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Not a high quality quarter


"In the short-term, we are seeing some headwinds, including slower growth of near-term group booking activity in North America and lower revenue growth in a number of international markets due to individual market dynamics. We are confident in our ability to manage through potential economic and marketplace volatility and we continue to maintain margin and cost discipline."

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

CONF CALL NOTES

  • Their recently acquired hotels are performing ahead of expectations
  • Mexico acquisition is performing well; on track to begin renovations next year
  • 5 large hotels that they renovated are doing well with the exception of Atlanta
  • SG&A was lower than they anticipated
  • Impact of Jewish Holidays:  about 75bps on owned and leased hotels
  • Got property and tax refunds last year that helped margins by 100bps on owned and leased
  • Weakness in International: 
    • New York:  timing of the Jewish holidays significantly impacted them during the last 2 weeks of the Q.  RevPAR growth was 75% lower than the first 10 weeks.
    • Atlanta had weak city-wide demand
    • International:  Tough comps in Seoul & Zurich.  Supply additions in Baku. 
  • Sold interests in 2 full service Seattle hotels for $15MM in cash and a reduction of $50MM of debt. resulted in a $28MM gain which will be deferred bc they will continue to manage the property.  Sold at TTM EBITDA 13.7x or 6.2% cap rate
  • Mumbia poor results and challenging Argentina market also impacted JV results
  • Some international markets are softening: India
  • Successfully realigned the company in 3Q. Realignment done on October 1. Expect to realize $15MM of savings in 2012 vs. prior estimates. Some are due to staff changes and some are one time. 
  • Sale of select service hotels at 7.2% cap rate or 11.7 trailing EBITDA. Will continue to manage these hotels over time
  • Adjusted EBITDA impact by sales: $11MM in 2012 or $15MM on FY basis
  • New deal in India: rebranding of 5 hotels in India: will double their footprint in India
  • 2 factors to consider on their earnings profile: 4Q will have carry over of same issues as 4Q.  Through 3Q of this year, they benefited from renovations completed last year.  Estimate that this lifted EBITDA in 3Q by $15MM. Properties that they sold have a $4MM quarterly EBITDA impact.  So there is a $19MM benefit to 3Q vs. 4Q.
  • Sandy will impact 4Q. Also have calender comparisons in 4Q
  • Market dynamics that impacted 3Q will impact 4Q. Renovations will also impact 4Q results.  
  • They will have several big renovations underway in 2013 that will also impact their results. 

Q&A

  • Headwinds that are Hyatt vs. industry:
    • Baku supply issues will be ongoing. Other markets - Zurich and Seoul are not ongoing.
    • NA has a lot of group business. Saw a slow down in the group pace growth there. Will be more impacted than industry at large.
    • Renovations: fee impact on large managed hotels under renovation
    • Hurricane will impact everyone
  • Optimism is based on:
    • Pipeline expansion
    • Their brands are doing really well 
    • Select service is really helping their corporate business relationships
  • New York performance for 2013 given the supply growth:
    • Have 4 hotels in NY now.  Have 4 under development that will be opened over the next few years.
    • Long-term outlook is very positive but there may be short-term absorption issues
  • SG&A declines: 
    • Benefited from re-alignment efforts
    • Expect flattish SG&A growth in 2013
  • Group business trends and slow down:
    • Definitely saw a slowdown in the rate of growth QoQ.  Some of this is due to election uncertainty.
    • Government business was particularly weak.  Partly demand and part of that was the decision to shift away from government business (yield mgmt)
    • Short-term bookings pace is still dominated by corporations.  Total production in the Q was up 12% due to associations booking into 2013.  Longer-term association business is good but shorter-term corporate has slowed. 
    • Rate growth continues to be positive across all segments
  • Weak owned/leased margins in the Q
    • Intenrational margins challenge: 50bps impact
    • Lighter F&B - especially in larger banquets
    • Difficult banquet comps YoY
    • Property tax refund benefited them by 100bps last year
    • Need mid-single digit RevPAR to maintain margin growth given inflation and rate/occupancy mix
  • 5 renovation properties contributed 250bps of owned/leased RevPAR
  • Lodgeworks portfolio contributed $15MM
  • Jewish holidays: Had a very strong F&B Q in NY in 3Q11.  Banquet biz in NY was down 8% and represents 75% of their F&B biz.  Retail outlet F&B was up 10%- mix impacted them as well
  • Sandy impact:
    • One hotel is shutdown and one is partially shut
    • Other hotels are running at high occupancy
    • Group and banquet is what is really going to be impacted along the East Coast (NY, Boston, DC) 
  • 157 dangling crane - same building of where the Park Hyatt is going to be located. They are not involved in the construction activity.  It's their partner. There may be delays in the completion of the hotel but it's too early to know.
  • RevPAR is expected to be weaker in China due to the election.  Expect corporate demand to return to normal levels post election. India is weaker due to the economy. 
  • Projects in India and Minneapolis progress aren't included in the pipeline update
  • Realignment expenses are expected to be minimal in 4Q and non in 2013. 
  • 16% of their room base is franchised. They are early in their franchised business. It's mostly on their Select Service. 75% of their pipeline is International and almost all of that is managed vs. franchised.
  • G&A savings detail: $7MM is recurring and $8MM is one time. Have not reduced any expenses around their development efforts
    • Recurring: Found opportunities to consolidate operational areas and find efficiencies. Also reallocated resources to key areas. Will have more holistic regional teams that will be able to make faster decisions and have more agility. 
    • One-time:  Underwent a 3rd party review globally. Had open positions that they no longer needed to fill. 
  • All of their buybacks were affected in the market
  • Actively working with customers who have canceled because of Sandy to reschedule them in the future which may involve waving cancellation fees 
  • Transaction with Summit fits into their strategy of expanding their Select Service ownership of hotels by strong corporates. Highly focused on expanding corporate ownership of their properties.

HIGHLIGHTS FROM THE RELEASE

  • RevPAR stats:
    • Comparable owned and leased hotel RevPAR: +4.6% (6.3% excluding the effect of currency)
    • Comparable North American full service hotel RevPAR: +4.2% 
    • Comparable North American select service hotel RevPAR: +6.0%
    • Comparable international hotel RevPAR: +0.8% (5.2% excluding the effect of currency)
  • “During the quarter, Adjusted EBITDA increased by over 14% as we benefited from the recent
    acquisitions of hotels in the U.S. and Mexico, as well as from the results of some of our key owned hotels that were renovated last year. North American transient rate growth also benefited overall results"
  • 5 properties opened in 3Q12, one hotel was removed
  • Company repurchased 911,244 shares of Class A common stock at an average price of $38.78 per share, for an aggregate purchase price of approximately $35 million. The Company has
    approximately $131 million remaining under its current share repurchase authorization.
  • "We expect to utilize our strong balance sheet and capital base to opportunistically expand our presence and increase earnings in the years ahead. We recently sold several hotel properties at attractive pricing, while retaining long-term management agreements, as part of our asset recycling strategy."
  • "Pro rata share of unconsolidated hospitality ventures Adjusted EBITDA decreased 18.2% in the third quarter of 2012 as a result of the sale of two joint venture interests, negative foreign exchange and weaker performance in two international markets"
  • "RevPAR for comparable owned and leased hotels was negatively impacted by the timing of holidays in
    September as compared to the same period in 2011. In addition, specific market conditions negatively
    impacted several international owned hotels."
  • "RevPAR for comparable North American full service hotels was negatively impacted by the timing of
    holidays in September as well as weaker performance in Washington, D.C. compared to the same period in 2011. Additionally, renovations at managed properties in Washington, D.C. and Dallas negatively impacted results"
  • "Group rooms revenue at comparable North American full service hotels increased 0.6%... Group room nights decreased 2.6% and group ADR increased 3.3%"
  • "Transient rooms revenue at comparable North American full service hotels increased 5.8... Transient room nights increased 0.3% and transient ADR increased 5.5%"
  • "As of September 30, 2012 this effort was underscored by executed management or
    franchise contracts for more than 175 hotels (or more than 39,000 rooms) across all brands. The executed contracts represent potential entry into several new countries and expansion into many new markets or markets in which the Company is under-represented. Approximately 75% of the future expansion is expected to be located outside North America."
  • Capex: $53MM ($21MM maintenance, enhancements to existing properties: $30MM, Investment in new properties: $2MM)
  • During the quarter, the Company sold its interest in two joint venture full service hotels for approximately
    $52 million. In addition, as a result of the sales, the Company's share of unconsolidated hospitality venture indebtedness was reduced by approximately $51 million. The Company will continue to manage these hotels under long-term management agreements.
  • Subsequent to the end of the quarter, the Company closed on the sale of eight select service hotels with an aggregate of 1,043 rooms for approximately $87 million. The Company will continue to manage these
    hotels under long-term management agreements.
  • Debt: $1.2BN; Cash: $450MM and $540MM of short term investments
  • 2012 Guidance: 
    • Adjusted SG&A:~$305 million
    • Capital expenditures: ~ $340 million
    • Depreciation and amortization: ~$355 million 
    • Interest expense: ~$70 million
    • The Company expects to open over 20 hotels in 2012