Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

Good morning, everybody. My name is Brandt Montour. I'm the Gaming, Lodging and Leisure Analyst here at Barclays. I'm here with Adam Rohman, the Investor Relations and Global FP&A Head at Hyatt Hotels. Thanks for being here.

Thank you. Thanks for having us .

So we're going to start things off with a few questions that I think all of our analysts are asking today and tomorrow that are very high level, and it's just meant to sort of help people synthesize across the different sectors. And we'll just start right off with the consumer, right? So the consumer health is top of mind -- maybe you could talk about how you think about that into '25 and how your company is positioned and what the levers are to sort of help try and accelerate growth.

Yes. No, it's a great question. I think for us at Hyatt, for those who are not familiar with us, we tend to serve a higher-income customer. So the vast majority of our earnings come from our upper upscale and luxury properties. So we've seen consumer behavior that's maybe been a little bit different from the broader industry this year where lower chain scales have seen some contraction in RevPAR. We've not really seen that in part because of the kind of the customer base that we serve being more not insulated, but maybe a little less impacted by kind of inflation and some of the other headwinds that some consumers have seen this year. So I think as we look into next year, we expect that -- those trends to continue. We've seen obviously great results in Europe this year, a lot of outbound U.S. travelers. So using disposable income to travel internationally. We've seen a lot of international travel from higher-income Chinese travelers to other areas of Asia and in parts of Europe and the U.S. So I think our consumer is healthy. When we look at corporate travel, group travel, the customers that we talk to are intending to travel as much or if not more next year. So I think we head into 2025, feeling good about where our consumer is at.

Okay. Great. Another topic top of mind is the political backdrop in the U.S. it's a high-level question. I'm bound to get a high-level answer, but we're going to go for it anyway. What are the categories that are top of mind, I would think we just had [indiscernible] tech extended lower tax is good for everybody. That's obvious. But for hotel specifically, if you unleash business optimism that probably is good for development, but if you have an immigration issue that might be tight for labor markets, but how do you think of the high-level factors and so that we can -- so that we know that what we're supposed to be sort of handicapping ourselves .

Yes, I mean, it's hard because we're sort of sitting here right now with -- we're in a little bit of a holding period, right? You've got the campaign that's done you sort of have an idea of what has been campaigned on versus what's actually going to happen. Obviously, with Republicans having full majority that gives them the ability to maybe do things differently than when, when Trump was in office, so the first time and there was a split Congress. So it's hard to say exactly what's going to happen. Obviously, the things you talked about are certainly factors that impact the business, whether it's tax rates, immigration policy obviously is something that we'll pay attention to, just as we see what the supply of labor looks like. It's hard to sort of handicap that sitting here right now. But certainly, whatever happens, we've operated. We have a long history of nearly 7 decades of operating across both types of administrations and more flexible and agile and adapt our business as needed. So there'll probably be some good things, maybe some things that create some headwinds, and we'll sort of see where things end up.

Okay. Great. What do you -- we get this question a lot in terms of investors misunderstanding certain business? What do you think -- what question do you get from investors that surprised you the most? And what questions you do not get that surprises you the most that you think you should be getting?

Yes. I'm going to answer it a little bit differently. I think for us, for those who are familiar with us, you know that we've been going through a nearly decade-long transformation. Seven years ago, we committed to permanently reducing our real estate holdings and shifting to an asset-light business model, which we've done. We expect over 80% of our earnings next year to come from our asset-light businesses, our management franchise and our distribution segment. So I think what investors will start to see and appreciate is the simplification of our business model. Obviously, as we've been going through this transformation, there's -- you have ins and outs as you're selling real estate, acquiring management franchise and businesses. And I think our story starts to become clearer and more easier to understand and predict and I think investors are starting to realize that we -- the conversations that I have are much more focused on customer behavior, geographic performance and less about what's going on in a particular divisional segment. So I think that's the first thing. I think the second thing is -- we're getting a lot more questions about fees per room. So well, net rooms growth, kind of the RevPAR plus net rooms go to ALG, still as important and still holds up. I think there's more of a focus on. Okay, are the rooms that you're adding to the system accretive or dilutive to your overall fees per room and because we focus so much on higher-end hotels, it's really meaningful, right? We opened up the Park Hyatt London in October, that is going to generate significant fees per room once it reaches stabilization versus if we open up a higher place and that may have a similar room count. So I think investors really have an appreciation for that, and I think that's a way that we differentiate ourselves versus maybe others. So I think that's probably something that we're spending more time talking about today than we would have maybe a year ago even.

Okay. That's helpful. Let's maybe rewind clock a little bit and look at when you first introduced guidance for '24 sitting here today, what surprised you the most this year in terms of performance versus your expectations good in that year?

Yes. I think the -- probably the performance in China, especially in the summer, second and third quarter, the level of contraction that I think we saw, I hadn't probably surprised everybody industry-wide. I don't think we really expected that. And -- probably the other piece is U.S. performance this year has just been a little bit lighter than I think we would have expected. It's sort of interesting as you sort of look at some of the forecasts that are coming out for next year that there's an acceleration of U.S. RevPAR growth versus this year, and it doesn't feel like that's a crazy assumption. And I think that's maybe more a reflection of the fact that this year just hasn't been quite as strong as probably we all thought. I think on the good side, the leisure customer continues to be very resilient, which is important for us, just given our mix of hotels, especially for our all-inclusive portfolio that we have. I think leisure results continue to be very, very strong, significantly elevated over 2019 levels. We're not really seeing any material contraction and we're seeing really good pace going into next year. So I think that's been a real benefit, coupled with the fact that business travel, both group and individual travel has been really, really solid this year.

Can we double-click on business travel in the second half of '25? I think that September, we had heard got off to a slower start than people thought. And then all of a sudden, it went crazy in October, but because I think people thought that maybe there was compression, because all that group business got pulled forward from November because of the election. Can you clean all that out for us and just tell us what -- when you smooth out that calendar, what's been going on in the second half of business transient?

Yes. I think for us, business transient has been really good all throughout the year. I think the thought was is first week of November was going to be a bit of a challenge just because everybody was staying home for the most part. And it was kind of leading into the next week for group. There just wasn't as much group activity. I think we've seen business travel be very solid through the month of November with the exception of last week because of Thanksgiving, which is pretty typical for the seasonality. So I think our business customers continue to get out on the road. I think return to office has been very helpful. I think this is sort of an upward take of getting people back in the office more regularly, and it seems to be holding, and we're seeing that have a positive impact on business travel. And when we talk to our customers, especially looking into next year, their intent to travel is very solid, and we're seeing it through a corporate negotiated rate discussions. So I think we feel really good about BT. It's not going to have the same rate growth that we saw in '24 versus '23, but it wouldn't be surprising if it's the leading customer segment next year.

Okay. And that's a great segue into the next question, which is really about '25 and obviously, you guys don't have guidance out there, but there is official forecast from STR and IHG was just up here talking about most forecasters in the 2 to 2.5 range for U.S. and you don't need to [ bless ] that for you guys, but just maybe talk through how you think about the building blocks for '25.

Yes. I mean I think if you think about -- maybe we can talk customer segments first and then we can talk geography. I think Leisure continues to sustain, probably grows moderately group looks really solid. Our pace for U.S. is up over 6% heading into next year. So I think the group momentum that we've seen really domestically over the last 18 months or so continues into next year. And as we talk to our group customers. I think there's a lot of excitement going into next year, meetings, I think people value meetings and events. And we've sort of seen this build up of lead activity that's probably going to start to convert into group bookings now that we've got clarity into the election and everything else going into next year. And then business travel should continue to be really solid. I think group and BT are probably the 2 stronger customer segments domestically. Next year. I think BT is going to be really strong internationally as it has been for us for the last year. So -- and then when you think about the geographic mix, we kind of talked about earlier, U.S. accelerating a bit off of this year wouldn't be a surprise. I think that's sort of where most of the industry forecasts are the trends that we see in China, which are improving, continue into next year, that would be positive. Obviously, we've got easier comparisons and in the second and third quarter. And probably the other piece is just Europe has been an incredible performer for us for really the last 2 years. And we expect Europe will still be really solid next year, but we're lapping a very tough summer where you had major events like the Olympics, the European soccer championships, Taylor Swifts summer tour. So I can see Europe being positive, but maybe not at the same level of growth rates that we've seen this year just as we kind of lap those big events next year.

That's helpful. Let's double click on Leisure because I think Hilton said a flat to up or flat to down, you couldn't really -- anything is more flat down. But -- and then others have said flat up. And I want to understand maybe occupancy versus pricing -- and it's just what the swing factor is to get that to grow or if we see another year of sort of normalization?

Yes. I think when you sort of think about the difference between pricing and occupancy, it sort of depends on the market that you're looking at. I think there are some markets where you're probably fully recovered from an occupancy standpoint, and it's just about maintaining rate growth, maybe at inflation plus a little bit, and you have some other markets where there's room to grow occupancy. And some of it also just depends on the seasonality of the market. We've got some places where we probably have some opportunities to grow occupancy a little bit more while still maintaining some rate growth. So I think the -- I'm not going to give a range of what you just described. But I think we feel good about our Leisure customer continuing to prioritize travel. We have enough of a elongated booking window in the all-inclusive portion of our business to know that Festive looks really good pace for in a couple of weeks for the holidays. And then when we go into Q1 pace for really the Americas all inclusive hotels looks looks very solid. So that gives us a good indication, at least for the first quarter that Leisure looks good. Obviously, we've talked about probably more recently, calendar shifts matter, timing of Easter falling in April next year versus March of this year is going to create a little bit of quarter-to-quarter comparisons, although the fact that our all-inclusive pace numbers in Q1 are as solid as they are. It's actually pretty positive for us. So I think we feel good about the Leisure customer. I think we've seen more return to normalized seasonality. So if you think about kind of the significant results that we are seeing in Mexico and the Caribbean in the third quarter, that's kind of returned back to the more normal seasonal patterns this year where you've got hurricane disruption. And so I think that makes it easier to predict and feel good and confident about trends for next year.

Okay. Does anybody in the audience have questions on RevPAR or demand. We may come back to this later, but I want to move to development and make sure we have plenty of time there. Okay. Great. Okay. So development. Top of mind, 2025 development backdrop is the topic. I know you guys didn't give guidance yet, but you made a lot of comments on the call about general what you think you can do? I mean, this was a quarter where you guys downgraded net unit growth because of -- maybe I should you tell me you downgraded, then there was a little bit surprising, but it was specifically because of a couple of dynamics that you guys had going on. And I think it would be helpful if you just talk to why that -- was it more of a one-off? And why -- and what the normalized run rate is to [indiscernible].

Yes. I think maybe starting with this year first. We've seen a few things that are maybe more atypical for us than what we would typically see. We came into the year with openings more towards the back end of the year, have seen some slippage into 2025, have had some conversion opportunities like think about one-off conversions, not M&A that we thought we would get over the finish line this year that look like they're going to probably take place next year. So that kind of drove a piece of the reduction in our organic outlook for this year. We've had a little bit higher attrition than what we expected. We've historically our attrition is sort of around 1% of our inventory, just a little bit higher this year, we talked about on the call. Some of it is just brand standard-related. Owners not willing to invest to maintain certain brand standards and hotels exiting because of that. You've got a couple of contracts that just reached end of contract period and thought we'd be able to extend it and it just didn't work out for a variety of different reasons. So we sort of view those as less the norm for us. And so I think when we look out to next year, we're really confident about our organic net rooms growth. We talked at our Investor Day kind of a 6% to 7% CAGR for the last -- from '23 to '25 . I think the path to organic growth of 6%, we feel really good about. Pipeline looks really good. Some of those conversion opportunities that we talked about if those come to fruition, I think we see more of a return to the growth rates that we've produced over the last 7 years, which have been industry-leading. So I think we feel good about '25. And don't really think about '24 as anything other than maybe just a little bit of an anomaly.

Okay. And so the sort of run rate organic room growth is 6% to 7%? Or is it more like fixed plus inorganic you just said that I think .

Yes, it kind of depends. I mean some of the organic stuff, as you know, is a little choppy depending on the size for those of you who are not familiar with us, some of our all-inclusive resorts that we've converted over the past couple of years can be of size, 800 rooms, a 1,000 rooms. So depending on -- you get to develop a property like that, and it can move the needle a little bit. But yes, I think when we sort of take a step back, obviously not getting an outlook, but somewhere in that, that Investor Day ranges.

And then you have all these portfolio deals that you don't know if you're going to win, they can really swing the needle.

Very much so and then obviously, the [indiscernible] transactions, whether that closes this year, next year is going to add 12,000 rooms to the portfolio. So I think we feel really good about development growth. I think we've been really thoughtful about how we grow the company, whether it's through organic growth, whether it's through M&A, whether it's through some of these portfolio opportunities that are relatively capital-light. I think what we're most focused on is making sure that the rooms that we're bringing into the system are accretive to all of our stakeholders, our guests are members, obviously, shareholders, owners, so being really thoughtful about that growth. And as you know, we've talked about before, if we we had 5,000 rooms on December 31 versus 5,000 rooms on January 1, it changes your headline net rooms growth number and has 0 impact on the financials of the 12/31 period. So it's really about focusing on making sure the growth that we bring in is accretive and drives free cash flow.

It's the new onset of analysts. I don't know, black and white. I see some familiar faces, but I want to focus on quarterly results alone. Let's maybe talk about that dynamic, whereby your peers have a set of brands sitting below the high end, and you don't. This came up on the call. And it's something that we hadn't really thought about with you guys before. But do you guys think that that's actually a competitive disadvantage? Or is it something that's really never happened and this is -- it was more -- it was Perth, Australia, I think it was the margin, right? Is it more of a one-off and you don't think you need to have a big mid-scale offering for those kinds of situations -- you mean like something that a brand that you can -- so a hotel that is in a market that the market's gotten more over time, the hotel owner doesn't want to reinvest in the hotel. And so they need to downgrade the brand, but you don't have a brand to offer them -- so they fall out of the system. .

Yes, it's something we've talked about, and we mentioned on the call, it's something we've considered. And it's not something that I think we've necessarily had to -- it's not something that we've maybe needed in the past because of the age, especially of our select service brand being relatively young compared to some of our competitors. I think the -- at the end of the day, it's something we've thought about. It's something we'll consider and we'll see if it's something that we ultimately need. I mean I think the important thing is even when you look at some of our older generation one Hyatt places, the vast majority of them are either going under renovation or owners are committing to renovating them. So it's not like you're going to take that whole generation of hotels and they're just going to exit the system. Most of them will stay in, and we'll have hotels that meets the brand standards of the newer generation design. So we'll see. It's not -- I think if we were to take a step back a couple of years ago and look at all the different places in the brand portfolio that we wanted to focus. I think all-inclusive lifestyle, luxury where we've put a lot of our attention was what really required our focus and where we wanted to spend our time, and that's what we've done. And we'll see what happens next. Obviously, we've got Hyatt Studios opening very soon, our first upper mid-scale hotel in the brand in the U.S., and that's very exciting for us as it starts to expand our offerings to a different price points and different locations.

Okay. Construction starts, what do they look like domestically versus internationally? Give us an update on sort of the momentum, second derivative of construction starts in U.S. I would like to hear U.S. to China specifically, but then you can maybe talk globally how that's moving right now.

Yes. I think it's interesting because the number of rooms that we have under construction has grown, especially over the last couple of quarters. So I think we've seen good positive momentum. If you measure it as a percentage of your overall pipeline, probably down a little bit, in part because we've had such active signings activity over the last 12 months. And so those rooms will start to get a shovel in the ground. Many of them already have. And I think the under construction mix will start to look better, but the actual construction activity has been really, really solid. And this really applies to both the U.S. and Greater China. . I think there are the 2 markets where we've seen the most active development this year. I think there are the 2 markets where we're going to continue to see really active development. I think it really demonstrates the fact that a lot of developers are not worrying about 1 quarter to the next, and it's obviously much longer term investment and so our brands are desirable in both markets, and we see that reflected in our pipeline growing and the fact that we're seeing more rooms get under construction. So obviously, here domestically, the interest rate environment as -- if rates continue to go down, will certainly help with construction, financing, and that will just make it that much more better. But the fact that we've had as good of a signings here that we've had so far to date, I think, is very positive given the environment in both the U.S. and China. And then really outside of those 2 markets, financing hasn't been a challenge, and we're seeing really good activity, whether it's in Europe or other Americas, Middle East. So very excited about our growth opportunities. It's everywhere.

The rates -- I mean rates went down and then, of course, they come back up a little bit and now we're worried about tariffs. And I guess put us in the developer's mindset, are they sort of looking at, okay, "Hey, multiyear rates are coming down, and that's what I care about." Or are they saying, well, look, I needed that 100 basis points.

Yes, right? Yes. I think for a lot of developers want it depends on the type of hotel and the complexity of it, whether it's mixed-use or whether it's a simple Hyatt Studios development. I think a lot of it depends on your banking and lending relationships. So we've seen a lot of our developers who have those strong relationships and/or may just look at the fundamentals that are taking place in the industry right now and saying, "I don't want to lose out." Every day that I don't put a shovel in the ground is the day that I'm losing out on good fundamentals. So they may over-equitize and be less concerned about loan to cost on day one and then look to refi out of it in a couple of years. or they may have different partners that they can bring in to help with capital formation. So I think it's improving. We get this question a lot of like what's the 100 basis points worth. I think seeing spreads narrow has been really important, which we've seen over the last 18 months. And so I think for a lot of developers, they're able to make the underwriting work. And certainly, when you can affiliate with a brand like Hyatt that has the different brands that we have that helps when you're going to do capital formation for both the debt and equity side.

Any questions on development or anything else?

Are? -- internally. -- is there a threshold for where internally you guys see rates needing to be for, I guess, you would say, some sort of like windfall of construction development.

I don't know if there's necessarily like a threshold for it. I mean we've had one -- we probably -- I think we had our best signings here ever last year. We'll see where this year shakes out, but it's going to be another really good year for us. So I don't know that interest rates have to be at this level at a certain level for a deals to work is to go crazy, right? I think we're seeing deal activity be to be very healthy. Obviously, some deals may benefit from a lower all-in interest rate versus others. But I think most developers have -- the fact that there is more stability in the debt markets, I think, has been important versus if you go back 2 years ago, when the Fed really hiked rates quickly, that just created a lot of uncertainty. And now that we're sort of past that, I think developers can underwrite it -- underwrite a deal more easily than they would have been able to when they just had no visibility into when and when interest rates were going to stop going up and what that level is going to be. So the fact that there's just more predictability or less uncertainty, I think, has been positive. .

Yes. This -- okay. Just as a follow-up, this might be very property level. But is there some sort of internal communication or official message about how you guys are thinking about cap rates and how they will move as it relates to interest rates?

No. I mean I think each deal is so unique that it's hard to have sort of abroad. You need to be at the -- this is where cap rates need to be or this is sort of the spread between cap rates and interest rates. Every property is so unique. And we see it in our own portfolio as we've gone through transactions over the last 2 years or so in this environment. So each deal is very unique and specific to the asset and cash flows matter versus maybe other forms and opportunities to create value. So it's hard to sort of make a broad-based statement about what that threshold.

Yes, different markets. I understood .

Okay anymore? Asset sales. You guys hit your long-term target. You sort of eased off the rhetoric in terms of putting out more targets. I don't think anyone's waiting that with bated breath. What is your -- the company's philosophy on sort of net sell downs over time if that's something anybody should look forward to? Or do you think we shouldn't be thinking about that at all?

Yes. I mean I think we're -- still going to be opportunistic when it comes to selling hotels that we own. We've talked about probably with many of you in the room, Higher Agency [indiscernible] is a great example, where we bought the hotel 2 years ago, repositioned it, renovated at it was a hotel that we were in a market that we were very familiar with. We used to actually manage the hotel, got it at a very favorable price, and we're able to significantly reposition the hotel, and we're not going to own it long term, right? If we who knows when we'll sell it, but it's not something that we look at and go, it's something that's going to probably be in the portfolio for a very long period of time. We don't have any sacred cows. We probably -- I don't know if we surprised people with the Orlando sale, but certainly being able to pull off a sale of that magnitude in terms of pricing, obviously, it's -- any time you sell a 1,600-room hotel comes with factors that you have to consider. It's not a straightforward transaction. So for us, I think we look at each of our assets individually and if we feel like there's an opportunity with the right buyer, who has a vision for the hotel. I think that's something we're always interested in. We've got a number of asset sales, including the Grand Hyatt -- or the Hyatt Regency Indian Wells, which recently upbranded to a Grand Hyatt Trinity. I bought that hotel from us a couple of years ago. Sunstone is renovating the confident and that will become on [indiscernible] Miami Beach next year. So we look for partners who can see a vision for the hotel and maybe do something a little bit different that will create value for them as an owner and us as a manager. And so we'll see where it goes. But I would be surprised if we're not -- if we own the same number of hotels as we do today, 2 years ago, 2 years from now. So we're just not going to put a target out because we don't feel like we need to. We've achieved what we wanted to in terms of transforming the earnings base of the company and the focus is really on the brands and the management franchise.

Okay. M&A has always been part of the company's DNA. It would be hard to put all of your deals in one box, though. How is the company's philosophy around M&A changed over the last few years, if at all? And what types of deals would you look to do here for your business today?

Yes. I think we've always had a pretty consistent philosophy with M&A where, one, it had to either complement or introduce our guests and members to what we already had in the brand portfolio. So if you go back to 2017 and we looked at our brands, we said lifestyle was really important, resorts were really important and luxury was really important. Like those were kind of the 3 areas that we wanted to focus on. So from a lifestyle standpoint, 2 Roads Hospitality Dream and then the standard international acquisition that we completed in October of this year kind of fit that space. The all-inclusive acquisition of Apple Leisure Group really helped round out our resort portfolio, especially in Mexico and the Caribbean. So when we sort of think about M&A, how do we amplify or introduce our members to do brands and experiences. I think is really important -- when we look at companies, we're looking for companies with an existing embedded pipeline for the most part because we want to be able to take that growth that we know is coming and then accelerate it with our our development infrastructure. So I think those are 2 real key things and then obviously asset light or if it has real estate a path to be able to exit the real estate relatively quickly. So that's been our philosophy. I think that continues to be our philosophy. We'll see kind of where things go if there's any interesting opportunities that we think helps us and rounds out the portfolio. But sitting here today, I think we're really excited about the fact, if you think about our World of Hyatt members next year, they're going to get introduced to standard Standard X Bunkhouse, the Bahia Principe brand once it closes and our first-time studios open. So that's a lot of great opportunities across different price points and purposes of visit that our guests get to experience in 2025. So I think we're really happy with what we've done with the portfolio and how we've organized our brands going into '25 as we sit here today as an asset-light company with a major focus on our management franchising business.

Any other questions from the audience? No. Thanks for coming -- thank you. Thanks, everybody. Appreciate your interest in Hyatt.