Hyatt Hotels Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Hyatt operated or franchised 754 full- and select-service hotels with 190,978 rooms across a worldwide portfolio spanning 59 countries.
Financial performance and liquidity
- Third quarter: Revenue was $1.074 billion, up 0.5% year over year. Net income attributable to Hyatt was $237 million, or $2.09 diluted EPS, compared with $18 million, or $0.14, a year earlier. The increase principally reflects a $240 million pretax gain on the Hyatt Regency Mexico City transaction.
- First nine months: Revenue was $3.316 billion, down 0.9%. Net income attributable to Hyatt was $725 million, or $6.21 diluted EPS, versus $176 million, or $1.38, in 2017. Results included $769 million of real-estate sale gains, principally the $531 million gain on three hotel sales and the $240 million gain on the Mexico City transaction.
- Operating performance: Q3 consolidated Adjusted EBITDA, a non-GAAP measure, was $175 million, down 0.9%; nine-month Adjusted EBITDA was $595 million, down 3.8%. System-wide comparable RevPAR rose 2.8% in constant currency in Q3. Management and franchise fees increased 7.6% in Q3 and 10.8% for nine months, while owned and leased hotel revenue declined due mainly to property dispositions.
- Cash flow: Operating cash flow was $132 million for nine months, versus $428 million in 2017. Investing activities provided $712 million, chiefly reflecting hotel-sale proceeds; financing activities used $543 million, including $654 million of share repurchases and $52 million of dividends. Cash, cash equivalents, and restricted cash ended at $1.056 billion.
- Debt and liquidity: Consolidated debt was $1.633 billion; cash and short-term investments totaled $1.231 billion, leaving net debt of $402 million and net debt-to-total-capital of 7.2%. The $1.5 billion revolving credit facility had no outstanding balance and was available at quarter-end. Long-term debt was $1.622 billion.
- Capital returns: Hyatt repurchased 8.56 million shares for $654 million during the nine months and paid $0.45 per share in dividends. The board authorized up to an additional $750 million of repurchases on October 30, 2018.
Material changes and notable items
- Hyatt sold Grand Hyatt San Francisco, Andaz Maui, and Hyatt Regency Coconut Point for approximately $992 million net, recognizing a $531 million pretax gain. The Mexico City transaction generated $360 million in cash proceeds and a $45 million unsecured financing receivable, alongside the $240 million gain and a $21 million goodwill impairment.
- Hyatt acquired Hyatt Regency Phoenix for approximately $139 million and Hyatt Regency Indian Wells for approximately $120 million. Owned and leased hotel revenue fell 12.9% in Q3 and 12.7% for nine months, largely reflecting dispositions; comparable owned-hotel RevPAR increased.
- Hyatt issued $400 million of 4.375% senior notes due 2028 and redeemed its $196 million of 2019 notes for approximately $203 million, including a $7 million extinguishment loss. The revolving facility was refinanced with maturity extended to January 2023.
- The effective tax rate was 7.7% for Q3 and 21.2% for nine months, versus 45.2% and 36.7%. The lower rates reflected U.S. tax reform and the relatively low tax rate on the Mexico City transaction.
Outlook, risks, and contingencies
- Hyatt stated that cash, operating cash flow, borrowing capacity, and capital-market access should be adequate for foreseeable funding needs. No specific earnings or RevPAR guidance was provided in the filing.
- On October 6, 2018, Hyatt agreed to acquire Two Roads Hospitality for approximately $480 million, subject to adjustments, plus up to $120 million of variable consideration. The transaction was expected to close in Q4 2018 and remained subject to closing conditions. The filing discloses a relationship between Hyatt’s Executive Chairman and an affiliate of a seller.
- Hyatt’s maximum remaining exposure under hotel performance guarantees was $319 million, including $268 million related to four managed hotels in France; recorded net performance-guarantee liabilities were $37 million. Debt and other guarantees had $750 million maximum potential payments and $375 million maximum exposure net of stated recoverability.
- Hyatt is disputing IRS assessments concerning loyalty-program contributions. If the IRS position prevails, estimated tax and interest for assessed years would be $177 million, partially offset by a deferred tax asset; $59 million would affect the effective tax rate if recognized. Hyatt said it believes its recorded uncertain-tax position is adequate.
- Other exposures include an Indian service-tax assessment with maximum expected exposure of $17 million, a putative hotel-industry antitrust class action, and ordinary-course litigation. Hyatt said it did not expect these matters to have a material effect, while noting that outcomes are uncertain. The company also cited hospitality demand, labor, currency, interest-rate, operating-cost, cyber, acquisition, and performance-guarantee risks.
- Hyatt expected adoption of the new lease standard in 2019 and said it could materially affect the financial statements. The loyalty-program deferred revenue liability was $584 million; management estimated a 10% decrease in the breakage assumption could increase that liability by approximately $30 million on a full-year basis.
Most important facts for investors to verify
- How much reported earnings growth came from real-estate sale gains, and how underlying Adjusted EBITDA and comparable hotel performance develop.
- Whether operating cash flow improves, given its decline and the substantial contributions from property-sale proceeds to investing cash flow.
- Integration, financing, and final consideration for the Two Roads acquisition, including related-party governance and closing conditions.
- Actual cash exposure and recoverability under hotel performance and debt guarantees, especially the France guarantee and the IRS loyalty-program dispute.
- The effects of continued repurchases and dividends on leverage, liquidity, and per-share value; also assess non-GAAP measures alongside GAAP results.
- Potential balance-sheet effects of lease accounting adoption and the sensitivity of loyalty-program liabilities to redemption and breakage estimates.