Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

Good morning, everyone, we're going to get started. I'm Mike Bellisario, senior research analyst at Baird, covering the global hotel brands and travel companies. Today, we have Hyatt. Joan Bottarini, Chief Financial Officer; and Adam Rohman, SVP, FP&A and IR. This is Session 3. So if you have questions, e-mail [email protected]. Joan is going to start with a few slides, and then we'll jump into Q&A.

Thanks so much, Michael. It's a pleasure to be here, and thank you for all of you attending, for your interest in Hyatt. We really appreciate the invitation to this conference. We have experienced great investor engagement. So I think you put on a really great conference, thank you. And one other shout out to you, Michael, is we really appreciate the quality of the research that you have done. We have talked about it a lot that you go deep, and it's really high quality. So thanks for that.

Thank you. More to come.

Great. Great. So for those of you, this is all posted on our website. I just wanted to make a couple of comments. We only have a couple of slides, but 2 really key points on where we are today and our strategy go forward. So this is our footprint basically where we're located globally, been in business for over 60 years. When you look at our distribution, our hotels and our rooms, we are -- 70% of our mix is in the upper upscale and luxury segments. This has been created from the beginning, our entrance into these types of product categories and has been cultivated over decades of time. So now where we are, and you would have seen us perhaps launch a new brand earlier this week in the upscale space, which is not in that 70% category. Earlier this year, we launched a brand in upper mid-scale. And 2 years ago, we launched a brand in upper mid-scale as well. So 3 brands over the course of the last 2 years, which when you think about the opportunity for Hyatt, because of our extensive mix in the categories of upper upscale and luxury, we are now building out our portfolio in upscale and upper mid-scale, which are adjacent to those segments, and we're very excited about the opportunity. We are under-penetrated in virtually 250 markets and in every market around the world because we have a smaller footprint, but we have a mighty footprint in all of the countries that we operate. Just about the growth over the last -- this is over the last 8 years. The reason why 2017 is relevant is that's when we undertook our transformation to an asset-lighter platform. And so the growth as we've unlocked the value in our balance sheet and have reinvested in asset-light platforms has been extraordinary over that time period. And so now today, we are -- this number here, 79% is as of 2024. This year, we are well over 80% asset-light mix. And so that creates great opportunities for us to generate more and more cash flow. And we also are very, very confident about our ability to continue to grow at the 6% to 7% organic growth rates into the future. So with that, I will conclude my introductory remarks.

First, on the fundamental backdrop. Can you maybe just give us a lay of the land? Sort of what changed? January-February, so strong. March to April and then where is everything at today as we sit here in early June?

Yes. Obviously, the first part of the first quarter was a continuation of what we saw in the fourth quarter. For us, it was a continued strong demand from the business traveler, leisure was very strong in the first quarter, especially given the mix that we have in Mexico and the Caribbean where our all-inclusive resorts are located primarily. There's been some macro noise that's taken place in March and April, and that created some concerns about visibility, especially in the short term, which has really led to a much shorter booking window. Pace into the future for business transient and leisure transient was down the last time we spoke during our earnings call. What we've since seen is that while pace was down into the future, we've just seen a shorter-term booking window and more bookings being realized at the last minute. So visibility still remains fairly short term in the business transient and leisure transient space. And this is primarily a domestic comment -- U.S. comment. Group continues to look solid. Bookings into 2026 and beyond for our customers for group have been very healthy. And then when you take a step outside of the United States into key international markets, we continue to see very good strength across our non-U.S. geographies. Europe is going to have a pretty tough comp this year just given the mega events that took place last summer. Greater China has a little bit of an easier comp in Q2 and Q3, which we think will help us see some growth. So overall, I think we feel good about the outlook that we put out during our earnings call. Nothing's changed that is making us rethink how we view the rest of this year, either positively or negatively. And given the short-term nature of the environment right now, certainly possible for an acceleration. And if things stay the same, we believe the downside risk is relatively low.

Health of the consumer, we get that question a lot, high-end performance, low end performance, what is driving each of those and the divergence that we've seen recently?

Yes. We've certainly experienced a divergence amongst the 70% mix that I was referring to and the lower brand scales. So it's about the decisions that are being made. The uncertainty in the environment is creating cautionary behaviors from guests. And so that's leading to the short-term behavior that Adam is referring to. But we think that could continue to persist, that bifurcation and the higher end is still actually prioritizing travel and experiences and it's showing up in our numbers. We had really strong luxury growth rates in the first quarter and then in the upper upscale space, it was slightly lower than that. But -- so that's where we're seeing that bifurcation really show up. And as Adam said, outside the U.S., our footprint is largely in that upper tier brand categories. So that's where a lot of that strength is coming through on a global basis outside the U.S.

In terms of revenue management strategies, are you seeing more people prepay, any trade down within categories? Any other sort of nuanced revenue management, consumer booking behavior changes you've noticed?

We have not seen any trade downs because the health of those upper tier brands has been very strong. So that continues to persist in the numbers. And again, our concentration at the upscale levels is such that we're not in the economy space, we're not in upper midscale yet in the U.S., but we're building. So there continues to be demand. It's just a matter of short term and slightly lower than those upper brand categories.

Switching gears a little bit on Playa, maybe high level. So just remind us the strategic rationale and sort of what's the end goal and the end game here? When this ultimately gets closed and we're talking 24 months from now?

Yes, that's right. So in our strategy -- in our growth strategy and in every acquisition that we've undertaken, we've said this has to be a complementary guest base. This has to have an asset-light model or a path to asset-light. And so Playa is no exception in that regard. There is a lot of real estate. It's a public company. You can all do the work to see that it's a large asset base that is owned. And the strategic rationale for us is, first, we have to have confidence that we'll be able to sell the real estate. And so when we entered into the contract to buy Playa, we did the research, and we engaged with the broker to say, help us understand, this is a market where there's not a lot of publicly available trade information, you will not be able to find it easily. So we engaged with the broker who does have a lot of experience in that market and we started to engage with potential investors, and the amount of interest and affirmation of our underwriting that we received gave us confidence that we will be able to undertake this disposition strategy that we've committed to in a period of time. We've given ourselves until 2027. But you know Michael, over the past 8 years, we've done it in advance of our committed period and at levels -- we've basically overdelivered in every single one of our commitments. So where does that leave us? The ability to sell the real estate critical. That leaves us with an operating company and a management company for the 15 resorts that Playa today owns, half of those are our Hyatt brands. They're franchised today. So the incremental value creation for shareholders is the transition of those franchise contracts into long-term management contracts with a significant incremental fee base. We will also -- and then we will be introducing the brands that are non-Hyatt branded that we will control because we'll own them into the Hyatt portfolio. So that's incremental fees and incremental rooms. And then furthermore, there's opportunity for us to scale our platform accordingly with respect to our resource base and meaning synergies and then also introducing the distribution platforms that we acquired from ALG into the Playa assets. They had not previously been leveraging the Unlimited Vacation Club and ALG vacations. And both of those distribution platforms will add incremental value for our ultimate real estate owners after we sell the assets. And all of that put together, incremental fees, tapping into the distribution platform and synergies across the resource portfolio leads to a great deal of shareholder value, which we will tell you about as soon as we have the information about our closing and the progression of our real estate discussions.

And the closing conditions are what?

So we have to -- there's a tender offer out there with a requirement to reach over 80% on the tender, which in our last expiration we did, and there is also a regulatory hurdle through Mexican antitrust.

The real estate is separate. That is not a condition to closing the transaction?

That is not a condition to closing and we cannot enter into an agreement officially to sell the real estate until we actually own it.

Right, yes. And then just more broadly on the asset sale front. I know you've mentioned, I think there were half a dozen other hotels. What's the landscape like and buyer interest like today, especially versus a pre-liberation day and then all the volatility we experienced in April too?

There's been a lot of talk, especially this week at the conference around the transaction environment. And that's a very broad -- it's a big industry with asset classes and product types across -- if you're just referring to hospitality assets. So you really have to consider the fact that the quality of the asset, how well it's performing in this market today and how well capitalized owners are with respect to their ability to finance. So all of those factors lead to this environment not creating any challenge -- unusual challenge relative because these are incredibly high-quality assets in great locations with very strong cash flow. So this is what makes them highly attractive. The real estate investor pool that we've been talking to is high net worth families that already own in all-inclusive markets in Mexico and the Caribbean and institutional investors alike. So it's a broad interest pool, and it's a highly attractive investment even today considering the environment. That's what gives us the confidence in our ability to meet and exceed our commitment.

Right. $2 billion, Playa and legacy Hyatt combined?

That's right.

Switching gears a little bit just to net unit growth, just sort of the 6% to 7% organic range you've talked about. I guess, what needs to happen to get back to that on a more consistent basis?

Yes. There's -- if we think about this year and maybe the next couple of years, a couple of things. We're seeing greater acceleration of openings out of the pipeline, which is very positive and beneficial for us and what is coming -- it's starting -- and it's already starting to arrive are the new brands. So we opened our first Hyatt Studios property in Mobile, Alabama in March -- sorry, February after launching the brand about 2 years ago. We've got a significant number of hotels in the pipeline already, and we'll continue to see more and more openings plus a lot of conversations that are taking place with developers, real conversations. These are real deals that we expect will happen. You've got Hyatt Select, which we announced in February, which is primarily a conversion brand in the upper mid-scale space. So more on the transient side, which is complementary to Hyatt Studios. And those are 2 brands in chain scales, upper mid-scale, where we have no presence in the United States before this year. And there is significant white space for us where a developer, an owner may be looking at the pool of different brands that exist in the market today, and they don't have a Hyatt property or there's maybe 1 or 2 Hyatt properties versus a lot more saturation of other brands. So they're looking at our customer base, they're looking at the quality of the world of Hyatt member, their ability to spend and their ability to travel and that makes it very compelling argument to do deals with us. And then last Friday, we announced the Unscripted by Hyatt brand, which sits in the upscale space. Very light touch conversion brand. So this is not a -- you've got to get the hotel renovated before it can come into the system. These are independent, unique hotels where they're leveraging our commercial engine, so they can sign, get executed and convert into the system pretty quickly. So we're going to be able to leverage these types of brands on top of a high-quality portfolio of pipeline of hotels, especially in the luxury and upper upscale chain scales, especially in international markets that are going to allow us to grow organically for a long period of time. So if you sort of think about what we've done over the last 7 to 10 years, we've spent a lot of time investing in building out the brand portfolio that we have today and a lot of strength in the high-end aspirational brands that we've either developed on our own or acquired over time. And there's significant white space for us to grow in the upscale and upper mid-scale segments, which are much less capital intensive. We have a lot of white space and opportunity to grow. And so we have a lot of confidence that domestically, we're going to see great growth in the sort of select service space, which will complement the strong portfolio of full-service hotels in the pipeline that we have today.

Development headwinds? Is that still a predominantly U.S. problem headwind? And then what are the developers asking for or needing from you today?

Supply right now is lower, particularly in the upper upscale luxury segments in the U.S. This is differentiated by market around the globe. And so there isn't a lot of new build in those categories, in those brand categories. In the upper mid-scale and upscale space, it's -- there's a lot of demand, and there are a lot of developers out there who own land, want to build, and that's because supply growth is still lower than the demand projections into the future. So there's -- and many of those developers are very well capitalized. They're using their own balance sheets to actually open -- and we know for the studios hotels, they are using their own balance sheets. So the capital formation challenge in the U.S. is not -- it's not something we're not actually talking to our developers about, but it is not impeding our expectations around our organic room growth from 6% to 7% for the next couple of years because we are being creative in certain situations to help on the capital formation front. And we have very high-quality brands where those owners and developers are actually being very creative and they're also very experienced. So I think when you put all of that together, we are going to weather this current environment and it's not impacting across the board the same way.

And one follow-up on that, too, is we've heard from developers this week that there is more and more of an appetite for the larger money center banks to start to lend into the space again, which as you know, was very prolific really until the -- especially during the low interest rate environment. And as that starts to open up, that will certainly help from a capital formation.

We heard that too. There's my NYU recap, there's [ banks ] are back.

Yes.

We want them back.

Are you seeing first time Hyatt franchisees come in with these new brands, first-time hotel developers too? Is there a new cohort of builders and franchisees coming in now?

It really is across the board. So yes, the answer is yes. But we're also seeing that multi-unit developer who are saying, "I'm going to build 5 of these, I'm going to build 10 of these," and they are experienced at this. They've done it with other brands. So we are now in that equation, in that contest, if you will, as far as what is the most beneficial flag to put on my asset, the new quality product that we've developed is super attractive. And particularly, I mean, one of the biggest driving factors is what Adam described is the underpenetration of the Hyatt brands because that allows you to tap into that membership base, where you're not actually diluting across maybe multiple brands in that market from another large brand. That's more proliferated in that market compared to Hyatt.

You've introduced new brands, so have your peers. Just what is the competitive landscape like to win deals? Are you -- I know you mentioned not a lot of investment but some creative structures, more key money, where are you spending the key money? And also how do you compete with the other brands, too, that are sort of doing the same thing as you?

What I was referring to earlier about the lower supply at the higher-end chain scales, upper upscale and luxury, those kind of very large -- for those of you who follow the industry, very large key money checks that have gone out, those are kind of, I would describe as like rare air. Those are like very rare assets. The numbers are very large. We are very disciplined about our key money deployment. And we -- you can guarantee that all of those deals have had multiple brands look at them. And so in cases where we've looked at those numbers, we've said this doesn't work. I'm not sure how this math works for us. And given our footprint in this space of luxury lifestyle resort hotels, we're also making sure that it's quality growth. So it makes -- it's accretive to shareholders. And also when we think about our footprint and where our members want to travel, putting that into the equation. So it is competitive. You've seen big money go out the door. We have not spent those types of levels. We have -- we've been about $150 million for the past couple of years, and that's about what we expect going forward. Now really strategic assets in a market where we don't have presence, the math has to work.

Along those same lines, capital allocation, top priorities today and then just how you think about the resumption of buybacks once there's some clarity on the Playa transaction?

So at the beginning of this year, I think it was maybe noted by you and maybe others that we did not give guidance. We're in the middle of all of the things we're doing with Playa, yet we bought back $150 million of shares in the first quarter because we recognize the value and the good deployment of our capital in that way. So we will continue to take decisions like that when we think it's prudent relative to balancing what we are doing on the investment side, which means -- that's why we've put this pause on providing an outlook on this -- on capital returns with respect to buybacks. Once we get past Playa, I think we'll have -- once we get past a lot of understanding around how the real estate sales are going to take place, we have to -- with the money that we're raising to acquire Playa, we have to mandatorily pay down our term loan first. We'll get back to our leverage ratios. And if the Playa assets take on an accelerated sales process, then we will have that underway sooner rather than later. If they don't, we have until 2027 to get that term loan paid down. But in the absence of that, we're still going to have -- we're still generating significant levels of free cash flow to be able to take advantage of what I described at the outset, which is returns when it makes sense.

And then just longer-term free cash flow conversion improving the inputs to get there are what?

Well, definitely, it is our growth rates and the net rooms growth over the next -- over the coming years. There's a little bit of an impact this year because of some incremental key money that we had put forth this year. Next year, we'll also see our CapEx estimates go down. So there's a couple of different catalysts that we expect will help bring -- our target is to get higher than 50% conversion. So we believe that path is definitely achievable given our net rooms growth expectations as well as CapEx needs coming down in the business overall.

On the loyalty front, what are you hearing from customers? And I guess what are you doing to add value and, I guess, win customers over from other brands? And then frankly, get a larger share of their travel wallet more broadly?

Well, we hear great things, great feedback from our members. Our World of Hyatt program is award-winning because of the actual offerings that we have in our portfolio. It's created a network that is highly attractive. We've also invested in the benefits of the program, which is definitely -- has definitely taken notice on the blogs. The travel blogs are -- Hyatt's programs, #1, has the best benefits. Well, that is -- that benefits our members, but they also benefits our owners because they're seeing those members who are spending more on property and being the first one to actually try and experience our new offerings or our new properties. The partnerships that we have undertaken, I'll use Under Canvas as an example. There's a glamping experience portfolio that -- the owners of that portfolio said, what is going to be the most beneficial membership base that I can tap into because I want to tap into a distribution network. Well, that's why they chose World of Hyatt, and that's why our members are coming to Under Canvas at higher levels than both of us had anticipated because it's a new experience for them, it's what they're asking for, it's how we're thinking about how we're growing so that we can be in places that our members want to be. And I'm just going to like emphasize this point one more time. Our members who are not staying with us in the U.S., the reason why they weren't staying with us in certain markets is because we didn't have a hotel in that market. And so we got this data -- we got this data from a credit card company. And so the reason why we weren't in those markets is because we didn't have a product that would have the return -- that would have the cost basis and return for owners to build in that market. Hyatt didn't have a brand. Now we do. Now we actually have 2 brands. So that's why we're actually doing that to engage and get more share of wallet in those places, those 250 markets in the U.S. that we don't have presence today.

Yes. And I think going back to a question you asked earlier about how we win from the development front, it's because we're leading with our brands and not the balance sheet. Like we have confidence in the brand portfolio that we built out and that delivers for developers, and we can be strategic about when we need to use the balance sheet for certain opportunities.

You mentioned partnerships, I think, of the Venetian. Should we expect more partnership, maybe nontraditional hotel deals coming in the years because your portfolio is larger, your loyalty program is larger, and there's a more positive flywheel effect that you can leverage?

Definitely, what is attractive for counterparties in those partnerships is the membership base. And they're saying, we want -- it's mutually beneficial because we want to provide those experiences for our members and then they want to -- our counterparties want to tap into the membership base. The Venetian is not a partnership. Organic growth, no capital and also fee generative based on the business that we deliver to the Venetian. And we need more rooms in Vegas. Our corporate clients who are -- our biggest and best corporate clients, they're doing rotations on their major events. If you don't have more options in Vegas, you're missing out on that rotation that they're doing between Orlando, San Diego, Chicago, and now we can. Now we can serve them better.

Last question just on technology. What are you doing? What is the brand doing to help owners, help franchisees? And I guess what's next in the queue as we all think about technology advancement more broadly?

We're doing a lot. So there may not be enough time, Michael, but a couple of things we're super excited about and I think are going to be transformational for our owners and our guests we have are completely swapping out our -- 3 of our major systems, which is revenue management, property management and reservation system. We're doing it all at the same time with some extraordinary talent that we've acquired along the way, who has done this at different -- at other companies, and it's going -- we're actually almost complete, and it's going exceedingly well. And doing all of those at once because they are so intertwined, it's going to help us be much more efficient and really enable a much better engagement with our guests who are booking with us. So the other piece, which is now -- and I'm out of time, is our investment in AI. And so if anybody wants to come to an after section, I can talk about [indiscernible] in AI.

Great. Thank you.