Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

We'll keep things going here. I know we're a couple of minutes behind, but that's only because of -- it's just a good chance to get everyone together. So our next fireside chat will be with the management team from Hyatt Hotels & Resorts. So to my right, Mark Hoplamazian, President and Chief Executive Officer; to his right, Joan Bottarini, Chief Financial Officer. So on Joan, Mark, welcome. Thanks for doing this with us.

Thanks. Thank you.

Thank you for having us.

A lot of places we can start. Mark, one place I wanted to -- I always like to start with the global hotel companies kind of highlight of the summer, give us 1 quick -- we were just talking a little bit, so I got a little preview, but maybe for everybody else, where does a, like, major lodging CEO travel when he has vacation?

Well, this summer, took a brief trip to Greece to celebrate my daughter's graduation from college, and Greenland for fishing. I fish with a group of travel people. I know I should get more diversity in my private life, but it just happens. We've been fishing together for many years, and we went to Greenland to fish for Arctic char which was really a great release because there's no cell service, and we hiked 10 to 12 miles every day, and it was absolute pristine wilderness. So all of those combined for a true break, which was great.

And how many Hyatts are in Greenland?

Zero. That will probably remain the case for at least the near future. We'll see.

So not a big development opportunity, at least not yet.

No, no.

Joan, any major call outs?

Well, exciting trip for us this summer, my daughter turned 21, so she joined me in Paris actually earlier this summer. We had an investor meetings and engagement there. So she hopped on the back half of that trip. So it was nice, a little business and pleasure in 1 week.

But not Olympics? Pre Olympics?

Right before. Right before. So we saw kind of everything being built and that was pretty exciting, too.

Still in the investor meetings, did she cover my session? She could. She's amazing.

All right. Well, let's put that to the test with -- let's kind of start off. If we were to kind of rewind back to really the last time I think the investment community was engaged as we left in the second quarter, the main kind of call out in late July, early August was a bit of slowdown, softness, whatever we want to call it, kind of coming out of this -- out of tougher comps in the leisure area. So I think the question we want to start with is just on that kind of travel and demand side. Let's leave it open ended. How do you feel about the environment right now, Mark? And should -- what should we be reading into a little bit of concerns that people may have about the broader RevPAR environment?

I guess at that level of how many feet above sea level you were. I think the first thing I would point out is that a lot of those comments were really about year-over-year comparisons. And last year was extraordinarily strong for leisure, in particular. So I think that's really the thing that caught so many people's attention. I think just to put that in context, if you look at the levels that we achieved last year, we were 20% above prepandemic levels, and we're maintaining that. So we're not down from last year. We'll have roughly the same leisure demand and leisure revenue base for the company globally this year as we did last year. So we elevated to a very high level first segment of recover, and we're maintaining that. The 2 segments that -- in business, transient and group have actually increased over time. Where are the differences? A lot more Americans, and I mean a lot more Americans traveled to Europe this year. And that's multidimensional. There is a Taylor Swift effect because it was cheaper to go, take a flight to Europe, see Taylor Swift and come back than it was to get ticket sometimes for the Taylor concerts in the United States. I still believe someone should do the math, I think she contributed a couple of hundred basis points to global GDP this year. Not kidding. It's incredible. She's had a much bigger impact on Hyatt than the Olympics in Paris did just to pick a reference point. So part of it was events, Taylor Swift, Olympics, the soccer tournament in Germany. Part of it was rotation, like people had been down in the Caribbean and Mexico for the last several years and said, okay, time to branch out. So I think that's part of what we're seeing. That's why Europe was up for us 12% in the second quarter. And the Caribbean and Mexico were -- Midland, kind of flattish. But I think overall, for the whole year, we expect the leisure total revenue base to maintain itself. And I do think that over time, you'll see a more natural balancing out of where people are traveling and then you'll see a resurgence of Caribbean and Mexico next year. And then I think China has been a tale of a couple of different dynamics, inbound has been really weaker than I think anybody expected, but it's also driven by lift into China. And outbound has been very strong, which has driven really good results for us in Japan and Korea and Vietnam and Thailand. But domestically, there's been really an interesting dynamic where our rooms revenue is actually up 3% to 4% for the first half of the year. And our F&B revenues are down close to 7% for the first half of the year. I think overall, for the total year, we think our revenue base in China is going to be down a bit, like low single-digit decline. But I think the dynamics there have to do with some weaker corporate group banqueting activity in our hotels. That's on the group side. But don't forget for Hyatt, that's -- food and beverage is like 50% of our total business in China. So that's where you might start to see a little bit of the dichotomy because RevPAR is actually up and our fees are down. And you might say, how in the world does that work? And the answer is well, half of our revenue is not RevPAR-driven, right? So that's just a -- that's a current dynamic in China. But overall, our segment that we serve is still driving positive RevPAR and room rate progression.

So let's kind of break down each of those. Let's start with the U.S. on the consumer side. It sounds like, to summarize back to you, it's a lot more about normalization if it -- than it is anything about that's concerning on the consumer side. We have heard a little bit about low-end leisure pockets where I think there are some areas of a little bit more concern. But is it Hyatt's customer base that helps you kind of that you may not be seeing that? Are there any segments that stand out when you look high to low? Or you see a little trade down, anything that alarms you on the leisure side?

I think you should -- the data you cited to me earlier today was really stark in telling that story.

When you look at major hotel segments or categories, and we look at it on a global basis, which is what we reported in our Q2 release is the luxury segment is up 7%, upper upscale is up 4%. This is the year-to-date numbers. And our upscale is up 2.5%, I think approximately.

Upscale meaning, select service.

Yes. Yes.

And so that is similar directionally in the U.S. And so it is our customer base that is resilient, is strong. Back in the -- back to the U.S., we're also super encouraged about what's to come. Our owners are making investments, major investments in some of our leisure resort properties. And so we will see the benefits of that as we've got this temporal disruption that we talked about on the call with respect to the renovations, which are going to be great hotels repositioned. Some of them are closed right now, so that is something that on the leisure side, we are absolutely excited about into the future. And then we also talked about Maui which has been a market that we anticipated would recover more quickly, it's taking longer. But as we look out into the future, we see a lot of positive discussions that we're having with the local government and the way they're trying to bring back tourism more quickly and welcome guests back to the island. So these are temporal issues for us right now in the U.S.

And the resorts that Joan was referencing, leaving the Miami, Andaz redo that Sunstone is doing. Aside, if you look at Indian Wells in California and the Scottsdale Gainey Ranch Hotel, both are being rebranded as Grand Hyatts. And the only reason I'm adding anything to what Joan said is because it's also interesting to note that about -- I'm going to guess 40% of their business, respectively, is group. So you have very high-end group in addition, a lot of it's incentive trips, right, or product launch kind of stuff. So also a lot of out-of-room revenue. So you've got the base of group coming to a brand-new hotel basically at an elevated level in markets that not only sustain that but demand that and then you've got the transient side, the leisure transient side, which I think is going to be much better, much, much more significant. So these are the kinds of things that are causing short-term disruption now but great long term for us.

And maybe just elaborate a little bit for us. I think one area that as we turn the page from summer in Europe and Taylor Swift to now we have to talk about her showing up at football games. So that's going to be the next thing, but -- which I think is tonight. But even without that, we're going into kind of back to the business travel environment and a very strong group environment. So just walk us through that, what are your sightlines there? Group is, in particular, a focus for Hyatt. How does that feel both pace wise? And just in terms of its recovery curve, how much can this offset some of maybe the broader concerns out there on the leisure front?

So I'll cover group, maybe you can cover business transient. So pace into the remainder of the year is about plus 4. 60% of that is rate and 40% of that is occupancy. Cumulatively, we are ahead in rate total for our group business. This is for U.S., by the way, and we are lagging in total occupancy recovery. Next year's pace right now is plus 7, about 40-60 split, 40% rate and 60% occupancy growth. So now you're starting to see some demand fill out that lag that we've had in occupancy. So I think total RevPAR and revenue base growth in group is super healthy and very well balanced, I think.

On the business transient side, it's -- the momentum is just super encouraging, which we have been seeing throughout the course of the year. In the second quarter, we reported 12% revenue growth in the business transient segment. And now...

And we -- I think by the end of that quarter, we surpassed pre-COVID levels in the United States.

With very strong rates. And we -- last night, we were obviously staying in a hotel here in New York, 100% occupancy last night. So very strong in these urban centers where we're seeing a lot of business travelers get back on the road, it's back to school, back on the road. And while it still remains short term, there is nothing we're hearing from our corporate large customer bases that are saying they're pulling back.

And the business transient travel that we see leading the pack in terms of growth is the largest customers that we serve. So it was an SME story in the beginning of COVID, now it's -- the larger corporations are now back on the road. And since a lot of our deals with them have dynamic pricing elements to it, the rate increases are significant.

So big picture-wise, if we kind of rewind how the portfolio has evolved over the last 5 to 7 years, big focus on lifestyle, big focus on, I think, increasing your leisure mix and this was structural, not just tactical. So help us think about that broader bet, Mark, as we sit here today. And really, obviously, this is a bit of a subtext here as Apple Leisure Group and the impact that's made? But you are more leisure-heavy today. Still the right bet? How do you feel about that structural balance and then overlay that with, again, some of the decisions were made before we exactly knew what COVID -- pre-COVID, post COVID was going to look like, so?

Yes. I feel really confident about it because among the data points that you've heard from us already during sitting here, given the customer base that we're serving, I think the leisure demand is relatively assured to be vibrant through economic cycles. Adam was telling me about some new research that had been done in their correlation, not surprisingly, for the highest correlation to leisure travel demand is the employment rate. And when you look at the category that is coming to our luxury brands, which is what Joan said it earlier, let's just say the employment levels are extremely high. So you end up with kind of the demand driver also supporting where we happen to stand in our customer base. And I think, therefore, leisure demand for us is going to continue to be reliable and a good base. We're about 55% leisure revenue in total versus 45%, and that's up from maybe high 30s through all the different things that we've done. It feels really comfortable to me.

And maybe going a bit deeper on ALG. A year ago, this dominated a lot of the investor conversations, but it was interesting, right? I think by the fall, certainly, I think it was right around December, you actually came up with a really unique solution, which maybe saved Joan some sleep on the accounting side of what you're able to do on UVC. But again, what you're really doing is finding a way to make this fit, I think, the more standard asset-light, capital-light where we think about lodging businesses. The one piece that's still a little different is the distribution business. So I want to ask about that. How important is that critically to Apple Leisure's success and your development and brand strategy there? And any opportunity to work through or change the structure of how that business fits as a bigger part of Hyatt?

So first of all, in terms of the first part of that question, yes, it's highly integrated because it's a key distribution channel for, I would say, pretty much all 4- and 5-star all-inclusive resorts. We don't really have much 3-star business through ALG Vacations. That business, when we bought ALG, was a low to single -- low- to mid-single-digit margin business and now it's a high-teens -- mid- to high-teens margin business. And there were very deliberate steps that the team took. We've -- since we bought the company, put more and more capital into technology that will have some medium-term impacts on being able to pull margins up further. And it's also true that your statement is correct, it operates at a lower margin inherently than the management business. So we're not trying to optimize margin as much as we are making sure that we've got unique selling points and maintaining the vibrancy and performance of this really important segment for us, which is all-inclusive. It happens that we believe that there may be opportunities for us to strengthen ALG Vacations maybe by having a partner organization or another company with whom we might choose to do business. So far, we haven't quite found the right fit, but we've had discussions. And we have no current plans cooking. So it's not like there's something imminent. But the platform has really been solid and highly productive and we get tremendous visibility into the marketplace through the volume of business that they do. So there are some really significant benefits if you say, okay, apart from the margin differences, which are observable, what else are you getting out of this business? And I think the other things are actually quite material.

So I want to pivot to the broader development landscape. So as we take a step back here, obviously, rate cuts are on the possible agenda for Wall Street, which we generally cheerlead, then combined with inflation is coming down, the driver of the rate cuts, both those seems like they should be positive ingredients and factors into a supply environment or a development environment that has been tough since COVID. So what -- kind of what do you say about the development environment as we sit here to do? What are some of your conversations looking to? And I'd love to sort of add on to this a little bit about full service because I think we know that people have kind of value-engineered supply growth to fit the -- what developers can do today. But obviously, a lot of the bread and butter of your brands, in particular, are going to skew to those higher price points where -- and more complex capital structure. So what does it mean big picture? And what does it mean for full service still in particular?

Big picture, no question that we'll have a positive impact if we see rate cuts and an increase in availability, advance rates. We have been operating at a lower start rate and a lower opening rate for the last several years, post COVID. And a lot of that has to do with rates and availability of capital, especially for construction projects. Most of the capital has come from regional and local banks that require personal guarantees and things like that. So there's just some constraints in terms of what developers can actually do. We're starting to see more traction in studio starts which is helpful. And the signing backlog for studios is growing, which is also encouraging. Those are much smaller projects, and it's a little easier for a developer to overequitize early because it doesn't cost them a massive amount of their own capital. So I think overall, it will certainly be a positive. And I do think it will have an impact on full service. And when I say full service, I'm not talking about traditional business transient focused core brands. I'm talking about more lifestyle that serve both business and leisure segments because you have a more diverse demand base. So I think lifestyle has been one of the highest growth areas with respect to full service development, and we'll continue to demonstrate that, which is why we've made such a big bet on lifestyle. So I think all that's true. And then in China, encouraging signs there.

Right. And just as a reminder, 2/3 of our pipeline is actually outside of the U.S. So when we look across capital formation is different and unique in different markets around the world. And in China, we're seeing now an acceleration actually, of starts of construction starts. So signings are very -- remain very healthy and we're seeing pickup now in actual starts, 200 basis points over what we saw at the end of last quarter.

Joan, can you unpack that for us a little bit because, I mean, obviously, demand is -- has been slowing a little bit at large, what you're doing, I think, broadly is better than the market, at least on the RevPAR side because the broad market statistics are actually down. Tony, throwout a number of July down 10% for China RevPAR, so that's definitely going to be concerning to some people. But even if you're doing better, we know the environment is tough over there on the demand side. So how do we foot those 2 pieces together and what is different? Because we also know in the commercial real estate environment there is difference. So how can you have supply accelerating, while demand is decelerating?

Sure. Well, there's motivation in -- by the government. They've actually reduced rates recently to stimulate growth. So they're taking action, and this is something they have continued to do over the course of the last several years, and it's just in how they go about it and what that is, how that leads to the stimulation in the actual consumer demand, which will take some time, but we're in it for the long term in China. And also remember that a significant portion of our existing assets and our pipeline assets are state-owned. So there's control there from that perspective to help with respect to the stimulation objectives.

I would also just add that the decline in real estate development is primarily concentrated in residential, which actually has a positive impact on factor costs that is building materials costs. So we still have -- we had a significant shortage during COVID, of course, when the lockdowns were absolute, getting skilled laborers to those sites, which is why so many of them shut down. But in some ways, the contraction of new development in resi is going to actually be a positive for us in hotel development.

Just given the time I want to transition a little bit to the M&A side of what you've been able to do on the portfolio and also your just broader kind of capital-light strategy. So you've obviously been no strangers to M&A, since even we've spent a lot of time together, $1 billion sale in Orlando, congratulations. It's an amazing outcome on that. Adam and I had a side bet on that. But I lost pretty significantly. Dates back to your Analyst Day, actually. So -- but you also -- that brings you to last year at this conference, you doubled down on your -- achieving your $2 billion kind of third asset sale and program goal and this put you over the hump, no doubt on that. So where are we at big picture here on the asset-light transition, Mark? Let's start there and then probably want to unpack Orlando a little bit more?

Okay. First, I would say, I'm not going to use those faithful words that George W. Bush had behind him Mission Accomplished on the aircraft carrier. But I would say we're -- where we aspire to get to, which is 85% fee-based earnings, and that's the run rate that we're at, at the moment, and you'll see for a full year next year. And we've done a couple of deals where we had purchased and sold or otherwise were involved in a transaction where a third party bought a couple of our hotels we just talked about it earlier with respect to the Indian Wells and the Scottsdale resorts, where we're seeing significant investment go, which is elevating the brand quality, the quality of our portfolio and so forth. And we have one such project. We bought the Hyatt Regency, what is now the Hyatt Regency Irvine, which was shut down. We completely renovated the hotel, but we also added significantly to what I would describe as leisure activity base, which is a completely redesigned and much bigger pool area with activities around it, activations around it and a new specialty restaurant, which opens up onto that space. So it's really transformed that hotel, and we're seeing the biggest growth right now. Of course, the business demand is coming back now for the hotel is open and operating. But the leisure demand on the weekends has been unbelievable. So -- and that was part of the design, like we thought this could be a business hotel with a resort identity on the weekends, and that's exactly what is proving out to be true. So that's a hotel that when we bought it, we said we're going to do these following things and we're going to improve performance and we're going to sell it. And that's what you can expect to see over the next year. And the same is true for a couple of other hotels that we own that we are positioning for sale in the coming year. We have 2 hotels that are under contract: the Grand Central Hotel here in New York and the Andaz Liverpool Street in London. Those are both pending entitlements and approvals for the massive redevelopments that are going on, out of which we will get 2 really great new hotels designed by some of the best architects in the world. So super interesting time for us to be proactively turning the assets that we have into new opportunities, but also having taken advantage of Hyatt Regency Irvine and the recreation of how that hotel should be positioned. So you can hear from my description that just because we achieved our goal doesn't mean that the whole effort and the mindset of continuously scanning what we need to be doing and starting to plan for the future in terms of the disposition process is alive and well. It's going to remain alive and well. I don't -- now I will say that I've never said -- in fact, I've said exactly the opposite that we will never ever get to 0 because it's not an object goal that I think is sensible nor do I think it's needed. So we will never -- I promise you, we will -- unless it's a freak circumstance, we will not get to 0 that's coming from owned hotels. It will just be so small but it won't be relevant to the total picture.

But the sort of net outcome here was you're also still able to redeploy a material check into standard asset-light. So maybe you can talk to us a little about that? And then Joan, from your standpoint, I believe there was a net to the tune of a number of hundreds of millions of dollars here, which then continues to contribute to the balance sheet. So...

Yes, I'll just recap it for you since 2017 and then maybe Mark can touch on Standard. But on the proceeds side, since 2017, when the disposition program started, $5.6 billion of gross proceeds at 15x average multiple. Our asset-light acquisitions, $3.4 billion in investments in asset-light companies at an approximate 9 to 9.5x multiple, significant shareholder value created. And then along with that, as part of our balanced capital allocation strategy, we have repurchased $4.5 billion of shares and all at the same time, maintaining our investment-grade profile, which has always been our commitment. So that's the recap from Investor Day of where we are today.

She might need a raise.

Great shot. That was fantastic.

So now can we do the lightning round for how that worked for Orlando, Standard because those numbers are also, I think, really attractive and there were some press articles that might not...

13, yes, so we sold Orlando roughly at 13.3 or a 13.2 or a 13.3 multiple. I think the -- I don't know what we've said about -- publicly about the Standard acquisition but...

Yes, we talked about the initial consideration and then the earn-out consideration and the stabilized fees. So that earnings release when we close, we will actually provide more information about expectations for '25 and then stabilized multiples.

But in both cases, below 10 multiple on stabilized fees. When I say both, I mean initial purchase price and then...

And on -- even if the earnouts hit.

Well, we hope and pray that the earnouts will hit like...

Because that is the pipeline.

Right. So -- and in terms of capital allocation, we -- this is not a match funding thing because we've got $1 billion over here, of which we got $600 million-or-so in actual cash proceeds, and we've got $150 million over here. So there's kind of an imbalance there. It's not like we said, "Oh, we'll sell this and buy this." The fact is that a number of the things that we are looking at are relatively smaller purchase prices, whether they be brand or management platforms or big conversion opportunities. The conversion opportunities, especially is more like credit support and other financial engagement but not acquisitions. But even the acquisitions, nothing is in our purview right now that comes anywhere close to the ALG deal. So we will continue, we are pursuing additional acquisitions to fill in different places in the portfolio, but you're not going to see mega deals of the size and the nature of the ALG transaction.

Unfortunately, we got a couple of minutes late start, but that's, again, I think a little bit what we're here for. So as we have time for it, Mark, Joan, thank you for doing this. Thank you for being here this morning.

Thanks, Shaun. Appreciate it.

Thank you, Shaun.

Thanks.

Thanks.