• Hyatt bets on mixed estate

Hyatt Hotels Corporation has forecast adjusted Ebitda of USD1bn by 2016, as it grows across all sectors of its businesses.

The group’s CEO said that by continuing to focus on ownership alongside management and franchising, “we like to think we have two shots on goal”, despite potential confusion for investors.

President & CEO Mark Hoplamazian told analysts and investors at the group’s first ever investor day that the company was “punching above our weight, not in spite of our size, but because of our size” He added: “We are not trying to groom our earnings schedule for the next earnings quarter, we are looking at long-term value creation.”

The group has seen rapid growth since going public in 2009, with 31% growth in estate size by number of hotels to 523, 97 of which are owned. Globally, this has meant 32% growth in the Americas, 46% in EAME and south-west Asia and 16% in the Asia-Pacific region. The group said that it had entered 72 new markets since the IPO.

Hoplamazian described the “evolution of our contract base”, which had seen the company move towards a position where 59% of adjusted Ebitda at the end of last year came from the owned and leased business and 41% was from the managed and franchised business.

In the owned portfolio, Hoplamazian said that the company would “continue to be active in buying and selling, with the potential sale of up to nine full service hotels this year” in North America, with the group planning to keep the sites under long term contracts. He said that the company owned “disproportionally at the top end of our chain scale” with 36% of earnings coming from luxury properties, 46% from upper upscale and 18% upscale.

The owned estate is also weighted towards the US, with hotels in the country representing 69% of owned and leased Ebitda.

Looking forward, he said that the company saw potential adjusted Ebitda of USD1bn by 2016, 14% CAGR from 2013’s USD680m. Split between the two businesses, this would mean 13% growth to USD657m at the owned and leased business and a 14% rise to USD475m for managed and franchised hotels.

With revpar estimated to increase by just over 5%, the company forecast that it would have a cumulative USD1.9bn to spend on operations, new investments or return to investors over the next three years. Each percentage point of growth in revpar was expected to add USD15m to USD18m at the owned and leased business and between USD5m and USD7m in the managed and franchised business.

Between this year and 2016 the CEO said that the company would invest USD900m in growth, with 40% allocated to key gateway city hotels, 30% to resorts and 25% to select service hotels. He said that maintaining a strong balance sheet remained a priority, and that the projected increase in Ebitda “gives us a chance to increase debt and maintain our investment grade rating, as well as return capital”.

Hoplamazian also looked to the managed and franchised business, where he said he expected to see fees of over USD150m per year once the hotels had stabilised. He added: “We expected very little attrition in our system. We’re relatively new to the franchise business and our contracts are young. Expirations are minimal.”

The group’s executed contracts also spoke of a leaning towards luxury, with 24% of rooms in the luxury segment, against 21% in the current operating portfolio. Hoplamazian said that 80% of the 240 hotels in the executed pipeline were outside the US.

Of the 54,000 rooms, 15% would require “material” investment from Hyatt, with 85% funded by third parties, representing an estimated capital investment of USD15bn, which the CEO called “a very significant” vote of confidence. The company’s global expansion continues, with potential entry into more than 100 new markets.

The investor day came after a strong set of results for Hyatt, with adjusted Ebitda up by over 12% on the year. Comparable owned and leased margins increased by 100 basis points and management and franchise fees increased more than 11% over the prior year. The group opened 51 new hotels, which it described as one of the highest expansion years on record.

 

HA Perspective [by Katherine Doggrell]: For a company that has historically shared comparatively little information, Hyatt must be feeling over-exposed round about now, having laid bare a chunk of information to be picked over by onlookers. Not as much information as one would hope – there were still questions over the exact make-up of the pipeline, but, even better, it was willing to put a figure on where it is heading, both in terms of earnings and estate.

This enthusiasm for fees is likely to be behind the group’s move to a more public face, as it sells itself to potential investors, but the question remains as to whether investors would be happier with a strict ownership model or an asset-light operator model, rather than a mix of the two.

There are familiar elements to Hyatt’s recent strategy – it has invested in its newer brands, setting the standard which other developers must meet. As Marriott International has with Edition and InterContinental Hotels Group with Indigo and selected others, the company has owned a number of its Hyatt Place-branded hotels, most-recently selling its property in Minneapolis to Summit Hotel Properties in January after spending an estimated USD20m renovating it from a Comfort Suites.

Speaking to Hotel Analyst, Ryan Meliker, managing director, equity research, Reits and Lodging at MLV & Co, said: “Investors understand that and investors are open to hotels growing their brands. Hyatt is in the process of expanding and it is a benefit to them to have control of their brands.”

The group is stronger through the ownership of flagship sites, which ensure the quality of brands, in addition to underpinning its balance sheet.

Growing the brands is critical to the company persuading owners to trust their properties to a relatively small player, which has a smaller presence outside the key markets and could be seen to be lacking the distribution which its larger rivals can offer. This protected it during the downturn, but may now be a drawback. Conversely, to those new to the group, growing from a smaller base means that Hyatt’s expansion prospects look more attractive than its peers.

The role in the company of the Pritzker family, who own close to 60% of the group’s common stock and hold 75% of the voting power, remains a niggle to the market, haunted by memories of the warring following the death of patriarch Jay Pritzker. However, since Hoplamazian took charge (a man with experience of the family, but not the hotel sector) the atmosphere has been reassuringly harmonious.

Hoplamazian said that his lack of experience stood him in good stead when taking over, allowing him to get away with asking stupid questions. He has now extended the favour to the rest of us.

[Additional comment by Andrew Sangster] Hotel companies have evolved from a guest focus to an owner and guest focus thanks to the emergence of the asset light model. Hyatt is now adding to that duo with a third element, staff (or, as it prefers, colleagues).

Walking the walk rather than simply talking the talk is crucial in this third area if Hyatt is to progress its brand identity in a meaningful way. Hoteliers are massively outgunned in terms of marketing dollars and technology investment when compared to online travel agents. The only realistic area where they can win in brand terms is through the on-property experience.

But it is not really its human resource policy that distinguishes Hyatt from its global major rivals. Important though it is, the rivals have a fair claim in arguing that they too invest in their people.

Hyatt is perhaps more distinct with the emphasis it places on f&b. In the Americas, 32% of revenue is from f&b compared to 61% from rooms. In Europe, the proportions are similar, 33% against 59%, but f&b grows in importance in Asia to be 43% of revenue against 51% for rooms.

An even bigger distinction is Hyatt’s attitude to its balance sheet. Between 2010 and 2013, the company deployed USD4.7bn of capital. For most of the global majors, the bulk of this would have been returned to shareholders but for Hyatt, just USD0.8bn was distributed.
Instead, USD3.5bn was spent on new hotels and USD0.4bn was maintenance capex on existing properties.

The company in this period generated USD1.8bn from operating cashflow, obtained USD1.5bn through asset sales and accessed a further USD1.4bn by using cash and its balance sheet.

This is proof then of the substance to Hoplamazian’s claim of pursuing long-term growth rather than quarterly earnings results. It does of course help in having one family controlling the shares.
 

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