our membership platform. And every one of those acquisitions, Dream, ALG, Two Roads all had an embedded pipeline. So growth that we can actually grow the brands. So those are the quick 3 criteria. And one of the things we've said is with the asset sale disposition program is that our first priority will be investing in asset-light platforms. And so as we've found those platforms, we've used those asset sale proceeds to invest and along the way, we've returned $2 billion to shareholders through share repurchases. So that's kind of the strategy as we think about how we're leveraging the proceeds themselves from the asset sales and then what we're looking to when we look at acquisition candidates.

And then on the topic of asset dispositions, you have one sizable one on the market right now, the Park Hyatt Zurich, that's been reported through industry trades. Feel free to talk about that if you want. But my real question is on asset dispositions. How do you think which market -- which hotels to bring to market at certain times? And I know you don't want to do all in one fell swoop, but it's more on a staggered basis and kind of managing that. How does that process get managed internally?

It's very thoughtful. And when I mentioned the $3.8 billion of proceeds that we realized over the last 5 years, it has been very intentional about when is the right time to time the market. The greater than 16x multiple is by no accident. We've been very targeted and strategic about when we're going to sell assets into strength or into a particular market situation. Last year, we sold the Grand Hyatt San Antonio. And so you may have thought, well, group was still uncertain, not recovering. We had an interesting deal to be able to sell that hotel and we took advantage of it. We've sold some resorts recently because resorts has been very strong. So we've been able to yield great outcomes for those sales, great valuations. So it's very strategic, and that's why this -- the pacing of the program and the way that we have announced our commitments over the past 5 years has been very much into what we believe we can execute at these great valuation multiples and making sure that we're pacing that with opportunities we see as far as reinvesting those proceeds and then returning back to shareholders if there's excess cash.

Okay. Any questions from the audience. Great. Thank you, Joan.

Thank you, Joe.

Appreciate it.