Hedgeye - HYATT 3Q REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

OVERALL:

MIXED - Performance in the owned segment was worse than expected. However, management provided a solid outlook driven by a much improved transactions market and strong group bookings for 2014/2015.

GROUP BUSINESS/BOOKINGS

BETTER: Group revenue up 7% in 3Q (Atlanta/Anaheim outperformed). Group pace for 2014 has increased to low single digit growth rate. 60% on the books for 2014, as expected by mgmt. In the quarter, for the quarter bookings was strong, primarily driven by corporate business. 2015 and beyond looking great due to association business.
PREVIOUSLY:

Pace for 2014 bookings is roughly flat at this time.
Overall, over the short-term and consistent with what we stated last quarter, we expect group demand to continue to be positive but not as strong as transient demand.
Over the next 18 months, we expect Atlanta and Washington D.C. to continue to be challenging markets, while we expect others such as Chicago and Orlando to be stronger.

4 HOTELS IN FRANCE CONVERSION FEES

WORSE: Incentive management fees for the French hotels were below mgmt expectations
PREVIOUSLY:

Over the first 12 months, post conversion, we expect to earn €5 million of base fees and €5 million to €10 million of incentive fees from these hotels. There will likely be sequential quarter-to-quarter volatility in incentive fees due to the structure of the agreements. In fact, we expect to earn most of the incentive fees in the second and third quarters during the high seasonal months for these hotels.
Because the annual guarantee is measured on a quarterly basis, we may be required to fund up to the guarantee level in a particular quarter, which could negatively impact incentive fees in such a quarter. Again, we're on track to earn €10 million to €15 million of total fees over the first 12 months of operations of these hotels.

CHINA

SAME: Strength in South China offset by weakness in North/East China. Austerity program continued to weigh.
PREVIOUSLY:

Northern China has been the weakest year-to-date. Eastern China is next in line, and Southern China is actually relatively positive. It's somewhat positive in RevPAR. So what you see is a contraction of business. And I think one of the reasons why Northern China which includes Beijing, is relatively more negatively impacted, is that is because of the austerity program. And while we've seen RevPAR contract, I'm happy to report that we maintain comp set leadership in our hotels in Beijing. So I would say that while the overall story is somewhat challenging, our relative performance has been encouraging in terms of our maintenance of our number one position in our respective comp sets.
We continue to have confidence in the long-term prospects in China, but anticipate that this year will continue to be challenging.

HOTEL TRANSACTIONS IMPACT

SAME: Net Impact of Dispositions to Owned and Leased Adjusted EBITDA (incl JV) was $10MM in 3Q. Hotel transactions impact for 4Q should be net neutral, with the exception of Hyatt Regency Orlando which will contribute $10MM.
PREVIOUSLY: Hotel transactions are expected to negatively impact our owned and leased EBITDA in the second half of this year. Specifically, we benefited from acquisitions, such as the Hyatt Regency Mexico City and The Driskill, which mostly offset the impact of asset sales through our second quarter. During the second half of 2013, however, we expect the earnings from recently sold hotels to have a negative impact on reported results, net of acquisitions due to the timing of these transactions and seasonality.

BAKU/LONDON CHALLENGES

WORSE: RevPAR in London was down 15% due to Summer Olymphics comps. Excluding London, EMEA/SW Asia REVPAR would have been up 5%. Baku market continues to be challenged.
PREVIOUSLY: Key owned hotels, particularly Baku and London are expected to have difficult comparisons in the third quarter. In Baku, we continue to face challenges related to significant increases in supply in this market. In London, our results last year benefited from the Diamond Jubilee, the Summer Olympics and the Farnborough Airshow. In London, we've grown market share year-to-date.

PLAYA/HOTEL TRANSACTIONS

SAME: No EBITDA contributions from Playa in 3Q. $18-20MM JV adjusted EBITDA from Playa in 2014 (fluctuations by quarter due to seasonality and timing). Hyatt expects to open the first two franchised resorts by year-end. Hotel transactions pace has picked up recently and has remained high.
PREVIOUSLY:

During the third quarter, we expect to acquire an approximate 20% equity stake in Playa for $100 million, and purchase convertible preferred equity for $225 million. As to earnings associated with this transaction, in 2014, we would expect to earn in the range of $18 million to $20 million of EBITDA that will be reflected as JV EBITDA excluding franchise fees. We expect these earnings to grow over time as the resorts ramp-up, post renovations and re-branding. I would say the second half of this year is probably quite modest (Playa contribution).
Our expected level of return on our investment is in the mid-teens percentage range, and represents a strong risk-weighted return. The minimum expected return on our convertible preferred equity investment is 10%, and we expect to achieve a higher return on our common equity investment. In addition to these returns, we expect to earn franchise fees from the six resorts that we plan to convert.
We believe the market continues to be healthy for transactions and have not seen any significant changes in buyer interest or pricing. And on the select service front, we have been, and I'll reiterate it again, we continue to be very active to look for potential deals and in some cases involving more than one or two properties. So bigger portfolio deals.

SAME: Government sequester continue to have an adverse impact, however, government shutdown had no impact.
PREVIOUSLY: Government remains weak. We've seen a decline in room nights, and part of that is revenue management, and part of it is underlying demand. Group remains somewhat weak at this point as 2014 paces down a bit. In D.C., we own the Park Hyatt Washington, D.C. We manage the Grand Hyatt and the Hyatt Regency. Both of those hotels have had some renovation impact this year.

RE-UP STOCK REPURCHASE AUTHORIZATION?

MIXED: While share repurchases were lower sequentially in Q3, asset transactions were to blame. On October 29, 2013, Hyatt's Board of Directors authorized the repurchase of up to an additional $200MM of common stock. The Company currently has approximately $211 million remaining under its repurchase authorization.
PREVIOUSLY: We will continue to evaluate it.