Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

And organic growth or net rooms growth on the all-inclusive side was a big -- this kind of pipeline opportunity was, I know, a big feature of kind of how ALG worked for you originally and a big reason for that deal. So what do we see there today, especially if you kind of were to put in at different price points, maybe the fundamentals have leveled off, but are the -- whether it's the cash-on-cash returns, it's harder for us sitting on the outside to underwrite. And I think is a place where investors fall through a little bit, it's harder and much harder to underwrite international ROIs than it is to kind of think about U.S. domestic kind of 4-wall economics. So do these projects make sense right now? And are we seeing that development climate remain because over years, the rate growth in those markets was phenomenal if we look over, I think, 3 and 5 years, right? So the absolute returns in a place, so we're still attracting capital to build in those markets.

The answer is yes. The economics are still very compelling. The stability of the returns is very high. And I think that's the perception issue that drives lower multiples applied to the property values. So our sale of Playa real estate was in the 8s in terms of multiple. So very high yielding, I think our -- the investors to whom we sold it will realize great returns. They're getting paid for the perceived volatility that is in some ways offset by the model itself. But that's the prevailing rate at which the all-inclusive model is more stable and more predictable over time, so you can manage costs better. So you end up yielding higher margins. That's what I meant by that. So what I see is a market that's absolutely -- already happened in Europe where you have institutional capital coming in size Blackstone being a major player. And in the U.S. market, the very beginning of institutionalizing ownership, yes, we will still have Mexican families and Spanish families and Dominican families that are the core owners. But we're starting to see and we will see more interest from institutional capital private equity to begin with. And then we'll see. I think there'll be more and more institutional capital that comes into the market, so there's more liquidity for owners who want to release capital to go and build additional hotels. The only issue that has caused some level of headwind on has been the weakening of the U.S. dollar relative to the Mexican peso because all revenues are in dollars and all expenses are in pesos. So we've seen that impact. We saw it more acutely in 2023. And where the pace of...

Cost headwinds?

Exactly. And this year, it's been generally better than last year, but the dollar is not holding up. So I think that's something that we're both well aware of and I also have new tools in our toolkit to manage that relative to what we went through in 2023 with respect to cost management. So I think that it's still compelling. I know it is because we're seeing a lot of new opportunities, both new builds and portfolios that we are pursuing at the moment.

I think it's interesting you sort of the feature set and the movement of institutional capital into this because if there was one single point of contention or concern for Hyatt going back, especially when we hit a bit of the speed bump around Liberation Day, it was, oh my gosh, can we sell $2 billion of real estate, right? I can't imagine how many times for Adam had to field that question over a 2-month period. Mark, can you help us write the postscript on this a little bit in terms of were you ever nervous? What are these partners looking for? How does this all come together? Because ultimately, it's exactly what you said you would do. And to the dollar number of, I think, what we were all thinking in terms of $2 billion on the real estate side, but it felt so uncertain to such a large part of the investment community that like what were you seeing are more confident than we were at that moment in time? And then like what does that mean for future deals like this for Hyatt, meaning the ability or desire to go, let's call it, capital heavier upfront and then find this capital-light elegant solution on the back end.

Look, I think to reduce it to one comment, it's a time frame. So in August of 2021 and November when we closed the ALG acquisition, what happened between those 2 periods of time is Omicron. The Omicron strain came to an end and Delta began. So when you think about a period of uncertainty, a lot of people sitting around saying, what is going on here? You could imagine that very few companies might step forward and say, we're going to actually make the biggest acquisition we've ever made. Which has been transformative for the company. But this is in the long string of, I would say, maybe atypical moves that we've made since the founding of the company. We were the first company to ever do a very large scale Atrium hotel that everyone in the industry thought was going to fail. Which turned out to be like [indiscernible] the thing to do. We started at an airport hotels at the beginning of the jet age when everyone was in city centers. We went to Asia first out Europe when we expanded internationally. So you can go chapter and verse since 1957, and we've taken our own path. And my confidence was derived really in the FIAS instance, by confidence in the ALG acquisition to begin with was superior economic model and form and format for resort. The only resort format that was growing in the most difficult areas for growth or resort construction because of hurricane coverage and whatever, namely Mexico and the Caribbean, and the clear evidence that we had with data that high-end leisure -- high-end resort was the first category to come back after every single downturn. And we were right. Not because we're brilliant, but because we're students of what's happened before, and we have a long-term perspective. If we were a company trading on what was going to happen in the fourth quarter of 2021, there's been a chance we would have bought the company. But it's turned out to be a massive value creator for our shareholders. And the same is true for Playa I mean we know this market extremely well. We are the biggest player by far. We know the players on the real estate side. We deeply understand what's going on in the demand side through ALG vacations, and we deeply understand how money is made at the resort level. So my confidence level was extremely high. Now if you had said, are you confident you can get it done in the third quarter of this year, I would have said no. But I'm 100% sure I can get it done in the next 12 months. So I had no doubt. I was never concerned about it. Not to mention the fact that because we're in the market and talking to all these players all the time, we already had a sense for who the buyer universe is going to be. And so we had already had pretty clear visibility that there was great demand for that asset base because that asset base is a premier asset base. They've got some of the best locations and at least the Hyatt Ziva and Zilara that were founded back in 2013, the highest quality hotels and the highest-performing hotels highest-rated, highest-customer service satisfaction scores, highest TripAdvisor ratings. So these are -- this is a premier portfolio. So that's the other thing that was clear to us. Anyway, so yes, that's where the confidence came from.

And I would just say the buyers who we ultimately signed with recognize that the high-performing quality of those and location of those -- that portfolio, linking it more directly into the Hyatt ecosystem meaning the distribution channels that we provide, which were not provided previously, just creates more incremental value. So there's more value to be gained with that transaction because of integrating the platforms together more directly. So it became a no-brainer on both sides.

Joan, can you just elaborate a little bit because I think this is important. I mean, what are those strategic synergies or kind of those things that when you looked at it or when some people -- I'm a little bit uniquely advantaged, I actually covered Playa. So we saw some of these pieces come together, right? I think a big one is your distribution engine through ALG, which was not a pipe that they had. And 1 thing we knew Playa had always struggled with was direct bookings, right? The wholesale channel is such an important way you source demand for this specific vacation type. But is that the one what were some of the other features or functions that you looked at when you kind of did your underwriting like -- this is why this makes sense for Hyatt. This is why it makes sense for us to run these hotels.

Well, we already had realized really, really strong penetration from World of Hyatt. So we already knew that our guest base was highly attracted to this product and these properties in particular. And when you plug into the Vacation Club, right, which we still manage and are still driving significant room nights to the all-inclusive resorts there. The Playa team, they did not have that option, obviously, being just a franchise, and they did not participate in [ ALGB ] which is the largest tour operator in the U.S. into these markets. So they were performing as well as they were even not tapping into that channel. So if you think about the need periods and compression and just creating more demand, just a huge opportunity for those assets.

So UVC was the additional big value driver in addition to the ALG vacations? Plug in.

So Mark, this is interesting because this kind of brings me to where I wanted to go, which is -- so you found UVC, which was sort of a separate and kind of unique business within like, I think, the 3 pieces of ALJ, right?

Yes.

It caused a few headaches for the investment community largely because of something I'm sure Joan knows better than anybody what's accounting, right, in terms of cash flow and this and that, just the timing of these functions. So help us think through -- and you found an elegant solution, elegant home for that business, a way to kind of manage that within, I think, much -- within Hyatt's portfolio. Where does that leave us as it relates to distribution. Here's a business that is another unique business as it related to at scale. Again, you're going to add to that scale at Playa. But long term, does this need to sit within high? Does it make sense? Is it just so fundamental to the nature of what you're trying to drive there? Or can you find another like sort of the right place for that business again as you get more comfortable running and operating these hotels through the management agreements?

Look, I think from the very beginning, we've been thoughtful about the potential to find other alternative solutions for how we retain the strategic benefit of ALG vacations, Apple Vacations because it is an important distribution channel to continue to have in the vertical integration of services that we offer. We never believed it was necessary to own 100% of it. In order to be able to retain that in the same way that UVC, we found a solution in which we continue to manage it for the benefit of the hotels, but we don't own 100% of it. The first rule is it has to be good for shareholders. Like we have to do something that would be accretive to shareholders. The second role is never ever, ever forget the first rule. So we're not going to do a stupid deal to try to control ourselves to change the way in which it shows up. The opportunities are very interesting because we are the biggest in North America. There are other opportunities. There are other travel platforms globally, which could create some interesting opportunities and benefits. So that's one possible avenue. Financial partner is another possible avenue or and a financial partner could come in many different forms and formats. So I would say we are very open to exploring these things, and we have -- we haven't found -- we haven't come across one that was super compelling to us yet, but I have every confidence that we will continue to explore that not just because we understand that it's from an accounting and a composition perspective of distraction, but also because of the point that I made -- that you made, which is you don't need to own 100% of it in order to get the strategic benefit out of it. As long as the thing that you do with it or the partner you bring in can add value to the platform, make it stronger. What we don't want to do is weaken the platform or diminish its impact. which does have strategic value within Hyatt. So that's really the long answer to your short question, but that's the direction.

And maybe let's kind of take the whole thing out now. I mean all of this comes back to your journey to asset-light is something that was sort of the key theme of your Analyst Day, I think your corporate strategy over the last any number of years and frankly, even on this journey as long as I've been working with Hyatt 15 years. It's pretty amazing. So give us kind of the update on that medium-term milestone. Was it take for us to get to -- can we get to 90%? What does it take us to get to the 90%? And what's our updated time line with the real estate -- with the Playa real estate sale behind us.

We -- I don't know if we've given numbers for -- yes, 27% for 90% asset light, and that was disclosed as part of the real estate sale for Playa, our expectations that we would as Mark said, we would absolutely get it done in the next couple of years, and now we've accelerated that. So we've got a number of assets that are in different stages of disposition for us, LOI or conversations in market. So we're still very active on that front. And we've always said nothing is precious in our real estate portfolio. So we will continue to evaluate transacting on the real estate portfolio, but doing that where we are evaluating each property type and actually selling into strength. Every single asset that we have sold in the time that you have been covering us we have sold with a managed or franchise contract. These are high-quality assets. They are high performing. And so when we think about the disposition strategy, we will make sure that we're preserving those -- that distribution. So that's -- we have taken time to do this, but we have realized great value for shareholders. I'll just remind you that we've sold $5.6 billion -- We've realized $5.6 billion in proceeds and have done that at a multiple in excess of 15x. So you do the math, the value of...

I would just say Q2 punctuation points first. There is 0 chance that we will not get to 90-plus percent fee-based earnings by 2027, none. There's no chance we won't. Second, you can think about this as a glad path. This is not a -- once we get to 90%, we're just going to sit back and kick our feet up and have...

Accomplished.

Right. This is a glide path towards being much more deliberate about whittling down that real estate portfolio even further. I don't think we'll ever get to 0. I think you will find us episodically going and buying assets but it will always be with an eye towards recycling. And you're going to be able to resell those assets in the future. I just don't want to pretend that we're not going to use our balance sheet in the future because that's not realistic. There's no competitor in our industry that's not used their balance sheet. And so we will, but it won't be a material piece of our earnings base.

All right. I'm going to come back to that in a minute, but I did want to comment that I did lose a bit to Adam on a big chunk of your $5.6 billion the underwriting of Orlando. So I owe you a glass tequila from Mexico.

Wow, I did not know you scored a glass of tequila. Good job, Adam.

Bottle will pass the test that we're allowed to do.

Make sure he buys it at a Hyatt Hotel.

Yes. For sure. So kind of last area, Joan, and I'm sure you get this one in just about every meeting, but I'm going to go down the credit card. Lightning round, credit card, what can you share at this point? Again, these are important negotiations. Just help us put a few parameters around this because we know these co-brand cards have become increasingly important value streams for you on this side, but also for our World of Hyatt members.

Yes. The program has grown exceptionally since 2021 when the last time we sort of re-upped the original agreement that was signed in 2017. And we're in a position now that we believe is a very strong one given our customer base and the attractiveness of our network to cardholders. And so that's Hyatt cardholders and others that are using their points to stay in our hotels. So I think that, that strength is something that we're we are considering as we are entering into these negotiations, and we will be able to update you by the end of this year, early next year, the latest.

And just remind us your current co-brand partner on the card is on banking relations?

[indiscernible].

Okay. Thank you very much. Joan and Mark, appreciate your time. Thank you for coming and joining us.

Thank you.