Hyatt Hotels Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial amounts are in millions of dollars unless otherwise stated. Hyatt operates and franchises a global hotel portfolio; at quarter-end its worldwide hotel portfolio comprised 887 hotels and 216,495 rooms.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $1,215 | $1,074 | $3,745 | $3,316 |
| Net income attributable to Hyatt | $296 | $237 | $445 | $725 |
| Diluted EPS | $2.80 | $2.09 | $4.17 | $6.21 |
| Adjusted EBITDA (non-GAAP) | $163 | $175 | $563 | $595 |
| Operating cash flow | — | — | $274 | $132 |
| Capital expenditures | — | — | $244 | $195 |
- Q3 revenue rose 13.1% as reported (13.6% excluding currency), largely reflecting Two Roads acquisition-related fees and reimbursed property costs. Reimbursements are substantially offset by related expenses and are not equivalent to fee revenue.
- Q3 net income increased 25.4%, but included $373 million of real-estate sale gains. Nine-month net income fell 38.6%, reflecting lower sale gains than in 2018.
- Adjusted EBITDA decreased 7.3% in Q3 and 5.4% for the nine months. Q3 system-wide RevPAR was flat in constant currency; Americas select-service and ASPAC full-service performance was weaker.
- Nine-month operating cash flow improved by $142 million, primarily because of higher tax payments in 2018 and working-capital changes. Operating cash flow less capital expenditures was approximately $30 million; this simple difference is not a company-defined free-cash-flow measure.
- At September 30, cash and cash equivalents were $660 million, restricted cash $140 million, and short-term investments $63 million. Debt was approximately $1.623 billion; reported net debt was $900 million and net debt to total capital was 16.7%.
- The $1.5 billion revolving facility was undrawn and available. Current maturities of long-term debt were $11 million. Operating lease liabilities were $428 million after adoption of the new lease standard.
- Stockholders’ equity was $3.756 billion. Hyatt repurchased $280 million of shares and paid $60 million in dividends during the first nine months.
Material changes and unusual items
- Q3 real-estate dispositions generated $373 million in gains: $272 million from the sale of Hyatt Regency Atlanta and $101 million from selling adjacent land and assigning a lease. The Atlanta hotel remains managed by Hyatt under a long-term agreement.
- Management and franchise fees increased 11.9% in Q3 and 9.8% year to date, driven primarily by Two Roads and new or ramping hotels. Owned and leased hotel revenue declined 4.5% in Q3, mainly due to portfolio transactions.
- Two Roads acquisition-related costs included $8 million of Q3 integration expense and $18 million for the nine-month period. Hyatt paid $24 million of contingent consideration and released $29 million of contingent liability to income year to date.
- Adopting lease accounting on January 1, 2019 initially added $512 million of right-of-use assets and $452 million of lease liabilities, with reclassifications also affecting reported balances. Management estimated a 1% decrease in the lease discount rate would increase lease liabilities by about $40 million.
Outlook, commentary, and risks
The filing provides no specific numerical earnings or RevPAR guidance. Management said cash, short-term investments, operating cash flow, revolving-credit capacity, and capital-market access should be adequate for funding requirements and capital deployment for the foreseeable future. It also described prudent capital spending and a strategy to expand management and franchising while reducing the owned real-estate base.
- Key operating risks include global economic weakness, changes in business and leisure travel, occupancy and room-rate declines, competition, labor costs and relations, currency movements, and disruptions from disasters, disease outbreaks, or political events. Hyatt cited political unrest in Hong Kong and weaker Greater China performance as pressures on ASPAC full-service RevPAR.
- At September 30, maximum potential exposure under performance guarantees was $252 million; recorded net performance-guarantee liabilities were $13 million. Maximum potential payments under debt and other guarantees were $444 million, with $267 million of maximum exposure after estimated recoveries. These are contingent exposures, not amounts necessarily payable.
- Hyatt had up to $395 million of commitments to lend, invest, or provide consideration under specified conditions, including an approximately $140 million remaining purchase commitment for a Portland development.
- The IRS was examining tax years 2015–2017; earlier loyalty-program tax years were before the U.S. Tax Court, with 2012–2014 pending that outcome. If the IRS position were upheld, the filing estimates a $188 million payment, including interest, partially offset by a deferred tax asset; $67 million could affect the effective tax rate. Hyatt stated it believes its recorded uncertain tax liability is adequate.
- Hyatt disputed two antitrust lawsuits and did not expect their outcomes to materially affect its financial position, results, or liquidity. The filing reported no material changes to previously disclosed risk factors.
- Forward-looking statements are subject to risks including the ability to execute dispositions and acquisitions on expected terms, maintain hotel performance, integrate Two Roads, and meet performance guarantees. The filing states disclosure controls were effective; integration of Two Roads into internal financial controls was ongoing.
Important facts for investors to verify
- Separate recurring hotel and fee economics from real-estate gains, pass-through reimbursements, and other non-core income when assessing earnings quality.
- Review the durability of Adjusted EBITDA and comparable RevPAR, particularly the weakness in select-service Americas and full-service ASPAC hotels.
- Assess cash availability after distinguishing unrestricted cash and short-term investments from restricted cash and assets held to fund operating programs.
- Monitor guarantee exposures, the France hotel performance guarantee nearing expiration, and the loyalty-program tax litigation and potential tax payment.
- Track Two Roads integration costs, acquired management-agreement impairments, and the effect of lease liabilities on leverage and fixed obligations.