Hyatt Hotels Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; compared with Q1 2017. Amounts are in millions of dollars except per-share data and where noted. Prior-period revenue figures were retrospectively adjusted for the adoption of the new revenue standard.
Business context
Hyatt operates, manages, franchises, and licenses hotels and related hospitality businesses worldwide. At quarter-end, its portfolio included 728 full- and select-service hotels with 184,830 rooms. During the quarter, Hyatt sold three owned resorts/hotels and entered into long-term management agreements for them.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Total revenue | $1,109 | $1,126 | Down $17 (1.5%); down 2.5% excluding currency effects |
| Owned and leased hotel revenue | $515 | $569 | Down $54, primarily due to dispositions |
| Management, franchise, and other fees | $132 | $114 | Up $18 (15.7%); net fees after contra revenue were $127 vs. $110 |
| Net income attributable to Hyatt | $411 | $55 | Increase was primarily driven by the $529 pretax gain on hotel sales |
| Diluted EPS | $3.40 | $0.42 | Includes the effect of the property-sale gain |
| Adjusted EBITDA | $202 | $218 | Down $16 (7.3%); owned-hotel segment decline partly offset by management and franchising growth |
| Operating cash flow | $54 | $141 | Down $87, mainly because Q1 2017 included $94 of interest income related to Playa preferred shares |
| Capital expenditures | $60 | $50 | Primarily maintenance/technology, property enhancements, and development |
Systemwide RevPAR at comparable hotels rose 4.3% in constant currency; reported RevPAR increased 6.0%. Growth reflected stronger demand and rates across regions, with particularly strong reported increases in ASPAC and EAME/SW Asia. Hyatt did not provide a clear consolidated operating-margin figure in the filing.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $1,160; restricted cash was $450; short-term investments were $54. Cash, cash equivalents, and restricted cash totaled $1,629.
- Total debt was approximately $1,450, and the company-reported net consolidated debt was $236, versus $899 at December 31, 2017. Net debt excludes unconsolidated venture debt.
- Hyatt had no revolver balance and reported approximately $1.5 billion of available capacity. It refinanced its $1.5 billion unsecured revolving facility, extending maturity to January 2023.
- Total assets were $7,987 and total liabilities were $3,793 at March 31, 2018. The filing states Hyatt was in compliance with applicable debt covenants.
- Investing cash flow was $935, including $992 of net proceeds from the three-property sale. Financing cash use was $109, including $75 of stock repurchases, $18 of dividends, and $10 to redeem Miraval subsidiary preferred shares.
Material changes, outlook, and risks
- The three-property portfolio sale generated a $529 pretax gain; $221 of the proceeds from Coconut Point was restricted for a potential like-kind exchange. Hyatt said the disposal was material but did not qualify as discontinued operations.
- Adjusted EBITDA fell despite fee growth: owned and leased hotels Adjusted EBITDA declined $29, while Americas management and franchising increased $11. The Americas segment’s fees included $8 of legal settlement proceeds related to an unopened franchise property.
- Equity losses from unconsolidated ventures increased to $13, including a $16 impairment associated with a Brazil venture buyout initiated in Q1 and completed after quarter-end.
- The effective tax rate was 26.7%, compared with 37.9%, primarily reflecting the U.S. corporate tax-rate reduction under the Tax Act. Hyatt said its accounting for the Tax Act remained incomplete.
- Hyatt stated that cash, operating cash flow, revolver capacity, and capital-market access should be adequate for foreseeable funding needs. No quantified earnings or RevPAR guidance is provided in the supplied filing text.
- Contingencies include up to $329 of remaining maximum exposure under performance guarantees, including $276 related to four hotels in France; up to $445 of lending or investment commitments; and $715 of maximum potential payments under debt repayment and other guarantees, with $388 net of stated recoverability from third parties.
- The IRS loyalty-program tax dispute could result in a $127 liability, including estimated interest, if the IRS position is upheld; Hyatt believes its recorded liability is adequate. An Indian service-tax assessment received after quarter-end had maximum exposure not expected to exceed $17; Hyatt planned to appeal and did not consider a loss probable.
- The $570 loyalty-program deferred revenue liability is sensitive to redemption estimates; a 10% decrease in the breakage assumption would increase the liability by approximately $30 on a full-year basis. Hyatt also expects the new lease standard to potentially have a material financial-statement effect.
- Management cited demand, occupancy and ADR, bookings visibility, labor and operating costs, foreign exchange, property-owner and franchisee financial health, guarantees, cybersecurity, litigation, and economic or travel disruptions among forward-looking risks. Hyatt reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- How much of reported earnings growth reflects the one-time $529 property-sale gain, versus recurring operating performance and Adjusted EBITDA.
- Whether fee growth and RevPAR trends continue to offset the revenue and earnings effect of owned-property dispositions.
- Use and availability of the sale proceeds, particularly restricted funds, and the pace of share repurchases and dividends.
- Developments in the IRS and India tax matters, performance and debt guarantees, and the Brazil venture transaction and impairment.
- The final effects of accounting-standard adoption, especially lease accounting and loyalty-program redemption assumptions.