HYATT 4Q09 CONF CALL "NOTES"

HYATT 4Q09 CONF CALL "NOTES"


"As to the economy and market conditions, we have started to see year-over-year increases in occupancy in a number of markets around the world. Having said this, the signs of economic recovery in the United States are mixed and our full service hotels around the world continue to face rate pressure. While these dynamics also apply in the select-service segment in the United States, Hyatt Place and Hyatt Summerfield Suites properties continue to expand their share of revenue in most of
their respective markets.”

- Mark S. Hoplamazian, President and CEO

 

HIGHLIGHTS FROM THE RELEASE

  • "Taking into account the current cyclical downturn, we believe that this is an opportune time to commit capital to renovations in our owned hotels and we will continue to do so in 2010 as we invest for the long term.”
  • "We expect to open more than 20 properties this year"
  • "Adjusted EBITDA increased by 85.7% in the fourth quarter of 2009 compared to the same period in 2008, largely due to a $16 million reduction in bad debt expense in the fourth quarter of 2009 compared to the same period in 2008."
  • "Bad debt expenses included in selling, general, and administrative expenses decreased $18 million in the fourth quarter of 2009 compared to the fourth quarter of 2008."
  • "Hyatt opened nine properties in the fourth quarter of 2009. During the fourth quarter of 2009, no properties were removed from the portfolio. During the full-year 2009, the Company opened 30 properties. Eight properties were removed from the portfolio during 2009."
  • "The Company expects to open a significant number of new properties in the future, the majority of which will be through management or franchising on behalf of third-party owners. This effort is underpinned by executed contracts for more than 120 hotels as of December 31, 2009 across all brands. Approximately 55% of the hotels are located internationally and 45% located in North America."
  • 2010 Guidance:
    • "Capital expenditures are expected to be in the range of $270 to $290 million, inclusive of broad-scope renovation projects at five owned properties. The Company anticipates that renovations at these properties will cause displacement beginning in July 2010, resulting from a reduction in daily room inventory of approximately 400 rooms on average per day during the second half of 2010"
    • Depreciation & Amortization: $285-295MM
    • Interest expense: $55-60MM

CONF CALL

  • Actions they take will from time to time negatively impact short term results in order to benefit the long run. Gave the 2010 renovations as an example
    • I wonder if they aren't alluding to a dilutive acquisition
  • 45% of their full service revenues comes from corporate and group business
  • Taking the Hyatt Place brand internationally starting in India
  • Started controlling and cutting costs in 3Q08, reduced comparable owned and leased hotel expenses by 4.4% y-o-y in 4Q09
  • Growth plan for management and franchise hotels
    • Most of their full service hotels will be managed
    • For international select service expansion they will do JV's where they invest equity
    • For domestic select service they will rely mostly on franchise
    • Realize that they can use their capital through financial participation of some kind or outright purchase to get into key gateway cities (for Full Service)
    • Focused on extending existing owner relationships
  • Pipeline represents 27,000 rooms, and 70% represent full service rooms
  • Capital application: Invest in new hotels, recycling capital by selling mature hotels and using the proceeds to buy new assets, investing in debt, acquiring fee simple properties and portfolio
    • Actively engaged at looking at several opportunities
  • Current trends:
    • Mixed signals in the US
    • Seeing some significant improvement in some emerging markets like China
    • Transient trends are showing improvement but rate is still under pressure
  • $1MM bad debt expense in the 4Q09 vs. $19MM in the 4Q08
  • 60% of adjusted EBITDA came from owned & leased, 15% came from international and franchising, 25% from NA mgmt & franchised
  • Demand is getting better but rates remain under pressure
  • Costs decreased at the hotel level due to lower staffing and lower food costs
    • Near the end of the runway for expense cuts
    • Recovery is expected to be occupancy driven in the 1H2010 and wages will be up - therefore margins will be under pressure
  • Transient occupancy in their management & franchised portfolio was up for the 3rd consecutive growth.  Group cancellations declined considerably though and that trend has continued into 2010
  • Starting to see a reduction in the rate of decline for group business, but there will be a lag before that translates into RevPAR growth
  • Rate of decline for RevPAR for select service has recently started to slow down materially
  • In 2009 they earned incentive fees from 35% of their full service hotels in NA
  • International business has started to show signs of recovery in local currency, 1/3 showed RevPAR growth
  • International fees increased primarily from an increase in incentive fees.  80% of their hotels paid incentive fees in 2009
  • Very focused on holding costs in line for SG&A but compensation expense will increase
  • Had $1.3BN in cash and $1.4BN of R/C capacity
  • $276MM of cash from operating activities was generated in 2009
  • 2010 Capex plans:
    • 4-5% maintenance capex as a % of owned revenues
    • Grand Hyatt NY & San Fran renovations will start in summer 2010 through 2Q 2011
  • Tax rate on US income of 38% and international income tax rate of about 20%
  • 1 pt of global RevPAR change = $10-20MM of adjusted EBITDA depending on mix of rate/occupancy and geography
  • Don't hedge FX, but don't expect a big impact for 2010

Q&A

  • Number of markets where they are working on expansion through mgmt & franchise arrangement and therefore don't need to apply capital.  Are more likely to apply capital in high barrier to entry markets in NA & Europe. Also remain focused on expanding their resort portfolio.
  • No target mix of owned vs managed mix
  • Dispositions?  Looking to structure transactions to support growth
  • Are focusing on conversion opportunities - and that is also where application of capital will matter
    • Potential to participate in recapitalization of a portfolio
  • How much capital is committed to the pipeline?  Only marginal bc its mostly managed and franchised
  • Other big projects in 2010?  Park Hyatt Chicago, Hyatt Regency in San Antonio and Atlanta
  • Churn commentary going forward?  Hard to predict, but historically they have been removals due to brand compliance and financial distress
  • Thinking about their capex - most of their 55 select service owned assets were conversions so they spent a lot of money on those.  The overall portfolio is in good shape
  • They did not mark up the tax basis on their assets during the IPO
  • The Waikiki asset is performing relatively well to service their loan. Don't believe that there is an impairment risk
  • They can avoid tax gains by contributing assets to a JV (may be able to do 1030 deals as well)
  • 25% of work force unionized (overall not just owned hotel work force - but its also roughly the same split for their owned portfolio)
  • Group business:
    • Group revenue in NA represents 45% of total revenue
    • Also a significant contributor to F&B
    • Have 9 hotels with over a 1,000 rooms
    • Mixed signals on group, overall business on the books for 2010 is lower than in 2009, however, the decline has began to be bridged since Oct 2009 (when bookings have begun to accelerate)
    • Rates remain down y-o-y both in the 4Q and continued into 2010
  • How is the international business really going to grow? How much of the international business is driven by domestic demand
    • It's not the only growth driver, as US recovers huge leverage there
    • Local demand for Chinese/Indian/etc is growing as a % of total business mix. Part of this is driven by the Chinese stimulis provided by the goverment
    • Most international hotel incentive fees start from a % take of the first dollar. Also margins from F&B internationally are also fairly high internationally
  • Of the 10 international hotels that they own. 1/3 of their total income comes from international.
  • Europe and the ME outperformed Asia in the 4Q09?
    • Correct - bulk of their portfolio saw RevPAR growth in Dec
    • Terrorist attacks in India caused significant disruption last year, and Chinese New Year shift also impacted them
  • Most of the opportunities they are seeing participating in recapitalization of assets and other structured transactions. Aren't seeing a pick up in fee simple transactions. They are deploying capital to development of their select service brands internationally.
  • How much of the fees are non-cash amortization of gains? Not a significant number. 

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