Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

Well, so excited for our next presenters. We've got Mark Hoplamazian, President and CEO of Hyatt, along with Joan Bottarini, who's the Chief Financial Officer, to discuss Hyatt Hotels, which is always very busy. There's lots of things that you're doing. Actually, yesterday on our panel, there were some very positive remarks from actually 2 panels referencing your, I would say, prodigious use of the balance sheet to create a strategic asset. So that was the exact comments, and you can -- I don't want to explicitly say who it is, maybe we can talk about that offline.

But maybe to set the stage -- so you've done a lot of things, as I referenced, trying to simplify the model. There's also on the flip side, you've done a couple of acquisitions. So maybe just walk us through the current mindset in terms of thinking about the asset-light journey, where we are and how these fit in.

Yes. So first of all, good morning, everybody. Thanks for taking the time to be here. And thank you.

Yes. Thank you.

Appreciate it. We have been committed to this asset-light journey since 2017. So it's been 8 years, not quite 8 years, 7.5 years. It will be 8 years in November when we formally announced. And we have basically achieved and accomplished exactly what we set out to do. I think it took us to actually execute against it for people to really realize that we were not winging it in La La Land, but we have. We've sold the assets that we had set out to sell. We are in excess of 80% fee-based earnings at this point. And counting we'll be growing the fee-based earnings percentage over time even higher because we will sell additional assets that we own legacy assets, and we have every intention of selling the Playa assets once we acquire Playa. So our commitment to that asset-light journey remains steadfast. And we have executed with discipline and with strategic intent to make sure that we are getting full value that we are selling assets where we have in Kuwait investment requirements. So we're sort of building into a sale, a PIP or a Property Improvement Plan where the owner will take that on. And we're paying close attention to the owner that we're selling to so that we know that we've got a good very long-term agreement, either management or franchise, which we've done for every single asset that we sold and that they will be potentially owners that will continue to grow with us. So I mean, as we look forward, I mean, over the next, say, 5 years, there's no question that we will be in the 90s with respect to percentage of our total revenues that are coming -- I'm sorry, earnings that are coming from asset-light fee-based earnings, fee-based earnings.

That's great. And Mark, we've got a couple of questions that we're asking every one of the companies here. The first one, which is a bit of a topic du jour, but it's just where are we in the demand environment? How do you think about where we are now versus maybe your long-term thought process for where RevPAR could go globally?

Do you want to start on that?

Sure. I'll start. We provided guidance this year of 1% to 3% in RevPAR growth. And as we announced that in our first quarter earnings, we were really looking at pretty diverse demand patterns around the world. So in the U.S., we're at the lower end of that range. In the second quarter, we said we expect to be about 0% to 2% in the U.S. And that's because we're seeing a little bit of a tad bit, I would say, of demand that is waiting to book. We are -- and that becomes challenging if you're looking at these patterns in the U.S. for us because it's just booking windows that are very narrow right now. So that's the U.S. Outside the U.S., demand is strong. It's strong in Asia, outside of China, in Europe and the Middle East, we're just seeing consistently good performance there. So this is consistent with what we said in the first quarter, and those booking windows still are pretty tight. And I think, Mark, you said yesterday, this uncertainty that people are feeling reads some caution. So that is the shorter booking windows that we're experiencing now. On the group side, we're still positive this year and engaging with our corporate group customers who got an update from our sales team yesterday that there's some waiting as far as booking that business that is coming into July hasn't gone permanent yet. So those are the types of things that we're experiencing right now in the environment.

Yes, it's interesting. Yesterday, we heard from some folks that there was that pause from a group standpoint. We had to see that. We also had some -- one of your peers and also a private equity panel, but they did say that the closer end bookings were actually coming in a little bit stronger. So people are -- despite that uncertainty, they're showing up, just a little harder as you're describing to maybe predict. Sounds good. I think that the other question that we often hear about the demand environment or need to think about with brands is that there might be different performance by chain scales or even by brands. As you look at your different portfolio of brands, how do you assess which ones are resonating, which ones are performing better or worse? And what are the tools that you have to maybe change the trajectory of any individual brand within your portfolio?

Yes. We're actually going through a really interesting evolution of how we assess success. Historically, we have done it in a pretty rudimentary or straightforward way of looking at market share and margins to the extent that you do get competitive information, GOP per available room, that sort of thing. And also growth. I mean, the ultimate litmus as to whether you've got a brand that's working or not is do you have a pipeline that's growing and developers that are continuing to sign up with you. We're evolving that, though, because there are more tools available to us, more data available and more analytics available to us to actually decipher brand health. And we're looking at multiple dimensions of brand health. With external data feeds and internal data feeds, we're just feeding into a model that's going to allow us to have a more robust sense of whether there's brand heat and whether there's brand activity that we can lean into and really flex both in terms of pricing and programming or whether there are things that we need to go back to rectify. So I'm excited about that because I think there's a lot of advancements that have been made for consumer products companies, for apparel companies, for footwear companies. They can really well assess kind of what's going on with their brand. And I think we have the -- there's no reason why that can't be done in the hotel business, and we've already started to go down that path. I will say that the continuation, we are still very focused on RevPAR index and where we stand. In Asia, we're also very focused on F&B revenues, which represent a big chunk of the total. So we are tracking these as real indicators about are we keeping up? Are we gaining share? And the good news is we're gaining share in the vast majority of our brands in the vast majority of the regions. So -- but there's no question that the upper end of the chain scale has been outperforming, has been growing the fastest is the most healthy at this point, double-digit growth in the first quarter in luxury. There's just a lot of momentum at that higher price point. And as you go down chain scale, it successively goes down lower and lower and lower.

Okay. Yes. So that's been another question we get from investors, which is just I think that some of them look at the pricing of some of the hotels, whether it's leisure or just broader luxury and say, how is this sustainable? These price points seem so high, but it sounds like it just keeps going. I mean, are you seeing any pockets of change amidst this greater uncertainty? And what gives you the confidence to be maybe moving even further into the leisure category?

Well, we already have more than 50% of our revenues coming from -- room revenue coming from leisure. So we, I think, have a really good balance. And I think that's -- it is a good balance for both World of Hyatt members as part of the program from the network effect, but also leisure has been -- higher-end leisure has been very durable over time and the first segment to recover after every downturn that we've had since, I don't know, for at least 30 years. So we feel good about where we stand. And there are opportunities for us to continue to grow in leisure, but we're also organically growing in more traditional markets that are not leisure-oriented markets. There may be purpose of visit at those hotels that are leisure, but they're not actually resort markets. So -- and with respect to like the price realization and whether there's a limit or not, don't forget that supply growth, especially in a city like this. I mean, why are your luxury hotels trading where they are? Nothing is being built. So it's not complicated. It's supply and demand. And for those of you who have been to the Park Hyatt, if you're in New York, you understand why a couple of thousand dollars a night is a massive bargain. I mean it's a freaking great hotel. So I don't understand, like, of course, it's going to be worth there.

Yes. So sticking with leisure, you're still in the process of waiting for approval fully from the Playa deal. There's also some other things that we can talk about. But you referenced that you're at 50% or more of leisure demand right now. Is that it? Or are we going to keep moving down this path? Or is Playa kind of getting you to the point where you feel like you're strategically complete in leisure?

No. I think there are probably other opportunities that probably was an unusual opportunity and an unusual profile because our commitment to being asset-light means that we're selling those assets. And they do represent a big chunk of the value of the company. So the Bahia Principe deal was completely asset-light. And I think that there will probably be other opportunities to do asset-light deals. So we don't have any interest in going asset heavier in any way, shape or form. So I would say I think that the kinds of things -- I don't think we have a deficit in our resort portfolio right now. But geographically, I believe that the Middle East will represent some interesting growth in leisure. Asia, I think, is underpenetrated in resorts for our system. We have such an extraordinary group of World of Hyatt members that are the road warriors of Asia, who -- Grand Hyatt for them is their core brand. They need -- we need to find a way to provide more and more leisure opportunities for them in Asia. So that's a place where I would say we would lean more heavily. And Europe also, we have a lot of room to grow out in Europe. But I would say Asia, just in terms of a network effect and the Middle East, those are the 2 areas that I think you can imagine that, that would actually be particularly beneficial from a network effect perspective.

Makes sense. And as part of your continual move towards asset-light, part of that's tapping the transaction market and making sure that you do sell some of the asset heavy. It seems like there's mixed messaging there when we talk to different investor bases. Maybe because of higher interest rates, maybe because of other factors. But what are you seeing in the transaction market? And why are your assets maybe different than just the run of the mill?

Well, I mean, I think if you talk to the brokers, it's the easiest place to get data, volumes are down this year -- transaction volumes, for good reason. I mean, I think there's been a lot of volatility in the fixed income market. And banks have been more cautious. So I think underwriting tends to be a little bit more challenging when you've got uncertainty and volatility. But I think what overcomes that is the quality of assets and positioning of those assets and the markets that they're in. So we have a number of things that we're working on right now in the existing portfolio. And of course, the asset base in Playa, we're working on that as well. And we actually feel confident we're going to be able to complete a number of transactions this year. We did make a commitment when we announced the Playa deal that we would sell down $2 billion worth of assets by the end of '27. And so we didn't say that would be all coming from the Playa portfolio or all from the legacy portfolio to the combination. So my view is we feel extremely good about executing that. No question about it. But I still think we can get deals done in this environment. It is harder than it was last year and the year before. But I think that, that's also temporary. I mean we've been doing this for 8 straight years, and we've sold assets through thick and thin.

Are the luxury -- or I should say luxury or your legacy. Are those -- do they have a different buyer pool than the Playa assets -- to be totally separate, but are they both influenced by the same rate dynamics? Or are these more so unlevered buyers?

The rate issues are the same if you're going to lever a transaction no matter what it is. However, it's more geography and the conditions. So resorts in the Caribbean, they have these things called hurricanes that come through from time to time. So that's an issue that has to be taken into account. There's...

Those are typhoons in the Atlantic.

Exactly. Exactly right. So you have to think about like what's the actual environment. Therefore, what's the likely -- what is the prevailing sort of multiple structure or valuation structure that's there versus, say, the Park Hyatt and sitting in the middle of [ Pleasanton ], like that's -- those are 2 vastly different things.

In the last year in 2024, there was a lot of feedback of how are you going to finish this commitment that you had made previously before the $2 billion that Mark just described. Well, because the debt markets had -- the rates have gone up so much end of 2023 and into the early parts of 2024, it's about finding the strategic buyer who is going to be the long-term relationship partner with us on the contract. We sold $1.8 billion of assets last year in an environment that was arguably more challenged. The CMBS market opened up. So the Hyatt Regency Orlando was a very strong deal, very shareholder accretive. So when you think about the quality, what Mark just described, I just wanted to put a fine point on that, that it is a very important factor, the long-term nature of the relationship and the fact that if these assets are higher quality, you're not looking at a short-term interest rate challenge, you're looking for the long term because you can get past that if you're a strategic buyer.

Has valuation conversations changed? Or how do you think about it? I don't want you to be negotiating with yourself, but what's the general thought process for the right multiple to be...

Throughout this entire disposition program, we have been selling into strength. The over $5 billion that we've sold, we've realized over 15x, right? And that does not even include the management contracts that we have secured, the long-term management contracts in every single case. So there's extra value to Hyatt beyond the 15x. So we -- that is our approach, and that is how we will continue. We will not be price takers. This is why we have done this in a very methodical way over those 8 years.

And if I had to rank order the issues, it's not pricing as much as it is filling up the capital stack. So we tend to find that potential buyers are saying, hey, based on our model and based on what we can borrow senior and what that's going to cost us, we have some gaps in the capital stack as opposed to actually, we're just going to renegotiate price. Right. So it tends to be more focused on filling out capital stack than it does to a price negotiation.

And by the way, I think that, that 15.5x mostly you get to quote that on a free cash flow basis because they're also very capital-intensive assets versus moving asset light.

Correct. Yes, so it's even better. Yes. Thank you for that. Adam, how come we didn't think about that?

Try not to get people in trouble here. The other implication of that is really the pipeline. So what are you seeing in terms of the development pipeline then in this environment where maybe rates are volatile and the broader macro is a little bit volatile.

It really varies by chain scale, but we have a number of Hyatt Studios under construction right now. The first one is open and operating and doing well in Mobile. A lot of developers were there for the grand opening, and they were resolved that they were going to get home and get a shovel on the ground. So I think for that category, for upper mid-scale, it's actually -- we're seeing new starts and construction starting to really spool up. I think in certain markets, China being prominent among them, I think the inception or completion of projects has been slower and remains slower at this point. So -- and in Europe, a lot of the things that we do are already in situ hotels that are converting. So we don't have a ton of new construction in Europe at this point. Everything in the Middle East is new construction. So I would say it varies across the board in many different domains. In the United States, we've had openings of lifestyle hotels. So we just opened a magnificent bunkhouse hotel in Houston. We've opened just recently. I just said that we didn't have any new builds in Europe. That's not true. We have 3 that have come to mind, Belgium, Standard and Lisbon. We have both an Andaz and The Standard opening in the coming year. So we have quite a few new builds actually in certain markets in Europe. So I would say, overall, new starts have been very slow if you look back over the last 2 years, but I feel better about where we stand at this point. We had an event last night and a lot of developers were there, and I was encouraged to hear how many of them were citing a number of different banks who have come to them and said, we're ready to get back in the market now. So I feel like we might be at a bit of a turning point here in terms of capital formation.

Have the developers changed as you've moved to more leisure into international markets, like the developer type or your owner type?

The developer type is really different by region anyway. So it hasn't really changed within a given region.

And then on the conversions, that seems like it's been a topic that all of your peers have been saying has become a bigger opportunity. What sets you apart within the conversion market? And what drives competitive advantages there versus maybe new development?

Yes. I mean I think, first and foremost, it's just penetration and saturation. So we've cited this before, but if you look at every market in which there is at least one Hyatt Hotel and then you look at all the Hyatts in those markets, the average number of hotels that we have in all of those markets is 4, and our primary competitors are 14. So we don't have anything that looks like significant penetration or saturation in any way, shape or form. almost all of the Hyatt Studios are opening in markets like Mobile. We have no product in Mobile whatsoever. And the next subsequent 3 markets where we will -- the next subsequent 3 openings for Hyatt Studios will be in brand-new markets. For Hyatt Select, which is a conversion brand from hard brand into Hyatt Select, those are markets in which we also have no or little representation. And the owner's decision point is, do I want the first Hyatt that's benefiting from a very, very healthy growth rate loyalty program, compounding at 20% a year with the highest -- I think one of the highest member per hotel.

Correct. There's ample capacity there.

Correct. So do I want that? Or do I want to build the 15th, 16th, 17th, 18th Hilton or Marriott, right? So I think there's a very clear value prop for those owners. And we designed Hyatt Studios to be really clearly a great return profile for developers, and we hit our mark with respect to the price per key, cost per key for the first one. And that's super encouraging because the worst thing that can happen is you set sort of a rough target and then you come in 20% above that. And all of a sudden, developers are like, well, wait a second on [ Missouri ], you got to prove to me that this can get built for the number you set because otherwise, it doesn't work. We're not having to do a reset because we are out of the blocks with a really solid execution.

Let me just add to on our competitive advantage with respect to conversions, I would say Mark touched on it, but the customer base. It's really compelling when you think about independent brands or even hard brands that might not be realizing the returns in their market. We just had a very -- in the last probably 6 months now, but it was a really important market that we weren't in Santa Barbara -- not Santa Barbara, Santa Monica. And that was converted from a hard brand to a Hyatt because of our customer base and what we could bring, again, back to we were not in that market. And then a market that we have a lot of presence in, in Shanghai, we had another hard brand conversion to an Alila in Shanghai recently. These types of conversions are because the owner is saying, I'm not performing and the Hyatt customer base is where I would like to tap into. And that is -- that's what's driving some of our conversions and the differentiated position that we have because they're very competitive in every market, these types of conversions.

Right. So you referenced the growth in loyalty program. I referenced that you had this -- I think it was in your latest quarter, it may have been at the end of the year that I think you have 40% more loyalty members per hotel than the peers, which suggests that there should be capacity there. But remind us who is that most loyal customer? How does that compare to some of the peers? And maybe just to level set.

Well, our elite members are spending significantly more. First, they're paying higher rates and they're spending more per night than nonmembers. And secondly, I think the total share of wallet is -- has grown, and we are looking to continue to grow it further and further. When we launched Hyatt Studios, it was primarily through the -- driven by the recognition that we were losing share of wallet with guests already [ below ] the Hyatt that were traveling in those markets where they couldn't find a Hyatt because there wasn't one. So I think that the network effect that we will continue to get behind is going to be high. I think our demographic is higher. We're told by our credit card partner that we have the highest spend per member, per cardholder. So -- and that's just not -- that's not a thing that's lived by itself. It's derived from the fact that we have a high demographic that we have as a core customer base. So -- and that's also not sort of -- there's real grounded logic in that, which is we play in the higher end of the chain scales. And within each chain scale, we're trying to be at the high end. So it's logical, therefore, that our customer base and therefore, the value of the customer just based on what Joan was just saying, is very high.

Since you mentioned the co-brand credit card, but maybe I'll expand it out to just non-room-related fees. How do you think about benchmarking yourself versus your peers? And then where you can maybe get opportunity to either improve economics to your owners or capture more fees?

Big question.

I mean with respect to the co-brand card, I think it's well known that we're in the middle of thinking about what the next level of that negotiation is because we have an extension until -- or we have a contract that expires at the end of next year. These things are long-term contracts. So we're starting already thinking what that will look like. Our position right now is a good one because we have a loyalty program that's been growing at 20% per annum in the last 5 years, and our distribution has grown 50% in the last 8 years since we started the disposition strategy. So we're in a really good position to actually make sure that we're balancing all of the economics between shareholders, these stakeholders, shareholders, owners, the program itself and importantly, our members. So we're going to take a careful look at that and take advantage of our position.

And so is it -- I guess -- I'm not sure how much you can share on this, but is it more about the number of cardholders or the spend per card that you think about in terms of what drives those economics? And then secondarily, is it more about the leisure customer or the business customer?

I think our customers are both, right? In the main. Yes, there are some that are retired, and so they're primarily leisure customers. But the vast majority of the core customer base has historically for Hyatt been the business traveler. We are now more than 50% of our room revenue coming from leisure. We have a much more balanced kind of customer base. So I would say that with respect to the drivers of the issues of value that is derived from these relationships, it's total spend and the growth rate that we've already realized and the growth in the future growth of members. So I would say we've got momentum, and we have seen repeat business coming from the new members that are signing up. These are not -- they're not virtual members. They're actually real people who are really spending money. It's not like, oh, I'll sign up because it doesn't cost me anything and then you never see them again. So we're actually seeing repeat stays. So I think all of those things will factor in. They all have -- and the dimensions on which we have possible variability relates to the value per point, the exchangeability, the -- there are so many different pieces of these deals.

So there's a lot of customer, the owner.

Exactly. Yes.

Maybe turning to margins a little bit and a big piece of that, I think, that always has questions from investors is on the owned side, not the biggest piece of the pie, but I think it's one that's a little bit more uncertain oftentimes in investors' minds in terms of margins. Maybe remind us of what you saw in the first quarter. I think you did reference some cost initiatives at the same time that you took price. So how do we think about the margin trajectory from here on the lease side?

As you mentioned earlier that the proportion of the portfolio is higher luxury skewed after the last disposition program commitment that we accomplished. So we are looking at a very healthy rate growth in that portfolio because of the nature of those assets. And in that portfolio, those of you who know the industry know that labor is the biggest cost that we have. We operate in some markets that have growing wage inflation. And what is really important, our managers are very focused on productivity where they can. And that means making -- that you must balance in those luxury assets, you must balance the productivity with customer service. So that is the primary goal, but you can do that through making sure you're leveraging data, making sure people are in the right place at the right time. So that's the focus of the managers, and it's actually yielding solid performance in our margins and that we expect that to continue.

Great. I have a bunch more questions, but if people want to jump in, I'll give the opportunity. People have been a little bit shy today. So one of the questions that we had for everybody as well is just around AI, which also another topic du jour. But how are you thinking about how to deploy AI? Is that more of a top line driver? Is it a margin driver? Are there other things to think about?

I was about to crack a joke about all-inclusive being AI, but I won't. I think a lot of the things that we've turned to have been both revenue focused, but also efficiency gains at the same time. So one of the biggest initiatives that we've undertaken is -- we built a large language model for use with respect to how we respond to business for group business. And it's very meaningful because we respond to over 1.5 million RFPs a year. So when you can sort those, value them, prioritize them, even make decisions about which ones can be automatically where the response is automated, with no touch, with little touch, with a lot of touch. You can also focus people's time and attention on the highest value pieces of business. But with the repository of all the data that we have historically on different groups and when you parse through the actual RFPs themselves and identified that the date range may not work for that given hotel, but for an adjacent hotel, you can -- there is a date range that can work for that group. All of a sudden, you've got an automatic way as opposed to a pick up a phone and check in with 4 different hotels, where they can -- you can get the responses done very, very quickly. So there's a big efficiency gain in that, freeing up time for salespeople to actually focus on the highest value. It also allows revenue managers of hotels to high-grade the total business that they've got. So my analogy is this. Disney implemented the magic band and their decision when I talked through this with a bunch of Disney executives, they said, look, a new ride on average cost us $1 billion to build. That is a way to build -- to expand capacity but our parks are not at capacity. They're not even close to capacity. So if we spend $1 billion and create the magic band, which I think they spent more than that, but -- and we can gather information on those customers and geolocate them and increase the park capacity in total by 20% just by having people guided to places so that you don't end up standing in line for 2 hours. That's the gift that keeps on giving. 20% every day that goes by. So that's actually something similar to what we are creating here. But we also have AI models that we're now building for our development efforts. We have a lot of machine learning that we're building into what we're doing with respect to revenue management and also with respect to finance functions. There are applications in legal. So we've got a large number of AI or machine learning projects underway right now. We started this effort to really have an enterprise view about what we're doing with AI starting at the beginning of '24. So it's quite matured already. This is moving very quickly, obviously. So I'm really excited about it from a top line perspective and an efficiency perspective. And yes, ultimately, it will drive costs down.

Great. I'm going to sneak one more in. And this is really just going back to the demand environment. I think you touched on this in the last call, but how do you think about your, call it, pullback playbook, what you would do or what you'd be looking out for to assess whether there was a sharper contraction or ways that you manage the business around that?

I would reference back to what we did over the last 5 years, which is each of our managers are hyper focused on how they go to market and looking at the demand that's coming. And so in a very constrained demand environment, they reinvented their hotel demand base. And so constantly leveraging that muscle as we go into the future is what we expect of those leaders, and they -- it's played out. So that's how we feel confident that we'll be able to get our fair share and above our premium in each market that we operate.

And I would just say because we can't tell what the nature of a potential dislocation is, the most important thing is to have the muscles to be able to adapt. So adaptability is the #1 issue. And I think we've proven that very, very well. We gained share, significant share during COVID, and that was because people were ready to pivot and ready to be agile. And that's how we're going to run the company going forward.

And you probably have more flexibility -- being more asset-light just in terms of your free cash flow.

Yes.

Great. Well, we're about a minute over. Please join me in thanking Joan and Mark for all the insights.

Thank you.

Thank you.