Hyatt Hotels Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Hyatt operated or franchised 639 hotels with 166,731 rooms across 54 countries. Unless otherwise noted, figures are in millions of dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,088 | $1,053 | $3,342 | $3,219 |
| Net income attributable to Hyatt | $62 | $25 | $163 | $87 |
| Diluted EPS | $0.47 | $0.18 | $1.21 | $0.60 |
| Adjusted EBITDA (non-GAAP) | $192 | $171 | $613 | $571 |
| Operating cash flow | Not separately reported for the quarter | $351 | $396 |
Q3 revenue rose 3.3% (3.7% excluding currency); Adjusted EBITDA increased 12.3%. Nine-month revenue rose 3.8% and Adjusted EBITDA 7.4%. Q3 pretax income was $90 versus $45; the effective tax rate fell to 30.2% from 44.6%. Nine-month rates were 28.4% and 45.3%, respectively. Management attributes the lower 2016 tax rates mainly to prior-year global transfer-pricing changes and a reversal of certain foreign tax reserves. Adjusted EBITDA is a company-defined non-GAAP measure and is not a measure of discretionary cash.
Comparable systemwide RevPAR increased 2.6% in Q3 (2.5% constant currency). Americas full-service and select-service RevPAR rose 3.6% and 4.6%; ASPAC full-service rose 4.4% reported but 1.8% constant currency. EAME/SW Asia full-service RevPAR fell 9.7% (7.8% constant currency).
Liquidity, debt and capital allocation
- At September 30, cash and cash equivalents were $544; short-term investments were $46. Cash plus short-term investments totaled $590, compared with $503 at year-end 2015.
- Consolidated debt was $1,466 and net consolidated debt was $876; net debt to total capital was 16.3%, versus 16.2% at December 31, 2015. Debt excludes approximately $799 of Hyatt’s share of unconsolidated-venture debt, substantially all non-recourse, though some is guaranteed.
- No revolving-credit-facility borrowings were outstanding; approximately $1.5 billion of capacity remained. Hyatt reported compliance with applicable debt covenants.
- Nine-month operating cash flow was $351, down from $396. Investing activities used $94; financing activities used $185. Capital expenditures were $140, versus $185 in 2015.
- Hyatt issued $400 of 4.850% senior notes due 2026, redeemed $250 of 2016 notes, and repaid a $64 term loan. It repurchased $268 of stock during the first nine months, with $111 remaining under the authorization at September 30.
Material changes and notable items
- Q3 owned and leased hotel revenue increased $19, including $13 from non-comparable hotels, primarily acquisitions and openings. Management and franchise fees rose $7, largely from new or converted hotels and improved Americas performance.
- Q3 equity earnings from unconsolidated ventures improved to $25 from a loss of $17. The 2016 period included $20 related primarily to a venture’s debt refinancing and $5 from hotel sales. For the nine-month period, equity earnings were $46 versus a loss of $46 in 2015; the prior-year period included significant venture losses and foreign-currency translation losses.
- Hyatt acquired The Confidante Miami Beach for approximately $238 and Royal Palms Resort and Spa for approximately $88. It sold Andaz 5th Avenue for $240, recording a $21 pretax loss, and sold Hyatt Regency Birmingham for approximately $49; the resulting $17 gain is deferred and recognized over the management-agreement term.
- The company’s $334 Playa preferred-share investment is a Level 3 valuation. Playa filed for a proposed IPO; Hyatt expected to convert up to $50 and for the remaining preferred shares to be redeemed, subject to completion. Playa separately redeemed $41 in October 2016. Hyatt disclosed that changes in scenario probabilities could shift the preferred-share fair value by as much as $15 downward or $60 upward.
Outlook, risks and contingencies
Hyatt gave no numerical earnings or revenue guidance in the provided filing text. Management expected weakness in EAME/SW Asia to continue affecting 2016 results, citing security concerns and reduced demand in France and Turkey, alongside weaker Swiss transient demand. It also reported lower short-term Americas group bookings for 2016 stays, although longer-term bookings increased. Hong Kong, Macau and Taiwan visitor arrivals remained weak; management expected that trend to continue.
Key exposures include a maximum $416 of remaining performance-guarantee exposure, including $387 related to four managed hotels in France; $587 of maximum potential payments under debt-repayment guarantees, with $267 maximum exposure net of stated third-party recoveries; and $366 of conditional commitments to lend or invest. Hyatt also committed to purchase a Portland hotel and land for approximately $160 upon substantial completion. The filing states that ordinary-course litigation and claims are not expected to have a material effect, and reports no material change in previously disclosed risk factors.
Other risks identified include economic and travel demand, occupancy and room-rate declines, terrorism and disasters, labor relations, foreign exchange, interest rates, hotel-owner and franchisee financial health, transaction execution, cyber incidents, and the ability to meet hotel performance guarantees. Hyatt announced that its World of Hyatt loyalty program would launch March 1, 2017.
Important facts for investors to verify
- How much of the improvement in reported earnings reflects recurring hotel operations versus venture refinancing and sale-related earnings, tax benefits, and other unusual items.
- Whether RevPAR and booking trends—particularly in EAME/SW Asia and short-term group business—stabilize, and how those trends affect fees and owned-hotel profitability.
- The outcome and valuation effects of the proposed Playa IPO, including conversion, redemption, and Level 3 assumptions.
- Potential cash requirements from guarantees, commitments, acquisitions, and hotel capital needs, alongside the decline in operating cash flow.
- Debt and liquidity measures, including venture debt and guarantees, and the pace and funding of further share repurchases.