Hyatt Hotels Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context
Hyatt operates, manages and franchises hotels and related residential and vacation properties worldwide. At quarter-end, its portfolio comprised 456 properties with 127,474 rooms and units. Consolidated revenue includes substantial managed-property cost reimbursements that are largely offset by corresponding expenses and carry no added margin.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $936 | $889 | $1,811 | $1,730 |
| Income from continuing operations | $36 | $19 | $46 | $26 |
| Net income attributable to Hyatt | $37 | $25 | $47 | $30 |
| Diluted EPS attributable to Hyatt | $0.22 | $0.14 | $0.28 | $0.17 |
| Adjusted EBITDA | $151 | $135 | $260 | $247 |
| Operating cash flow | — | — | $210 | $184 |
- Q2 revenue rose 5.3% (3.7% excluding currency effects); six-month revenue increased 4.7%. Q2 income from continuing operations rose 89%, while six-month income from continuing operations rose 77%.
- Q2 Adjusted EBITDA increased 11.9%; six-month Adjusted EBITDA increased 5.3%. This is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
- Comparable owned-and-leased hotel RevPAR increased 5.9% in Q2 and 3.9% for the first half. Q2 occupancy was 75.4% versus 74.4%, and average daily rate (ADR) was $167 versus $160.
- Cash and cash equivalents were $876 at June 30, down from $1,110 at year-end 2010; short-term investments were $521. Management reported approximately $1.4 billion in cash, money-market funds and short-term investments.
- Six-month capital expenditures were $118, compared with $90 a year earlier. Cash decreased $234 over the first half, principally reflecting $396 of share repurchases, partly offset by $210 of operating cash flow.
- Debt was $769, including $55 of current maturities and $714 of long-term debt. Debt-to-total-capital was 13.8%; net cash and short-term investments exceeded debt by $628. These figures exclude Hyatt’s share of unconsolidated venture debt, about $559, substantially all non-recourse.
- The $1.5 billion revolving credit facility had no borrowings outstanding; $65 of letters of credit reduced availability. The facility’s remaining availability was approximately $1.13 billion before those letters of credit. Hyatt said it had begun renewal discussions for the June 2012 maturity and expected to complete renewal during 2011.
Material changes and notable transactions
- Management and franchise fees rose $11 in Q2 and $24 for the first half, reflecting improved base, incentive and franchise fees. Owned-and-leased revenue was nearly flat in Q2 and declined $18 for the first half, with hotel sales or transfers and major renovations affecting comparisons.
- Hyatt repurchased and retired 8,987,695 Class B shares for approximately $396 at $44.03 per share, about 5.2% of pre-repurchase shares outstanding.
- Hyatt acquired three California Woodfin Suites properties for approximately $77 and began operating them as Hyatt Summerfield Suites. It also sold six Hyatt Place and two Hyatt Summerfield Suites properties to a joint venture in which it holds 40%; the stated sale price was $110, with $20 contributed to the venture and a $2 pretax loss recorded.
- After quarter-end, Hyatt agreed to acquire 24 hotels and related assets from LodgeWorks for approximately $802 in cash. The filing expected closing in Q3 2011, subject to conditions, and disclosed Hyatt’s right to terminate during a 75-day inspection period.
Outlook, risks and contingencies
- The filing provides no formal earnings or revenue guidance. Management said transient demand had strengthened year to date and expected further ADR improvement if the economic environment remained stable or strengthened. It anticipated limited renovation-related impact in Q3 and benefits as renovations were completed in Q3 and Q4.
- Management noted moderate near-term group occupancy growth in North America. International results faced pressure from political unrest in the Middle East, Japan’s natural disaster and difficult comparisons with events in China and South Africa in 2010.
- Hyatt reported up to $581 in commitments to lend or invest in ventures, including commitments connected with a proposed New York hotel purchase, a Hawaii venture and development with Noble. Maximum potential payments under certain hotel profitability agreements were $34; maximum exposure under loan, lease-completion and repayment guarantees was $45, or $41 assuming enforcement of partner-sharing agreements.
- Financing receivables totaled $465 gross, with an $84 allowance. Receivables on non-accrual status were $117, including $77 of unsecured hotel-owner financing. A $278 secured loan to a Waikiki hotel venture was due in 2012 with an extension option; Hyatt said it expected the loan to be extended.
- Other disclosed risks include hotel demand and economic cycles, operating costs and interest rates, currency movements, access to capital markets, natural disasters, legal matters, and potential stock-price pressure from future sales of Class A shares issuable upon conversion of Class B shares. Hyatt said litigation was not expected to have a material adverse effect; it reported compliance with debt covenants.
- Unusual items affecting comparisons included a $12 deferred-tax-asset benefit from releasing a valuation allowance on certain foreign net operating losses, a $5 loss related to a tentative related-party sublease, and a $2 loss on the sale of eight hotels. The filing also described a prior-year $8 vacation-ownership construction-dispute settlement.
Most important facts for investors to verify
- Whether the LodgeWorks acquisition closed, its final funding and financing, and the resulting integration and operating performance.
- Progress and final terms of the revolving-credit renewal before its June 2012 maturity.
- Hotel operating trends, especially RevPAR, group demand, ADR and the timing and cost of renovations.
- Recoverability and timing of the $278 Waikiki loan and other impaired or non-accrual financing receivables.
- Use of cash and investment balances, capital spending, and the effect of the share repurchase on liquidity and per-share results.
- Potential exposure from the $581 of commitments, guarantees, letters of credit and other contingencies, and possible sales of Class B-conversion shares.