Hyatt Hotels Corp annual report, FY2014

Hyatt Hotels Corporation — FY 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report; quarterly data are summarized below where relevant. Hyatt operates, manages, franchises, licenses and owns hotels and related properties. Its portfolio comprised 587 properties and 155,265 rooms/units in 50 countries at year-end.

Financial performance and liquidity

Metric	2014	2013	Change
Total revenue	$4.415 billion	$4.184 billion	+5.5%
Net income attributable to Hyatt	$344 million	$207 million	+66%
Diluted EPS attributable to Hyatt	$2.23	$1.30	—
Adjusted EBITDA (non-GAAP)	$728 million	$680 million	+7.1%
Operating cash flow	$473 million	$456 million	+$17 million
Capital expenditures	$253 million	$232 million	+$21 million

• Income before taxes was $525 million versus $321 million. Reported net income margin was approximately 7.8% versus 4.9%; 2014 earnings included substantial real-estate and business-sale gains.
• Gains on sales of real estate and other were $311 million, including a $231 million pretax gain on hotel sales and an $80 million gain on the vacation-ownership sale. These gains are excluded from Hyatt’s Adjusted EBITDA.
• Owned and leased hotel revenue rose 4.9% to $2.246 billion and segment Adjusted EBITDA rose 10.8% to $522 million. Americas management and franchising revenue rose 5.8% to $1.877 billion and Adjusted EBITDA rose 8.6% to $253 million. ASPAC Adjusted EBITDA fell 12% to $44 million; EAME/SW Asia was flat at $40 million.
• Comparable systemwide RevPAR increased in each region: Americas full service +6.6%, Americas select service +8.1%, ASPAC full service +2.0%, and EAME/SW Asia full service +2.1%. Foreign-exchange effects weighed on international comparisons.
• At December 31, cash and cash equivalents were $685 million, short-term investments $130 million, and total debt $1.390 billion. Net debt after cash and short-term investments was $575 million; debt-to-total-capital was 23.1% and net-debt-to-total-capital 9.6%.
• The $1.5 billion revolving credit facility, extended to January 2019, was undrawn at year-end and had approximately $1.5 billion of available capacity. Hyatt reported compliance with applicable debt covenants. Current liabilities were $730 million and total liabilities $3.512 billion.

Material changes versus the prior comparable period

• Revenue grew 5.5%, while Adjusted EBITDA grew 7.1%. Management cited stronger demand and room rates, particularly in the Americas, and improved group and food-and-beverage activity at U.S. hotels.
• Net income rose markedly, but the comparison includes $311 million of 2014 gains on sales versus $125 million in 2013. 2014 also included $25 million of equity earnings from unconsolidated ventures, compared with a $1 million loss in 2013.
• Hotel dispositions shifted Hyatt toward franchising and management: Hyatt sold 52 select-service and four full-service properties, plus its vacation-ownership business, while entering into long-term brand agreements for many sold hotels. The franchised portfolio increased to 239 properties from 183 in 2013; total portfolio properties rose to 587 from 548.
• Hyatt acquired the Park Hyatt New York for approximately $392 million and Hyatt Regency Lost Pines Resort and Spa and adjacent land for approximately $164 million, and exercised its $191 million purchase option for Hyatt Regency Grand Cypress.
• Operating cash flow increased modestly. Investing cash flow was positive $373 million, largely reflecting asset-sale proceeds; financing cash outflow was $607 million, including $443 million cash paid for share repurchases and $191 million to acquire Grand Cypress.
• Hyatt repurchased 7.69 million common shares for $445 million in 2014, approximately 5% of prior-year-end shares outstanding; $444 million remained authorized at year-end. Hyatt has not paid cash dividends and intends to retain earnings.

Outlook, commentary, risks and unusual items

• No quantified earnings, revenue or RevPAR guidance is provided in the filing. Management reported strength in short- and long-term bookings and expected further improvement in group business, while noting uncertainty in Europe and risks from China’s growth rate and South Korea’s market saturation.
• Management planned continued portfolio growth, especially through management and franchise agreements, select-service expansion, asset recycling, targeted investment and renovations. Hyatt announced the Hyatt Centric brand in January 2015, with its debut expected in the second quarter of 2015.
• The most significant disclosed performance guarantee relates to four managed hotels in France. Hyatt recorded $19 million of 2014 expense under the guarantee; remaining maximum exposure was €362 million (about $437 million), within total performance-guarantee exposure of $464 million. Management said expected 2015 payments were not expected to significantly affect liquidity.
• Other notable 2014 items included a nonrecurring $23 million stock-compensation expense (about $22 million recorded in SG&A), $17 million of asset impairments, and a $7 million realignment expense. The effective tax rate was 34.1%, versus 36.2% in 2013.
• Principal risks include hospitality cyclicality and fixed costs; competition and new room supply; currency movements; dependence on third-party owners and franchisees; possible agreement terminations; development and renovation costs; performance and debt guarantees; cyber and information-technology risks; and legal, regulatory, environmental and tax exposures. Hyatt highlighted concentrated voting control: Pritzker family interests held approximately 75% of voting power as of year-end.
• Hyatt said ordinary-course legal proceedings were not expected to have a material effect. Management and the auditor reported effective internal control over financial reporting; the auditor gave an unqualified opinion on the financial statements.

Important facts for investors to verify

• How much of 2014 earnings growth is sustainable operating improvement versus asset-sale gains, equity-method gains and other nonrecurring items; review the Adjusted EBITDA reconciliation and cash-flow statement.
• The amount, timing and collectability of any payments under the France performance guarantee, including how the €362 million maximum remaining exposure could evolve.
• Whether franchising and management-fee growth can offset the revenue and earnings contribution lost through hotel and vacation-ownership dispositions, and the terms and durability of the new agreements.
• Comparable RevPAR, occupancy and ADR trends by region, including the effects of foreign exchange, room supply, political instability and market-specific demand.
• Capital deployment and shareholder returns: the economics of acquisitions, renovations and ongoing buybacks, along with debt maturities and revolver availability.
• Potential dilution or stock-price pressure from Class B conversions and permitted shareholder sales, and the implications of concentrated Pritzker voting control.