Hyatt Hotels Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Figures are in millions of dollars except per-share data, percentages, and hotel statistics. Hyatt operated or franchised 872 full- and select-service hotels with 213,037 rooms across 63 countries.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $1,289 | $1,133 | $2,530 | $2,242 |
| Income attributable to Hyatt | $86 | $77 | $149 | $488 |
| Diluted EPS | $0.80 | $0.66 | $1.39 | $4.12 |
| Adjusted EBITDA | $213 | $218 | $400 | $420 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $179 | $30 |
- Q2 revenue rose 13.8%; management attributed much of the increase to Two Roads, including reimbursed property costs. These reimbursements are substantially offset by corresponding expenses, so reported revenue growth does not by itself indicate equivalent underlying margin growth. Hyatt did not report a consolidated operating margin in the supplied filing text.
- Q2 net income increased $9 million, while Adjusted EBITDA declined $5 million (2.1%). Six-month net income fell sharply from 2018, primarily because the prior-year period included a $531 million pre-tax gain on hotel sales.
- At June 30, cash and cash equivalents were $515 million; cash, cash equivalents, and restricted cash totaled $567 million. Short-term investments were $62 million. Consolidated debt was $1.712 billion and net debt was $1.135 billion, up from $948 million at year-end 2018. Debt-to-total-capital was 32.0%, versus 30.8%.
- Hyatt had $1.4 billion available under its revolving credit facility, with $80 million drawn. It reported compliance with applicable debt covenants. Operating lease liabilities were $441 million following adoption of the new lease standard.
- Six-month capital expenditures were $146 million, compared with $121 million a year earlier. Hyatt repurchased $147 million of stock and paid $40 million in dividends during the six months.
Changes, operating trends, and management commentary
- Net management, franchise, and other fees increased 10.5% in Q2 to $152 million. Management cited Two Roads, new and ramping hotels, and growth in franchise fees. Americas management and franchising Adjusted EBITDA rose 5.4% in Q2; owned and leased hotels Adjusted EBITDA fell 4.4%.
- System-wide comparable RevPAR increased 1.3% in constant dollars in Q2. Americas full-service RevPAR rose 2.5%, while Americas select-service RevPAR declined 2.4%, which Hyatt linked largely to U.S. supply growth outpacing demand. Group revenue was lower than the prior-year quarter; transient demand was stronger.
- Two Roads contributed to higher fees, residential-management revenue, and reimbursed property costs. Hyatt reported $5 million of Two Roads integration costs in Q2 and $10 million for the first half. The company was still integrating Two Roads into internal control processes.
- Six-month operating cash flow improved from $30 million to $179 million, primarily due to higher tax payments in 2018 and working-capital changes. Investing cash flow was a $95 million use, compared with $774 million provided in 2018, when major hotel-sale proceeds were received.
Outlook, unusual items, and risks
- The filing provides no specific earnings or RevPAR guidance. Management said cash, investments, operating cash flow, revolving-credit capacity, and capital-market access should be adequate for funding needs and capital deployment objectives for the foreseeable future.
- Q2 and first-half effective tax rates were 18.4% and 20.7%, respectively. A nonrecurring benefit from a U.S.-Swiss tax agreement contributed to the lower rates. A separate IRS dispute over loyalty-program tax treatment could require a payment of $185 million, including estimated interest, partly offset by a deferred tax asset; Hyatt said it had recorded an adequate uncertain tax liability. The filing does not state the liability’s recorded amount.
- At June 30, remaining maximum exposure under performance guarantees was $263 million, including $205 million related to four managed hotels in France. Hyatt also had up to $420 million of conditional lending, investment, or other commitments and $473 million of maximum potential payments under listed debt guarantees, with $270 million of exposure net of stated recoverability. These are contingent exposures, not amounts reported as currently payable.
- Hyatt cited risks including economic and travel demand changes, occupancy and rate declines, labor costs and relations, foreign exchange and interest rates, hotel-owner and franchisee financial health, integration and transaction execution, cyber and technology risks, and legal, tax, and guarantee exposures. It said risk factors were not materially changed from its 2018 Form 10-K and did not expect ordinary-course litigation to have a material effect.
- After quarter-end, Hyatt sold land adjacent to Grand Hyatt San Francisco and assigned the related Apple store lease for approximately $120 million on July 31, 2019.
Important facts for investors to verify
- How much of revenue and fee growth reflects Two Roads, new hotel openings, and reimbursed costs, and how these factors affect recurring profitability.
- Whether RevPAR and group-booking trends improve, particularly in U.S. select-service markets and locations noted as weaker by management.
- The effect of the prior-year hotel-sale gain and 2019 tax benefits when comparing earnings, cash flow, and effective tax rates.
- Developments in the loyalty-program tax litigation and the company’s performance-guarantee, debt-guarantee, and other commitment exposures.
- Progress integrating Two Roads, execution of planned capital spending and repurchases, and changes in net debt and lease obligations.