Hyatt Hotels Corp annual report, FY2015

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Hyatt Hotels Corporation — 2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Amounts are in U.S. dollars.

Business context and reporting period

Hyatt operates, manages, franchises and licenses hotels and related hospitality properties. At year-end, its portfolio included 599 hotels with 159,336 rooms across 52 countries. The business spans owned and leased hotels, management and franchising, and licensing. Management and franchise agreements generally require substantially less capital than hotel ownership.

Financial results and liquidity

  • Revenue: $4.328 billion, down 2.0% from $4.415 billion in 2014. Management and franchise fees rose 10.3% to $427 million; owned and leased hotel revenue fell 7.4% to $2.079 billion, principally reflecting hotel dispositions and currency effects. $1.786 billion of revenue from managed properties was reimbursed at cost and had no profit impact.
  • Profit: Net income attributable to Hyatt was $124 million, down 64.0% from $344 million; diluted EPS was $0.86 versus $2.23. The 2014 comparison included $311 million of real-estate and other gains, compared with $9 million in 2015. 2015 also included $64 million of equity losses from unconsolidated hospitality ventures, versus $25 million of equity earnings in 2014.
  • Adjusted EBITDA: $727 million, essentially flat with $728 million in 2014. This is a company-defined non-GAAP measure and is not a substitute for GAAP income or operating cash flow.
  • Margins: Net margin was approximately 2.9% in 2015 versus 7.8% in 2014, calculated as attributable net income divided by reported revenue. Revenue includes large pass-through reimbursements, so this ratio should be interpreted with that qualification.
  • Cash flow and investment: Operating cash flow was $538 million, up from $473 million; the increase included $82 million from release of restricted captive-insurance cash and favorable tax-payment timing. Investing cash flow was a $47 million use. Capital expenditures were $269 million, and the company forecast approximately $275 million for 2016, including about $90 million for new properties.
  • Cash and liquidity: Cash and cash equivalents were $457 million and short-term investments were $46 million at year-end, totaling $503 million, down from $815 million a year earlier. Hyatt reported $1.5 billion of available revolving-credit capacity and no revolver borrowings.
  • Debt: Consolidated debt was $1.375 billion; net debt after cash and short-term investments was $872 million. Debt-to-total-capital was 25.6%, and net-debt-to-total-capital was 16.3%. $328 million of debt was classified as current, including maturities in 2016. The company said it was in compliance with debt covenants.
  • Q4 snapshot: Fourth-quarter 2015 revenue was $1.109 billion versus $1.079 billion in Q4 2014; net income attributable to Hyatt was $37 million versus $182 million. Quarterly figures are unaudited.

Material changes versus 2014

  • Hotel portfolio growth continued: total hotels increased to 599 from 555, while rooms increased to 159,336 from 151,105. Franchised properties expanded, particularly in the Americas select-service business.
  • Americas comparable systemwide RevPAR rose 5.5% for full-service hotels and 7.7% for select-service hotels. Owned and leased comparable hotel RevPAR increased 2.4% overall, with U.S. performance offset in part by international weakness and currency.
  • Comparable ASPAC RevPAR declined 3.5% as reported, but increased 3.3% excluding unfavorable currency effects. South Korea was affected by MERS. EAME/SW Asia comparable RevPAR fell 10.3% as reported, but increased 0.8% excluding currency effects.
  • Americas management and franchising Adjusted EBITDA increased to $295 million from $253 million. Owned and leased hotel segment Adjusted EBITDA declined to $493 million from $522 million; EAME/SW Asia fell to $32 million from $40 million, while ASPAC rose to $52 million from $44 million.
  • Hyatt repurchased $715 million of common stock during 2015, versus $445 million in 2014. Financing cash outflow was $715 million, largely reflecting buybacks. The board authorized an additional $250 million repurchase program in February 2016.

Outlook, risks, contingencies and unusual items

  • Management described positive group-booking trends and stronger Americas demand, while warning of Greater China market saturation, Hong Kong weakness, Middle East pressure from supply and reduced government spending, and continued France weakness after terrorist attacks and amid hotel renovations. It anticipated French RevPAR declines in 2016.
  • Hyatt expected 2016 performance-guarantee expense for four managed hotels in France could exceed $50 million. The remaining maximum exposure for those hotels was approximately €344 million ($374 million at year-end exchange rates); total performance-guarantee commitments were $400 million.
  • Total debt-repayment guarantees were $391 million. Hyatt estimated maximum exposure at $262 million after considering partner and third-party recovery arrangements. Actual recoverability remains subject to those arrangements and counterparty performance.
  • In late 2015, Hyatt disclosed malware affecting payment-card data used at certain managed locations, primarily restaurants, from August 13 through December 8, 2015; a limited number of locations had an earlier exposure window. Hyatt recorded a $3 million estimated liability and said it had cyber insurance, subject to a $3 million deductible.
  • An IRS proposed adjustment concerning the Hyatt Gold Passport Fund could produce an additional current tax liability of $129 million, including $30 million interest, if sustained; the company disputed the position and appealed. The filing reported $110 million of total unrecognized tax benefits at year-end.
  • Hyatt had no history of cash dividends and said it intended to retain earnings for development and expansion and engage in share repurchases. Pritzker family interests controlled approximately 75.3% of voting power, reflecting the dual-class share structure and voting agreements.
  • Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.

Most important facts for investors to verify

  • Whether earnings and cash generation improve without reliance on property-sale gains, and how the 2015 decline in GAAP net income compares with nearly flat Adjusted EBITDA.
  • 2016 cash requirements: the $328 million current debt classification, refinancing or repayment plans, planned capital spending, and the pace of share repurchases.
  • Actual payments and remaining exposure under the France hotel performance guarantees, plus outcomes under debt-repayment guarantees.
  • The resolution and cash-tax consequences of the IRS Hyatt Gold Passport dispute and related uncertain tax positions.
  • The financial, legal and reputational consequences of the payment-card incident, including insurance recoveries and any additional claims or remediation costs.
  • Whether reported hotel-demand trends hold up against currency movements, regional risks, new supply, renovations and competing booking channels.