Hyatt Hotels Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and reporting period
Hyatt operates, manages, franchises, licenses, and provides services to hotels and related businesses. At year-end, its worldwide hotel portfolio comprised 913 hotels and 223,111 rooms in 65 countries. Hyatt reported four segments: owned and leased hotels, Americas management and franchising, ASPAC management and franchising, and EAME/SW Asia management and franchising. Its strategy emphasized growing management and franchising, expanding in selected markets, and reducing its owned real estate exposure.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $5,020 | $4,454 |
| Net income attributable to Hyatt | $766 | $769 |
| Diluted earnings per share | $7.21 | $6.68 |
| Adjusted EBITDA (non-GAAP) | $754 | $777 |
| Cash provided by operating activities | $396 | $341 |
| Capital expenditures | $369 | $297 |
| Cash, cash equivalents, and short-term investments | $961 | $686 |
| Consolidated debt | $1,623 | $1,634 |
| Net consolidated debt | $662 | $948 |
Revenue rose 12.7%, while net income was nearly flat and Adjusted EBITDA declined 2.9%. Reported revenue includes substantial reimbursements of costs incurred for managed and franchised properties, which are largely offset by corresponding expenses. Net income margin on reported revenue was approximately 15.3% in 2019 versus 17.3% in 2018; this ratio should be interpreted with that gross-up in mind. The filing does not provide a single consolidated operating-margin measure in the excerpt.
Operating cash flow improved by $55 million, primarily because of higher tax payments in 2018 and working-capital changes. Investing activities provided $585 million, principally reflecting asset-sale proceeds; financing activities used $541 million, including $421 million of share repurchases and $80 million of dividends. The company had $1.5 billion of available revolving-credit capacity and no revolving-credit balance outstanding at year-end. Total debt-to-capital was 29.1%, and net debt-to-capital was 11.9%. Debt figures exclude approximately $572 million of Hyatt’s share of unconsolidated venture debt, substantially all non-recourse, though some is guaranteed.
Material changes versus the prior comparable period
- Reported revenue increased by $566 million, including $505 million more reimbursement revenue and higher management, franchise, and other fees. Net management, franchise, and other fees rose 10.3% to $586 million.
- System-wide comparable RevPAR increased 0.7% in constant currency to $136. Americas full-service RevPAR rose 1.7%, while Americas select-service RevPAR fell 2.0%; ASPAC full-service RevPAR fell 0.8%, and EAME/SW Asia full-service RevPAR rose 3.9%.
- Owned and leased segment Adjusted EBITDA, including Hyatt’s share of unconsolidated ventures, declined $41 million to $387 million, largely reflecting property dispositions. Americas, ASPAC, and EAME/SW Asia management and franchising Adjusted EBITDA rose to $376 million, $87 million, and $49 million, respectively.
- Adjusted EBITDA declined despite higher GAAP net income per diluted share. Real estate gains were $723 million, down from $772 million; unusual and investment-related items also affected results. 2019 included a $30 million release of Two Roads contingent consideration and a $15 million release of a debt-guarantee liability, among other items.
- Hyatt sold Grand Hyatt Seoul, Hyatt Regency Atlanta, and adjacent property next to Grand Hyatt San Francisco, generating approximately $940 million of net real estate-sale proceeds in 2019 and $723 million of pretax sale gains. The company generally retained long-term management agreements for sold hotels.
- Portfolio growth continued: hotel count increased from 843 to 913 and rooms from 208,207 to 223,111. The 2019 year-end executed contract base was approximately 500 hotels and 101,000 rooms.
Fourth-quarter results
For the three months ended December 31, 2019, revenue was $1,275 million versus $1,138 million in the prior-year quarter, and net income attributable to Hyatt was $321 million versus $44 million. Diluted EPS was $3.08 versus $0.40. These quarterly figures are unaudited; the filing excerpt does not provide a clear fourth-quarter Adjusted EBITDA value or a complete bridge explaining the quarter’s year-over-year net-income change.
Outlook, risks, contingencies, and unusual items
- COVID-19: The filing, dated February 20, 2020, reported closures of certain Greater China properties and significant occupancy declines at others. Management expected adverse effects on 2020 ASPAC and consolidated results and on Greater China construction and room growth. The duration and financial impact could not then be reasonably estimated. No numerical 2020 earnings guidance is provided in the supplied filing text.
- Asset-reduction plan: Hyatt committed in March 2019 to reduce its owned real estate portfolio by $1.5 billion over three years, through March 31, 2022; it had realized proceeds of almost $1 billion by December 31, 2019. Proceeds may support growth investments and shareholder returns. Execution depends on market conditions, sale prices, and transaction timing.
- Guarantees and commitments: At year-end, performance guarantee commitments were $238 million and debt-repayment and other guarantees were $415 million. Hyatt also reported $296 million of investment commitments. These are maximum or contractual amounts, not necessarily expected cash outflows; associated recovery arrangements may reduce exposure.
- Specific guarantee: A performance guarantee covering four managed hotels in France expires April 30, 2020. Remaining maximum exposure was €147 million ($165 million at year-end exchange rates); Hyatt said expected guarantee payments had not been significant to liquidity.
- Tax dispute: U.S. tax years 2009–2011 were before the U.S. Tax Court over the tax treatment of loyalty-program contributions, with 2012–2014 pending that issue. If the IRS position were upheld, the filing estimated a $191 million payment including interest for assessed years, partially offset by a deferred tax asset; Hyatt said it had recorded an adequate uncertain-tax liability.
- Other risks: Hospitality cyclicality, fixed operating costs, labor costs and disputes, competition and third-party booking channels, cyber and technology incidents, currency fluctuations, property impairments, owner/franchisee financial health, and delays in development or renovations could adversely affect results. The company reported political unrest in Hong Kong as a 2019 headwind.
- Unusual accounting and operating items: Hyatt adopted lease accounting standard ASC 842 on January 1, 2019, recording operating lease right-of-use assets and liabilities. At year-end, operating lease liabilities were $425 million. The Two Roads acquisition generated $37 million of 2019 expenses, including $22 million of integration costs, and $18 million of impairment charges related primarily to acquired intangibles and contract terminations.
Most important facts for investors to verify
- Reconcile reported revenue growth to reimbursement revenue and fee growth; assess underlying fee and owned-hotel earnings separately.
- Review the composition and sustainability of 2019 net income, including $723 million of property-sale gains and other income items, against the 2.9% decline in Adjusted EBITDA.
- Track COVID-19 effects on Greater China operations, global travel demand, construction schedules, and Hyatt’s subsequent 2020 disclosures.
- Monitor progress, pricing, and use of proceeds under the $1.5 billion real-estate reduction plan, including any effect on recurring earnings and cash generation.
- Assess guarantee, investment, lease, and unconsolidated-venture exposures, including the France performance guarantee and venture debt not included in consolidated debt.
- Follow the loyalty-program tax litigation and the $671 million deferred loyalty liability; management disclosed that a 10% decrease in the breakage assumption would increase that liability by approximately $35 million.
- Consider governance and shareholding structure: Pritzker family business interests controlled approximately 91.6% of total voting power at January 31, 2020.