Hyatt Hotels Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; comparisons are with the same 2011 periods unless noted. Amounts are in U.S. dollars.
Business context
Hyatt operates, manages and franchises hotels and manages vacation ownership and residential properties. At quarter-end, its portfolio comprised 496 properties with 135,992 rooms and units. The company reported three segments: owned and leased hotels, North American management and franchising, and international management and franchising. Reported revenue includes substantial reimbursements of managed-property costs, recorded in both revenue and expense with no added margin.
Financial results and liquidity
- Third quarter: Revenue was $977 million, up 8.9%; net income attributable to Hyatt was $23 million, versus $14 million; diluted EPS was $0.14, versus $0.08. Net income attributable to Hyatt was about 2.4% of revenue, compared with 1.6%.
- First nine months: Revenue was $2.949 billion, up 8.9%; net income attributable to Hyatt was $72 million, versus $61 million; diluted EPS was $0.44, versus $0.36.
- Adjusted EBITDA, a non-GAAP measure: $154 million in Q3, up 14.1%, and $459 million for nine months, up 16.2%. Management cautions that the measure is not a substitute for GAAP income or cash flow and may not be comparable across companies.
- Operating performance: Comparable owned-and-leased hotel RevPAR increased 4.6% in Q3. North American comparable systemwide RevPAR rose 4.2% for full-service and 6.0% for select-service hotels; international full-service RevPAR rose 0.8% as reported, or 5.2% excluding currency effects.
- Cash flow and investment: Nine-month operating cash flow was $366 million, versus $338 million. Investing cash outflow was $419 million, versus $805 million; capital expenditures were $210 million. Operating cash flow less capital expenditures was approximately $156 million, a derived measure. Cash and cash equivalents declined to $446 million from $534 million.
- Debt and liquidity: Consolidated debt was $1.223 billion, with $988 million of cash, cash equivalents and short-term investments; net debt on that basis was $235 million. Debt-to-total-capital was 20.0%, and net debt-to-total-capital was 3.8%. The $1.5 billion revolving facility had no borrowings and approximately $1.4 billion of undrawn availability after letters of credit.
- Balance sheet: Total assets were $7.736 billion and total liabilities $2.831 billion at September 30, 2012. Current assets were $1.876 billion and current liabilities $613 million. A $278 million mortgage receivable from a Hawaii hospitality venture became current because it matures in July 2013.
Changes versus 2011
- Q3 revenue increased $80 million. Owned-and-leased revenue rose $33 million, North American management and franchising revenue rose $47 million, and international segment revenue rose $1 million. Managed-property reimbursement revenue growth largely has corresponding expense and should not be mistaken for equivalent profit growth.
- Q3 Adjusted EBITDA increased $19 million: $9 million from owned and leased hotels, $8 million from North American management and franchising, and $2 million from international operations. Growth reflected stronger transient rates, acquired hotels and improved results at renovated properties; group demand was weaker partly due to holiday timing.
- For nine months, revenue growth was partly acquisition-driven, including the Mexico City hotel acquired in 2012 and properties acquired in 2011. Interest expense rose to $53 million from $42 million, primarily reflecting the 2011 senior-note issuance.
- Cash used for acquisitions was $180 million in the first nine months of 2012, compared with $688 million in 2011. Share repurchases were $35 million in 2012 versus $396 million in 2011.
Outlook, commentary and risks
- No numerical earnings or revenue guidance is provided. Management said North American long-term group trends were showing some positive signs, but short-term bookings weakened in Q3 and visibility for the short and medium term remained limited, potentially into Q4 and beyond.
- Management expected international results to vary by market amid the Eurozone crisis, slower growth in China and economic concerns in India; several large Asia-Pacific managed hotels were expected to undergo renovations in 2013.
- The company planned to complete a corporate and regional organizational realignment in Q4 2012. It recorded $12 million of related costs in Q3 and $19 million for the first nine months.
- Hyatt announced a $200 million share repurchase authorization and repurchased 911,244 Class A shares for $35 million in Q3 at an average $38.78 per share.
- In October 2012, Hyatt completed the sale of seven Hyatt Place hotels and one Hyatt House hotel for approximately $87 million; it retained management agreements for the properties. It also sold two joint-venture interests for $52 million and extended the hotels’ management agreements by ten years; the $28 million pretax gain is deferred and amortized over those agreements.
- Commitments to lend or invest in ventures totaled up to $521 million, net of related letters of credit. Notable items include an approximately $250 million share of a planned New York hotel purchase, contingent on contractual milestones, and a remaining $72 million Hawaii development commitment. Maximum potential payments under certain hotel performance guarantees were $26 million; loan, lease-completion and repayment guarantees had stated maximum exposure of $109 million, or $81 million assuming enforcement of specified partner-sharing agreements.
- Unrecognized tax benefits were $163 million; the company said up to $53 million could be reduced within 12 months as audits and statutes are resolved. A September 2012 putative antitrust class action against hotel and online travel companies sought unspecified damages; Hyatt disputed the allegations and did not expect a material effect.
- Management identified property and equipment for which a 10% change in certain undiscounted cash-flow estimates could result in an impairment charge of approximately $25 million. No goodwill impairment was recorded in the period. The filing reported no material change in previously disclosed risk factors.
Key facts for investors to verify
- How much of revenue and reported growth reflects pass-through managed-property reimbursements rather than fee or owned-hotel economics.
- Whether RevPAR, group bookings and management/franchise fees continue to improve, and how currency and planned renovations affect results.
- The economics and cash requirements of the Mexico City acquisition, hotel dispositions, Hawaii and New York commitments, and the near-term maturity of the $278 million mortgage receivable.
- The sustainability of Adjusted EBITDA growth after considering realignment costs, marketable-security gains, acquisition effects and higher interest expense.
- Potential cash demands from guarantees, tax matters and litigation, alongside the pace of share repurchases and capital spending.