H 2Q11 CONF CALL NOTES

A decent quarter doesn't matter in this market environment


"Our business performed well in the second quarter, showing solid growth in earnings, stronger occupancy levels and increased average rates in multiple segments and regions. We are building on that momentum with three recently announced transactions -- two acquisitions and the formation of a joint venture -- that will expand our select service presence, heighten awareness of our successful brands among both guests and owners and strengthen our select service development capabilities, thereby enhancing our ability to attract third party capital to fuel our growth in this attractive segment in North America and internationally."

- Mark S. Hoplamazian, president and chief executive officer of Hyatt Hotels

 

HIGHLIGHTS FROM THE RELEASE

  • Adjusted EBITDA of $151MM and Adjusted EPS of $0.27
  • "Comparable owned and leased hotels RevPAR increased 5.9% (3.3% excluding the effect of currency)"
  • "Comparable North American full-service RevPAR increased 5.0% (4.7% excluding the effect of currency)"
  • "Comparable North American select-service RevPAR increased 9.6%"
  • "Comparable International RevPAR increased 9.9% (2.5% excluding the effect of currency)"
  • "Opened five properties during the second quarter of 2011 including three owned extended-stay hotels purchased during the second quarter of 2011 for approximately $77 million" and sold 8 hotels to a JV which it owns 40% for $110MM
  • Owned & leased Adjusted EBITDA was negatively impacted by approx $10MM due to renovations and RevPAR was negatively impacted by approximately 500bps
  • As of June 30th, Hyatt had 150 (35k rooms) executed hotel management and franchise contracts - 70% of which are located outside of North America
  • 2Q Capex of $72MM
  • Debt: $770MM; Cash: $875MM; Short term investments: $520MM
  • 2011 Guidance:
    • Capex: $380 - $400MM
    • D&A: $285 - $295MM
    • Interest expense: $50 - $55MM
    • 15 hotel openings excluding the acquisition announced in July

CONF CALL NOTES

  • Rate growth was due to continued mix shift and pricing power that resulted from higher occupancy
  • Saw higher interest from potential owners in their brands this quarter
  • There has been limited financing in hotel development available - so therefore they have used some of their own cash to fund growth in these brands (select service)
  • Acquired through a foreclosure process--3 hotels in California--and will complete renovations at the hotels. 
  • During the quarter, they formed a JV with Noble to develop select service hotels and has a strong track record in developing hotels through multiple cycles. Own 40% and invested $30MM - think that they can develop 6-8 hotels
  • Lodgeworks acquisition comes with the branded management rights. Majority of the hotels are located in high barrier to entry markets and the hotels are in good condition.  Their extended stay product will grow by 40% as a result of this acquisition.  The full service hotels will benefit from their reservation systems and rebranding efforts. They like the extended stay segment.
    • 2012 Adjusted EBITDA will be approximately $50MM from this acquisition and expect that EBITDA will grow further as a result of rebranding and access to Hyatt's reservation system.  2 hotels are still under construction and several are less than 2 years old and are still ramping.  Many of the markets have limited new supply coming online over the next few years
  • Lower effective tax rate helped their EPS - benefited from a $12MM reversal from a charge in their international division
  • Smaller asset base in 2011 vs. 2010 due to asset sales over the last 12 months - roughly 3,000 less rooms (12 hotels) impacted owned and leased results
  • Timing of the Easter holiday negatively impacted results
  • Group business booked in the quarter for the quarter was up 7%. Easter holiday negatively impacted group business.
  • Transient rate benefited from a shift to corporate
  • Saw an increase in food and beverage and other revenues for the first time in a while
  • RevPAR was negatively impacted by Japan and North Africa and tough Shanghai comps. Excluding these 3 regions, local currency RevPAR gains would have been 11%.
  • No plans for future share repurchases at this time
  • Guidance doesn't include Lodgeworks but only the 2 they have closed.  Noble borrowed $65MM - their net proceeds were $90MM
  • Expect to fund $770MM of the Lodgeworks purchase in cash next quarter with the balance funded at a later date
  • Less than a 100bps and less than a $5MM impact from renovations in 3Q, after that their renovations will have a positive impact

Q&A

  • They believe they will be able to significantly improve the EBITDA production capacity of their acquisition
  • See an expansion of more Select Service opportunities and some increase in Full Service as well on the acquisition front
  • Expect to open 15 properties ex Lodgeworks this year - have 8 left to open in the 2H of the year
  • Don't feel like there are any markets that they are over concentrated in. The Noble $30MM investment will be funded and drawn over time
  • Still focused on cost controls.
    • Decreased paper utilization
    • Keeping food costs in check - inventory management to reduce spoilage and turnover
  • Why do they like Extended Stay?
    • Gold passport membership levels are the highest in their Select Service which has a lot of managed corporate accounts
    • Feel like they have a dedicated customer base
    • Expect to expand these brands into emerging markets like India - Summerfield Suites are being built adjacent to IT center.  Feel that these brands have international growth potential
  • Lodgeworks assets are largely up to Hyatt Select Service brand standards so there is minimal investment required. Woodfin requires more capex. They would consider eventually selling these assets and retaining management contracts
  • Lodgeworks team has a long track record of raising development financing. They will likely participate in some new development activity with them in the future.
  • Group side overall trends - up 3% largely driven by rates. Business booked in the Q for the Q was up 13%. Business booked for 2012 has 8% higher ADRs.  Corporate and association business (70% of group) was also up. Booking windows continue to be short. However, the business that they are booking is coming in at decent rates.
  • Business in China ex Shanghai is up in the teens. Europe is a mixed bag.
  • Transient business was up 6% as a combination of rate and occupancy.
  • Leisure (10-15% of NA) ended the quarter on a strong note. June was up 10%. So far no impact of gas prices. Overall think that the trends are reasonable and they are cautiously optimistic.
  • Plan to remain investment grade - which is about 3.5x. Have a R/C that they are in the process of renewing now. Still have capacity to fund more growth
  • Bought back the shares given the overhang of the shares.  There is no plan on stock repurchases.
  • Thoughts on effective tax rate through year end? Reversed valuation allowance on an international asset based on improving results. Best to use a 35-40% tax rate.
  • 2Q impact from Japan and ME was $1.7MM - evenly split. Think it will be about $5MM impact for the year.